SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members:...

124
COMMONWEALTH OF AUSTRALIA SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Reference: Contracting out of government services CANBERRA Friday, 4 July 1997 OFFICIAL HANSARD REPORT CANBERRA

Transcript of SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members:...

Page 1: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

COMMONWEALTH OF AUSTRALIA

SENATE

FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE

Reference: Contracting out of government services

CANBERRA

Friday, 4 July 1997

OFFICIAL HANSARD REPORT

CANBERRA

Page 2: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

SENATE

FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE

Members:

Senator Murphy (Chair)

Senator Gibbs Senator MurraySenator Lightfoot Senator SynonSenator Lundy Senator WatsonSenator Mackay

*Senator Payne to substitute for Senator Lightfoot on 4 July 1997

Participating members:

Senator Abetz Senator ColstonSenator Allison Senator ConroySenator Bolkus Senator FaulknerSenator Bob Brown Senator MargettsSenator Bob Collins Senator Stott Despoja

The Finance and Public Administration References Committee, noting the necessity forpublic accountability of all government services provided by private contractors, willexamine:

(a) How best to ensure that the rights, interests and responsibilities of consumers,contracted service providers and government agencies can be defined andprotected; particularly

(i) whether contracting out arrangements should be governed by writtencontracts between the government agency and the service provider in allcases;

(ii) whether contracts should contain standard clauses dealing with matters suchas responsibility for record keeping; complaints and dispute resolutionprocedures; allocation of responsibility between the contracting agency andthe contractor in the event of financial or other loss on the part of theconsumer; and

(iii) definition of standards of service.

Page 3: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

(b) The adequacy of tendering procedures adopted by government agencies incontracting out services.

(c) Whether the jurisdiction of the Ombudsman’s Act 1976 should be extended toensure that it covers all contracted out government services.

(d) Ministerial responsibility to Parliament for contracted out services, noting that inother parliamentary systems it has been argued that, with regard to corporatised orcontracted out government services, Ministerial responsibility extends only topolicy issues and does not encompass questions of day-to-day management andoperation.

(e) Whether government, to meet its responsibilities for policy making, should accessto all files; information etc generated by private-sector contractors in meeting theircontractual obligations.

(f) Whether and to what extent claims of commercial-in-confidence should be acceptedas limiting the right of Parliament to examine contractual arrangements betweengovernment agencies and service providers.

(g) All aspects of outsourcing the information technology (IT) requirements ofCommonwealth departments and agencies, with particular reference to:

(i) the range of IT requirements of Commonwealth agencies,

(ii) the costs and benefits of IT outsourcing;

(iii) the privacy implications of IT outsourcing and the need for privacyprotection for sensitive information held by Commonwealth agencies,

(iv) the adequacy of measures proposed to ensure public accountability fortaxpayers’ funds and public scrutiny of service providers,

(v) the approach being adopted by the Office of Government InformationTechnology to the outsourcing of IT,

(vi) the means by which opportunities for in-house bids and the domestic ITindustry can be maximised,

(vii) the employment implications of IT outsourcing, and

(viii) the experience of other jurisdictions with IT outsourcing and theinternational implications for Australia of IT outsourcing.

Page 4: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE

Contracting out of government services

CANBERRA

Friday, 4 July 1997

Present

Senator Murphy (Chair)

Senator Lundy Senator Payne

Participating member

Senator Allison

The committee met at 9.03 a.m.

Senator Murphy took the chair.

