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AGENCIES’ OUTSOURCING DURING 2003—04

Overall, 56% of agencies reported finalising new outsourcing contracts or contract extensions in regard to at least one aspect of an ICT or HR service or function during 2003—04. Thirty-eight agencies (44%) reported that they did not finalise new outsourcing contracts or contract extensions during this period.

It appears that outsourcing activity undertaken in 2003—04 tended to be concentrated on ICT services. Figure 10.1 shows the level of outsourcing activity in the last two years. The outsourcing of at least one aspect of ICT services occurred in 47% of agencies in 2003—04, up from 29% of agencies in 2002—03.

Figure 10.1: APS agencies’ outsourcing activity, 2002—03 and 2003—04

Source: Agency survey

OUTSOURCING OF ICT SERVICES

Forty-one agencies (47%) reported outsourcing at least one aspect of ICT services (other than strategic planning for ICT) during 2003—04 (57% of large, 63% of medium and 31% of small agencies).

Of those agencies that reported finalising new contracts or contract extensions for outsourced ICT services during 2003—04, 15% indicated that they wholly outsourced ICT. The majority (85%), however, indicated that they partially outsourced ICT services.

Five agencies (6%) reported partially outsourcing some aspect of strategic planning for ICT during 2003—04.

Last year’s State of the Service report included information on average contract duration and value. An examination of some agencies’ responses to the Senate Order on departmental and agency contracts shows significant differences between the data supplied on outsourced contract duration and value in response to the agency survey and data on outsourced contracts reported in agencies’ Senate Order lists for 2003—04.² For this reason, information on contract duration and value from the agency survey has not been reported this year.

To overcome this inconsistency in future years, Finance has agreed in-principle to enhance the procurement information system to enable direct collection of data on contract duration and value related to outsourcing for reporting purposes.

This year’s survey also asked agencies to report on insourcing that had occurred during the year. Six agencies indicated that they had insourced some aspect of ICT. The main reasons for insourcing included maximising cost effectiveness and improving service quality.

Resources

The agency survey asked agencies to estimate the proportion of annual resources dedicated to ICT contract management in 2003—04 as a percentage of the total cost of all outsourced ICT contracts.³ Overall, almost half (48%) of the 64 agencies with at least one aspect of ICT services currently outsourced reported spending less than 2.5% of the total value of ICT outsourced services on managing related contracts.

Consistent with findings in previous reports, small agencies tended to dedicate a larger proportion of resources to contract management compared to medium and large agencies. This reflects the lack of economies of scale present in contract management in small agencies. Figure 10.2 shows that small agencies were more likely than large agencies to have dedicated more than five per cent and less likely than medium and large agencies to have dedicated less than 2.5 per cent to contract management.

Figure 10.2: Amount dedicated to contract management of ICT contracts in 2003—04

Source: Agency survey

A comparison of this data to last year’s results shows that overall a larger proportion of APS agencies dedicated more than 10% of the total contract amount to the management of ICT contracts during 2003—04 (14% of relevant agencies) than during 2002—03 (7%).

Table 10.1 shows that much of that change is due to small agencies–the proportion of relevant small agencies that spent more than 10% on contract management doubled from 10% in 2002—03 to 20% in 2003—04– although both medium and large agencies also saw increases.

Table 10.1: Amount dedicated to contract management of ICT contracts by size, 2002—03 and 2003—04

Source: Agency survey

Agencies’ evaluation of outsourced ICT services

The extent of the effectiveness of outsourcing can be difficult to determine. The APS Commission recognises that there are many benchmarks against which effectiveness can be measured. However, for simplicity’s sake agencies were asked to report the effectiveness of outsourced services or functions against four key outcomes: overall service quality, the breadth of services available, access to skills, and value for money. Agencies were also asked to report on the mechanisms they used to evaluate outsourced services during 2003—04.

Of the 40 agencies that did report having undertaken some performance evaluation of outsourced ICT services during 2003—04, the most popular approach reported was a review of the service by management (93%). Other measures reported include inspection and monitoring (65%), contract clauses (63%), feedback mechanisms (45%), key performance indicators (45%), audits (40%), client surveys (40%) and complaint records (30%).

