IT management

Fundamentals of IT outsourcing


Outsourcing may be defined as the planning, execution and termination of contract work to outside tenders. It involves the transferring of work from within an organisation to outside individuals and/or groups.

The person who does the outsourced work is known as a contractor or consultant.

The benefits of outsourcing

The work that is outsourced is usually of a highly repetitive and/or specialised and complex nature, or is not part of the goals of the organisation, or where expensive and/or highly-changing technologies may prohibit their outright purchase (although renting new technologies is now becoming a popular option for many businesses so long as the training costs for staff are low).

Thus one of the main benefits for outsourcing to an organisation is to increase the quality and enjoyment of work for all staff members in the organisation, while at the same time keep the operating costs of a business down.

But one should bear in mind that outsourcing is not meant to solve a number of problems associated with repetitive work such as Repetitive Strain Injury (or RSI). Outsourcing simply transfers the problem to someone else who is better able to manage it.

Furthermore, an organisation who wishes to consider outsourcing as a way to improve the work quality for employees should first ask 'What is quality of work for employees?' and 'Do employees really want their work outsourced to someone else?' before embarking on an outsourcing program.

Then there is the issue of maintaining a high standard of work as well as not jeopardising the security of the work when it is outsourced. For example, the CSIRO is a world-class Australian scientific research organisation and there were serious questions being raised by CSIRO scientists in 2000 as to whether the quality of their scientific work would be seriously undermined if all their IT requirements were outsourced to outside contractors with little or no scientific skills.

Dr Pauline Gallagher, the CSIRO staff association assistant secretary with the Community and Public Sector Union, had this to say about the Australian Federal (Howard/Liberal) Government's decision to outsource all the IT work at the CSIRO:

"In the CSIRO, IT staff are very science literate and interact closely with research colleagues every day. It would be impossible for an outside contractor to step in and take over this role without jeopardising the CSIRO's research work. It requires extensive knowledge of systems, instrumentation and the research being undertaken. The CSIRO is often involved in remote fieldwork on land, sea and in the air, and the quality and cost effectiveness of contract support in those environments is completely unknown." (1)

Early in 2002, the CSIRO was eventually given the freedom to implement its own selective outsourcing strategy after the Federal Government backed down on its controversial "whole-of-government" outsourcing program.

Other benefits of outsourcing for an organisation include the following:

  • To lower costs.
  • To increase efficiency and productivity.
  • To acquire better service.
  • To centralise services.
  • To get a tax advantage.
The benefits of outsourcing are not inherent. In other words, outsourcing cannot guarantee success to an organisation. Only,
  • careful and detailed planning;
  • constant re-evaluation of available services and work performance;
  • identifying potential risks; and
  • providing clear communication of needs throughout the 'cradle to grave' outsourcing process;

will success be maximised.

Greater guarantees of success in the outsourcing process can be found by ensuring tenders are properly certified. For tenders in the information technology area, they should comply with the following standards:

  • ISO 9000/AS 3900 - Guidelines
  • ISO 9001/AS 3901 - Development of service/product
  • ISO 9002/AS 3902 - Final test and inspection
  • ISO 9004/AS 3904 - Quality system components list
  • AS 3563.1 - Software development

The disadvantages of outsourcing

The main disadvantages of outsourcing for an organisation are that:

  1. there is always a cost for outsourcing (although sometimes this may cost less than purchasing new technologies and training staff to use them);
  2. there is always time spent in the early stages to find appropriate tenders for outsourcing;
  3. there are potential litigation factors to consider;
  4. there is a risk that the security of the information being outsourced may be jeopardised;
  5. there are heavy costs involved in varying the service required and thus the original contract; and
  6. there is a partial loss in control of the outsourced work if it is done outside the organisation.

As with any business activity, there are always risks associated with outsourcing. Failure in outsourcing usually occurs because of,

  • poor planning;
  • insufficient details of what is required in the contract work;
  • poor communication;
  • unrealistic expectations; and
  • rushing to have work completed on time.

Experience in the outsourcing process has shown that neither the size nor the kind of restructuring that goes on within an organisation will affect outsourcing. Almost any organisation can outsource its work (2). Outsourcing is only there to assist an organisation to perform better because of a higher standard of quality service delivery resulting from the greater source of creativity, skill and energy that can be found outside the organisation. (3)

If you intend to outsource some or all of your work, do bear in mind three things:

  1. Make sure there is flexibility in the outsourcing contract, especially if it involves information technology;
  2. Make sure the contract can be reviewed and modified regularly; and
  3. Do not outsource work if you do not have some understanding of the nature of the problem or work being outsourced.