491

Page 5: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 492 SENATE—References Friday, 4 July 1997

In attendance

ANU Public Policy Program:Professor Richard Mulgan

Australian Archives:Steve Stuckey, Assistant Director GeneralKerrie Scott

Australian Bureau of Statistics:Don Aitken

Australian Customs Service:Michael Roche, Deputy Chief Executive Officer, joint author ofClients FirstBryan Box, National Manager, IT Outsourcing Project

Australian Information Industry Association:Peter Upton, Executive DirectorRob Durie, Deputy Executive Director

Australian National Audit Office:Russell Coleman, Executive Director, Information Management BranchAlan Greenslade, Executive Director, Performance Audit Business Unit

Australian Taxation Office:Richard Highfield, Second CommissionerGeoff Seymour, First Assistant CommissionerJohn Growder, Assistant Commissioner, Information Technology

Commonwealth Ombudsman’s Office:Philippa Smith, Commonwealth OmbudsmanJohn Wood, Deputy Ombudsman

CPSU:George Petrovic, National Industrial Officer

CSIRO:Jonathan Potter, General Manager, Information Technology Services

Department of Communications and the Arts:Peter Witheridge, Acting Director, Information Systems

Department of Defence:Mike McNamara, Head, Industry Services and Contracting Group

Department of Social Security:John Palmer, First Assistant Secretary, Infrastructure Services Division

Department of Transport and Regional Development:Max Wilson, Director, Information Services Branch

Human Rights and Equal Opportunity CommissionDavid ThorpNigel Waters

Office of Government Information Technology:Andy Macdonald, Chief Government Information Officer Public Service & Merit

Protection Commission:Richard Harding

FINANCE AND PUBLIC ADMINISTRATION

Page 6: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 493

Repatriation Commission:Keith Lyon, Deputy President

Department of Veterans’ AffairsColin Stubbings, Information Manager

CHAIR —I call the committee to order and welcome all the participants in today’sround table discussions on IT outsourcing. We have adopted this format, rather than themore restricted question and answer approach, to encourage the free exchange of views onthis topic. The objective of the committee’s inquiry is to ensure that the wide range ofviews on the various matters covered by the committee’s terms of reference is fullyconsidered. They are being canvassed in the media and over the very luxuriant local ITgrapevine to which Mr Maclean of OGIT referred in recent estimates hearings. We wouldlike to get that range of views on theHansardrecord and perhaps offer the opportunity toclarify some of the misconceptions on this subject that are out there.

The committee encourages all participants to speak freely and reminds everybodythat the proceedings of the committee are covered by parliamentary privilege, and thatwitnesses are protected by section 12 of the Parliamentary Privileges Act 1987 against anyprejudice arising from their evidence. I remind committee members that public servantscannot be required to comment on government policy or on advice that they may havegiven in contributing to the formulation of policy. That does not, however, prevent themanswering questions or contributing to the general discussion of matters that are clearly inthe public domain. The committee prefers all evidence to be given in public but, shouldany witness wish to give any part of their evidence in camera, they may put such a requestto the committee and we will consider it.

We have received submissions from the Office of Government InformationTechnology, the Department of Defence, the Department of Administrative Services, theDepartment of Veterans’ Affairs, the Australian Information Industry Association,Professor Richard Mulgan, Dr Clare Burton, ESRA and a private submission from Ms LynPysden. Is it the wish of the committee that these submissions be published? There beingno objection, it is so ordered.

I note in passing that a number of departmental submissions were transmitted to usvia the Office of Government Information Technology. Two of the submissions wereprovided to OGIT on 23 June but not provided to the secretariat until the close of businesson 1 July. We understand OGIT’s coordinating role in this matter. However, it wouldassist the committee if departments dealt with us directly. Before getting under way, can Iask for the benefit ofHansardthat all participants at the start of their comments give theirnames and the capacity in which they appear today.

Outsourcing IT services to specialist providers is a well-established and widespread

FINANCE AND PUBLIC ADMINISTRATION

Page 7: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 494 SENATE—References Friday, 4 July 1997

movement, both in Australia and overseas. I invite Dr Macdonald to kick off the meetingby commenting on his Canadian experience and any other relevant examples in otherjurisdictions and lessons which we might draw from them.

Dr MACDONALD —As I indicated to you before the meeting, I would like to putsome context around the meeting before I get into the international experience. IToutsourcing has been widely adopted globally in both government and private sectors withthe independent Gartner Group reporting that the global market in 1995 was valued atabout $US18 billion and conservatively predicted that it would rise to $US40 billion bythe year 2000. It is becoming an increasingly common approach to the provision of basicinfrastructure services for agencies and allows them to focus on policy and servicedelivery.