Of the 40 agencies that reported undertaking some performance evaluation of outsourced ICT services during 2003—04, the majority of agencies (24 agencies or 60%) reported that the overall quality of ICT services to end users had changed for the better, and only two agencies (or 5%) reported a change for the worse.

Table 10.2 shows that agencies’ rating of effectiveness of ICT outsourcing improved in 2003—04 compared to 2002—03 in relation to all four factors: service quality, access to skills, breadth of services and value for money. The improvement was more pronounced for access to skills and breadth of services.

Table 10.2: Effectiveness of ICT outsourcing, 2002—03 and 2003—04

Source: Agency survey

OUTSOURCING OF HUMAN RESOURCE SERVICES

This year 17 agencies (20%) reported that they had outsourced some aspect of HR services⁴ during 2003—04 (29% of large, 15% of medium and 18% of small agencies).

Of those agencies that reported finalising contracts or contract extensions for HR services during 2003—04, four reported wholly outsourcing HR services. The great majority (13 agencies) indicated that they partially outsourced HR services.

Two agencies indicated that they had insourced some aspect of HR services. One agency indicated that this was due to poor contractor performance.

Agencies’ evaluation of outsourced HR services

Twenty-two agencies (25%) reported conducting some performance evaluation of outsourced HR services during the reporting period. A further 28 agencies (32%) stated that they had not evaluated outsourced HR services, nine agencies (10%) had evaluated prior to 2003—04 and 27 (31%) indicated that they did not have any HR services currently outsourced.

Of the 22 agencies that reported undertaking some performance evaluation of outsourced HR services during 2003—04, the majority (12 agencies or 55%) reported that the overall quality of HR services to end users had changed for the better. The response against most of the other criteria was similar. Table 10.3 shows, however, that agencies’ rating of effectiveness of HR outsourcing dropped slightly this year in relation to quality and access to skills, while breadth of services and value for money were rated as better by a larger proportion of relevant agencies. In addition, no agencies this year rated outsourced HR services as worse than previous arrangements, indicating that some of the problems experienced last year have been rectified.

Table 10.3: Effectiveness of HR outsourcing, 2002—03 and 2003—04

Source: Agency survey

Market testing of HR services since 1999

Government policy since November 1999 mandates market testing of relevant activities including HR services for agencies subject to the Financial Management and Accountability Act 1997 (FMA Act). Market testing enables agencies to determine the most efficient and effective service delivery option, and generally involves a competitive tendering process. Market testing can apply to services currently performed in-house or to second generation testing of services that have previously been outsourced.

This year’s agency survey asked FMA Act agencies to indicate whether they had market tested specific aspects of HR services (recruitment, payroll services, learning and development and agreement-making) since November 1999 regardless of the outcomes of the testing.⁵

Overall, 66% of FMA agencies reported having market tested at least one of the four aspects of HR services mentioned above. Large agencies (75%) were more likely to report having market tested at least one aspect of HR services compared to medium (64%) and small agencies (62%).

The most common aspect market tested since November 1999 was payroll services (51% of relevant agencies). Around 40% of relevant agencies reported having market tested recruitment services, and the same result was reported for learning and development services. The market testing of agreement-making services was less prevalent with only 10% of relevant agencies reporting having done so during the period.

2 The Senate Order requires that FMA Act agencies provide on their internet home page a list of all contracts to the value of $100,000 or more which have not been fully performed or which have been entered into during the previous 12 months. The Order was passed by the Senate on 20 June 2001, with subsequent amendments passed on 27 September 2001 and 26 June 2003.

3 Agencies were asked to include human resource costs and other administrative costs.

4 HR services were defined in the agency survey as including payroll services, recruitment, training and development and agreement making.

5 Of the 87 APS agencies that responded to the survey, 71 were subject to the FMA Act as at 30 June 2004. One FMA agency incorrectly reported that it was not subject to the FMA Act and did not answer the survey questions on this topic. The analysis is, therefore, based on the responses of 70 FMA agencies.