With regards to contract flexibility, Mr Dwight King, managing director of business processes and information at Telstra in Australia, had this to say:

"Five and 10-year outsourcing deals may be signed with the best of intentions but they become dated. You have to have a supplier that's willing to change." (4)

About the contract

When outsourcing work of any kind, there has to be a record of what has been agreed between the agency/organisation or person outsourcing the work and the contractor - that is, the person who will perform, or is performing, the outsourced work - known as a contract.

The contract (verbal or written) must be carefully prepared because the information in the contract may be relied upon by the contractor to make important financial decisions (e.g. purchasing equipment etc).

When preparing a contract, not only must it show who is the successful tenderer (i.e. the contractor), with whom, where and when the outsourced work is to be performed, what has to be achieved, and the expected deadline to complete the work, but all other terms and conditions of the contract must be clear and written down in plain simple language to avoid ambiguity. The things you should definitely cover in the terms and conditions include:

  1. procedures for resolving disputes;
  2. indemnity and insurance;
  3. conflicts of interest;
  4. information confidentiality;
  5. ownership of intellectual property;
  6. access to premises;
  7. monitoring of performance; and
  8. payments scheduled (e.g. linked to verifiable milestones, performance or achievement).

Also, if the contract relates to information technology, it should be flexible enough to adapt to various changes associated with this industry (e.g. new equipment and ways of doing things).

Remember, outsourcing is a risk. If anything should go wrong, there could be serious lengthy and costly legal action against the organisation responsible for outsourcing the work. Therefore it is imperative for the organisation to take appropriate measures to minimise the risk involved when outsourcing its work. Otherwise, if, for any reason, the contract cannot be made clear because the work has to be done quickly, it is vital to have frequent, open and effective communication between the organisation and the contractor, or else face possible legal consequences.

However, don't let the the legal issue deter you from outsourcing your work. As Michael Corbett, CEO of outsourcing consulting firm Michael F. Corbett & Associates:

"I am not going to convince everyone that outsourcing is good. But it is a tool and it has to be in your toolkit. You have to know when and how to apply it." (5)

About the tendering process

The main points to remember during the tendering process include the following:

  1. Care should be taken not to make representations (whether oral or written) that may encourage a tenderer to spend more money than is required to meet the tendering process;
  2. Care should be taken not to suggest to a tenderer that they have been awarded the tender if a decision has not been finalised; and
  3. Care should be taken not to encourage tenderers to undertake part of the work which is the subject of the tender before the contract has been awarded to the successful tenderer.

In Australia, some of the important legislation governing the tendering process and in the development of appropriate legal contracts include:

  1. Section 52 of the Trade Practices Act 1974: "A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive, or likely to mislead or deceive."
  2. Section 2A of the Trade Practices Act 1974 which implies the Commonwealth can be interpreted as a corporation: " so far as the Crown in right of the Commonwealth carries on a business, either directly or by an authority of the Commonwealth."

For further information about the tendering process, creating appropriate contracts, and the Australian legislation in support of these activities, check out the toolkits section of

Should the organisation that outsources its work give all their IT assets to outsourcers/contractors?

There is a belief among certain organisations (and prior to January 2001, the Howard Government) that IT assets and outsourcing costs can be reduced by selling all internal IT assets or giving them away to contractors for a lower outsourcing cost. But what happens when the contract is terminated? Will you really be saving money in IT?

The purpose of outsourcing is to perform work outside of the organisation which is highly specialised and/or would require the rare use of expensive IT assets not available within the organisation.

If the work is to be performed on a regular basis and is not highly specialised, the organisation would be wise to spend the time choosing carefully a list of quality and flexible IT assets for exclusive use within the organisation, and then purchasing them at the best price. Anything else which would place a considerable burden on the IT budget is better suited to the oursourcing process.

But never sell regularly-used IT assets just to save a few dollars in the short-term. It could cost you more in the long-term.

A classic example of this situation can be seen in the current Australian Federal (Howard) Government's approach to IT outsourcing. It was the clear intention of the Howard Government in 2000 to save as much money as possible using any means at its disposal. The result of this economic rationalism approach is that practically anything can be sold or giving away in the hope of saving that extra dollar.