IT outsourcing is not new. The previous government’s promotion of IT outsourcingcommenced in 1991 with the industry statement launched by the then Prime Minister andindustry minister with a number of key policy outcomes. All Commonwealth agencieswere to test the market for potential outsourcing. All components of their IT platforms,including application development, were to be potentially outsourced. The overallobjective was industry development through the maximum outsourcing of government ITplatforms.

Subsequently, in 1994 the then Minister for Finance commissioned an independentreview of the Commonwealth’s use of IT and a report from this study entitledClientsfirst: the challenge for government information technologywas released in March 1995.This report examined ways in which the government could better use its large investmentin IT, including recommending that outsourcing be considered in terms of defining thecore activities of agencies and in improving agency focus on their business needs. Otherkey recommendations included the establishment of the Office of Government InformationTechnology and the creation of the position of chief government information officer.

This report envisaged that the principle of contestability would be extended to allelements of information technology, including hardware, software, applicationsdevelopment and support, operations, telecommunications, desktop and the like—a muchwider scope than what was included in the current competitive process. It alsorecommended a minimum processor size of 200 mips for IBM and compatible datacentres, with smaller centres to be consolidated either internally or through outsourcing,subject to a business case assessment that takes into account other factors includingindustry development.

A draft blueprint entitledFramework and strategies for information technology inthe Commonwealth of Australiawas developed and launched in January 1996 by the thenMinister for Finance. It recommended increasing competition for and outsourcing ofCommonwealth IT services through consolidation of data centres that were below aminimum size threshold by adopting a standard market testing approach for all agencies

FINANCE AND PUBLIC ADMINISTRATION

Page 8: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 495

and by using government purchasing power to maximise savings. In particular, it notedthat, with the existing mainframe architecture, there were excessive costs arising from theduplication of support services, multiple small and uneconomic data centres, separatecommunications networks and the higher cost of linking the different architectures andagencies. It also noted that there would be a requirement for a broader look at businessprocesses that extended across individual agency boundaries and that the IT architecturewould also have to extend beyond individual agencies and encompass agency groupingsdetermined by their business needs.

The government in the 1996-97 budget context endorsed the decision principles forwithdrawal of government from commercial business activity. Following from this, theMinister for Finance has recently released two exposure draft documents relating to theissue. These are entitled:The performance improvement cycle: guidance for managersandCompetitive tendering and contracting: guidance for managers.The Minister for Finance has stated publicly that IT is becoming a basic infrastructureservice. In keeping with the guidance provided in the documents referred to above, theCommonwealth is in a position to move from an IT provider role to one of purchasingservices from organisations whose business is to provide such expertise and services.

As stated above, agencies have been required since 1991 to test the market for theoutsourcing of both new and existing information technology service requirements as analternative to maintenance of in-house capabilities. The intention of this requirement hasbeen to achieve maximum outsourcing, subject to value for money, agent efficiency andpublic policy considerations.

The current whole of government consolidation and outsourcing strategy initiatedin the 1997-98 budget was based on a major evaluation, including initial market testing,undertaken by OGIT and the Department of Finance. This evaluation was designed to testthe cost-benefits and risk of building into the existing IT policy a much greater emphasison cross agency consolidation of infrastructure. The evaluation compared the current andprojected business as usual IT infrastructure costs reported by agencies with estimatedcosts under a whole of government consolidation and outsourcing approach, based onintegration and aggregation of services between platforms and agencies.

Agency costs have been measured according to a standard costing methodologywhich incorporates full costs borne by agencies in accrual terms. Estimates of the savingsfrom consolidation outsourcing were based on a method of vendor charges from the initialmarket testing of a large sample of agencies. The OGIT finance evaluation identifiedsignificant financial and other benefits for agencies in outsourcing the IT infrastructureunder whole of government arrangements, which provide a framework for clustering ofbusiness and exercising leverage in a sharply competitive market. The estimates of netannual savings for agencies used in the construction of budget savings are consideredconservative overall in the sense that a well-run and open competitive tender process thatmaximises opportunities for consolidation could be expected to considerably improve on

FINANCE AND PUBLIC ADMINISTRATION

Page 9: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 496 SENATE—References Friday, 4 July 1997

the outcome.

The current strategy approved by cabinet in the 1997-98 budget, in summary,requires agencies to test the market for the provision of IT services and proceed tooutsourcing of such services, unless there is a clear case not to do so. In this context, ITservices covers the operational platforms for all budget funded agencies. Agencies may butare not required to include applications development and other IT activities within thescope of their market testing. Market testing is to be undertaken within a whole ofgovernment framework designed to maximise savings and minimise cost to both industryand agencies.

Given the potential volume of Commonwealth business being offered, there areopportunities for industry, including SMEs, to get into a business on a scale thatpreviously could not be envisaged in Australia. There are significant benefits flowing fromthis initiative in addition to cost savings, including: genuine opportunities for Australianbusiness, including scope for participation in development of SMEs; an opportunity tooptimise the Commonwealth’s IT infrastructure to support agency business requirementsand directions; enabling the rationalisation and standardisation of IT infrastructure acrossagencies; enabling government and agencies to focus on their service deliveryrequirements; enabling the government to deliver its services more efficiently whilepreserving or improving the quality of service; and ensuring a strong measure of privacyand security of government information.

To minimise risk and maximise benefits from this initiative, OGIT and Financewill ensure that a highly disciplined, efficient and coordinated process is conducted undera common framework that is driven from the top levels of agencies, and that a robustcompetitive process is used which maximises the Commonwealth’s negotiating positionthroughout the process. We will ensure that fair, equitable and consistent treatment ofaffected staff is provided, facilitating their move to an industry where IT is not the corebusiness and not a support function as it is in government. World-class experts who havesignificant experience in large-scale IT outsourcing could be used appropriately.

There is a flexible approach to tendering using a request for proposal process thatallows for detailed iterative discussions with vendors to refine their technology solutionsand pricing and to ensure that time lines for implementation will be met. The options forimplementation will vary according to the agency and its specific circumstances. Theapproach for mainframe and larger non-frame agencies will be to cluster. This involvesagencies joining together to enable consolidation of uneconomic, discrete mainframe datacentres and the aggregation of mid range and desktop network infrastructure.

Appropriate clustering arrangements and staged time frames for conducting markettesting will be critical, and OGIT will work closely with agencies in establishing clustersand in sequencing the market testing. A whole of government common use arrangementwill be developed jointly by DAS and OGIT to provide services to smaller agencies for

FINANCE AND PUBLIC ADMINISTRATION

Page 10: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 497

which clustering may not be appropriate. Agencies will loan, manage and implement thecompetitive process within the whole of government framework. Agencies will developand define their specific business, technology, service and performance requirements. Theywill be responsible for providing appropriate skilled resources for market testing andcontract management.

OGIT will coordinate market testing across agencies, ensuring that an open,competitive process is followed based on a common contractual costing and projectframework. On the larger cluster transactions, OGIT will work with agencies to facilitateand participate in the implementation of the framework.

The government has agreed that the Privacy Act 1988 will be amended to applythe act to contractors supplying services to government in relation to personal informationheld by them on behalf of the government. Contractual arrangements will require privatesector vendors to meet the required privacy specifications associated with the processingof any government data which remains the property of the agency at all times. Contractswill impose obligations on vendors to provide the same level of protection of personalinformation as is currently applied by the Commonwealth agencies covered under thePrivacy Act. Security requirements will be defined to meet the needs of each agency andvendors will be required to contractually commit to specified levels. Additionalrequirements will be that no offshore processing of government information will be taken.