So what they've tried to do was to set up a single organisation called the Office of Asset Sales and IT Outsourcing (OASITO) at the Department of Finance to oversee the entire IT outsourcing process for all government departments and so make "whole-of-government" decisions like the sale of all IT assets and for which kinds of work and to whom the work can be outsourced on behalf of all department heads.

Unfortunately, this approach to IT outsourcing is only a short-term "money saving" solution. There is still the issue of the long-term financial consequences of following this approach, which has not been taken into account properly and can reveal a totally different story.

As Selina Mitchell for The Australian has noted:

"GOVERNMENT agencies will be forced to buy back their internal IT infrastructures if outsourcing contracts are terminated, the government has admitted.

'Officials managing the process have confirmed that under the contracts, technology assets once owned by government agencies were passed to outsourcers.

'If an agency wanted to return to in-house services it would have to buy back the assets.

'The news has sparked claims by the Opposition of asset stripping to inflate claimed levels of savings coming from the outsourcing process.

'"At the end of the five-year outsourcing contract, departments must continue with the contract or face the cost of completely replacing all their IT hardware," Labor IT spokesperson Kate Lundy said." (6)

Outsourcing should be decided and controlled by the original people doing the work before it is outsourced

Following the release of an internal public-service report into the rather embarrassing and contentious IT outsourcing policy of the Australian Federal (Howard/Liberal) Government, sweeping changes has taken place after 13 January 2001.

According to the report, the organisation overseeing the entire IT outsourcing process for government departments known as OASITO should be gradually phased out and the power to decide how and when IT oursourcing should be implemented be given back to the department heads in a process known as selective outsourcing.

A wise move in anyone's language!

Now the only problem remaining is giving Australian IT companies a chance to compete on an equal footing with larger international IT companies for the outsourced work as a result of the impact from globalisation.

Are there advantages being a contractor in an outsourcing project?

Being a contractor can be good and bad. To understand what the advantages and disadvantages are of being a contractor, you'll need to know something of what it takes to be a business entrepreneur. For more details, click here. While there are certainly some advantages in being a contractor, you should be aware of one particular pitfall in Australia.

In July 2000, the Federal (Howard) Government introduced legislation making it difficult for self-employed contractors to be entitled to the lower company tax rate by getting them to fill out papers for the Australian Taxation Office (ATO) for each contract work so that the ATO can make their own assessment as to whether the contractors are "self-employed" or a "temporary employee of a company". This was crucial for the Federal Government because by choosing to see contractors as "employees" in certain circumstances, they can receive more tax from the contractors.

With so much fine-tuning of the Goods and Services Tax (GST) introduced in July 1999, this kind of legislation was necessary to ensure the Government did have enough tax for the 2000-2001 financial year to help pay for various government services not to mention the big advertising campaign going on at the moment on television (currently costing taxpayers $300 million dollars) to presumably convince the public to keep the current Government in office (and what about the politicians' pay packets as well?).

Although the Federal Government has made recent changes to the legislation in this election year to allow "self-employed" contractors to assess for themselves as to whether they are "self-employed" or a "temporary employee of a company", the Federal Government still has the option of being "mean" and "tricky" with contractors at a later date should they decide (via the ATO) to audit the contractors and then choose for themselves using complicated legal arguments and/or further changes to the legislation in the future what they deem to be "self-employed" or not. And that could cost a lot of "small contractors" a lot of money in the long term through serious tax penalties plus interest.

To help you understand the difficulty many contractors are having to face with the Federal Government, please click here. This article appeared in the Letters to the Editor in The Canberra Times dated 13 July 2001. It shows on page 12 the view of one person on this tax issue.

An important tip for contractors

Contractors are no longer required to do it all themselves. The aim for contractors nowadays is to have an idea of the big picture in the IT industry and then to specialise or develop partnerships (or alliances) with specialists in those areas considered important for the clients.

As John Grant, director of Brisbane-based Dat#3, said:

"Customers are changing their view of how to purchase IT solutions. If we don't bring our expertise into some well-defined areas, we're going to be out-engaged by the specialists." (7)

And Kathy Beckman, senior analyst for services with IDC Australia, believes contractors and service providers will need to develop partnerships with smaller niche-market specialists. In her own words:

"A lot of the providers are realising they can't do it all themselves, so if they want to offer a whole service to a customer, they're going to have to partner with people that may sometimes be their competitors in other situations." (8)

Hence the term "networking" used in the late 1990s has now been replaced by "alliances". While networking referred mainly to long-term contractual or permanent relationships, the aim nowadays is to get into very short-term relationships in the IT industry known as alliance contracting.

When can I access and view tender documents?

In democratic countries like Australia, legislation has been passed to allow the public access to a wide variety of documents, no matter what they are or how sensitive the information may contain, including those relating to the tendering process. This is how openness, accountability and fairness is tested and measured by the general public with respect to the activities performed by any individual, business or government department which may have an affect or potential affect on the public in some way. In Australia, the legislation in support of this accountability activity is known as the Freedom of Information (FoI) Act.

While it is important for the tendering process to be impartial and open to ensure everyone is treated fairly, the timing for accessing tender documents is also imperative. Why? Because there could be current or ongoing "commercial value" contained in the documents.

In a recent court case, a Canberra firm of architects took on the Australian National University (ANU) in relation to the contract for the design of extensions to an ANU library (i.e. the Hancock Library). Despite unsuccessful attempts by the firm to access the original tender documents via FoI, the firm argued that the tender documents were in the public interest and the firm needed to know the decision-making process behind the tender as they had evidence to support the claim that the ANU had "unofficially" accepted the firm could do the job but had given the contract to another firm at a higher cost. Although the newspaper article discussing this case revealed no financial loss had occurred to the firm caused by the tendering process, the firm did also provide a quote from the ANU law school academic Dr Nick Seddon supporting the need for open access to the tender documents. According to the quote made in a Senate inquiry:

"...the paramount consideration, when the government engages in any activities, is the public's right to scrutinise, no matter what form of service delivery the government chooses. This is a fundamental aspect of our democratic system that cannot be thwarted by the use of the contract." (9)

On the other hand, the ANU maintained the view that the tender documents contained "trade secrets" of current "commercial value" and were therefore not in the interest of the public to have them released. Considering the contract for designing the ANU library has only just been completed by the successful tenderer, and the construction of the extensions is near completion at the time of the court case, this may well be true.

But since there was no substantial evidence shown by the unsuccessful tenderer that they had suffered a financial loss during the tendering process, or the "commercial-in-confidence" information contained in the tender documents would not cause future financial loss to the successful tenderer, or there was evidence of inappropriate or illegal activity during the tendering process on the part of the ANU, it is unlikely anyone, not even the firm, can view tender documents until after a certain period of time has passed.

This was generally the view held by the Administrative Appeals Tribunal (AAT) who handled the dispute. Because no clear evidence of financial loss was made by the Canberra firm, or illegal activity by the ANU was revealed or suggestive of this fact or whatever, the AAT decided against the release of the tender documents, at least for now. However, perhaps in the near future, the court's decision could be overturned if the Canberra firm believed it has further evidence, but only if the evidence can outweigh the "commercial value" contained in the withheld documents.

So if you wish to view tender documents for any outsourced work, make sure the "commercial-in-confidence" information does not outweigh the public's need to know via FoI. Otherwise, you will have to show evidence of some kind of illegality in the tendering process in order to view the tender documents.

What can I access in a contract under FoI

As of September 2003, a number of Australian Federal departments working under the auspices eyes of the Australian Prime Minister Mr John Howard and his Liberal Government are trying very hard to hide behind a veil of secrecy on the type of information that can be released under FoI in lucrative Government contracts. The most common excuse by the Government for hiding information is the dreaded 'commercial-in-confidence'.

According to a newspaper article titled Details of Government contracts kept secret: auditor in The Canberra Times dated 13 September 2003, the following is a list of the things that should and should not be kept secret in a Government contract under FoI:

Contract information can be kept confidential if it contains:

  • Trade secrets
  • Proprietary information
  • Contractor's internal costings
  • Pricing structures which would reveal a contractor's profit or loss
  • Intellectual property relating to a contractor's competitive position

Contract information that is not legitimately confidential includes:

  • Performance and financial guarantees
  • Indemnities
  • Price of individual item or groups of items
  • Rebate, liquidated damages and service credit clauses
  • Performance measures applying to the contract
  • Clauses on how intellectual property rights are to be dealt with
  • Payment arrangements

Among the Government departments notorious for not complying with these requirements include the Department of Defence and the Australian National Assessments Office (ANAO). In the coming months, we should see these and other Government departments review their policies in this area.

It is also a requirement for Government departments to list on their web sites all Government contracts worth in excess of A$100,000 and to provide an explanation of why information is kept secret.