In summary, the policies being applied in relation to the possible outsourcing ofthe Commonwealth IT infrastructure are not new. It reflects trends of both recent yearsand future directions in an industry that is maturing rapidly in the provision ofcompetitively priced services for non-core IT activities. This provides the potential forsignificant savings to the Commonwealth, conservatively estimated at approximately $100million per annum, which excludes the Department of Defence, when fully implemented.It will also provide a unique and significant opportunity to develop a model for public-private partnership which will deliver lower cost, better quality services to Australianswhile delivering benefits to industry and the community and regional development todevelop a more robust, export oriented IT industry in Australia and provide betteropportunities for SMEs to share in the world market.

That is my opening statement, Mr Chairman. If you permit, I will talk about theoutsourcing experience in international jurisdictions.

CHAIR —Yes, that is something we would like to hear, given some informationthat we have received with regard to not only international experience but also domesticexperience.

Dr MACDONALD —I have some preliminary comments. I would like to talkabout market trends. IT outsourcing is a global trend, both public and private. As I havealready indicated, the market is a key indicator of success. The growth in the IT

FINANCE AND PUBLIC ADMINISTRATION

Page 11: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 498 SENATE—References Friday, 4 July 1997

outsourcing market continues to grow. It has been estimated that the worldwide totalmarket is $100 billion—Dataquest made this in 1996—and growing rapidly. The GartnerGroup strategic analysis indicates that, by the year 2000, three-quarters of enterprises willroutinely supply selective outsourcing and one-fifth of the Fortune 500 companies in theUnited States will enter into full service strategic megadeals.

Outsourcing is increasingly considered to be normal business practice because ITinfrastructure is not considered to be part of core business. The IT platforms areincreasingly becoming commodity items. Access to more skilled staff is becomingprohibitively expensive. No single organisation can have the full range of expertisenecessary to support the diversity of IT platforms.

Within the Australian private sector, IT outsourcing is being undertaken in anumber of major Australian private sector corporations, including the CommonwealthBank, which is progressing a $6 billion outsourcing plan over 10 years for its corebanking technology systems. It operates the second largest IT operation in the countryafter Telstra and expects to outsource to reduce costs and tell the market of newtechnologies while reducing the risk of investing in them. Analysts estimate that theCommonwealth Bank spends approximately $400 million per annum on technology andequipment.

The Macquarie Bank outsourced its mainframe data centre to IBM in 1994 toachieve financial advantage and access new technology and increase processing power.The $15 million contract signed in November 1994 is expected to save the bank up to $5million over the five-year life of the contract.

AMP has just signed a $5 million contract with technology solutions provider, CSCAustralia. Under this deal, CSC will take over the management and ownership of AMP’sdesktop and network technology and its mid-range processing. This deal expands onCSC’s 10-year contract for AMP’s mainframe operations.

Integral Energy is a large Australian power distribution company. It has signed a$100 million, five-year contract with EDS to manage Integral Energy’s IT andtelecommunications operations. This outsourcing will substantially reduce IT costs andprovide flexibility and speed in responding to markets. It will enable it to providecompetitive pricing for commercial consumers of Integral Energy products and services.

Australia Post has a $32 million two-year outsourcing contract with Unisys forassistance, development, implementation and systems management. The contract wassigned in 1994 and renewed for three years in January of this year. The Unisys teamsupporting Australia Post has grown from 65 to approximately 240 people.

There is much activity within state governments in Australia. In Victoria theVictorian IT policy on IT outsourcing was set in 1993 and applies to all government

FINANCE AND PUBLIC ADMINISTRATION

Page 12: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 499

agencies. It encourages outsourcing of all IT functions, with the exclusion of planning,strategic control and standards. It is only to be undertaken if it can be justified oneconomic grounds and is appropriately subject to security and confidentiality.

IT outsourcing has been taken on an agency by agency basis in most cases, withsome cross initiatives being undertaken. For example, like agencies, such as theDepartment of Transport and Vicroads, have been cooperating.

The goal was to achieve the outsourcing of 70 per cent of recurring ITexpenditures state wide. They include such items as salaries, operating expenses, softwarelicensing, Telecom and contracts but does not include capital expenditure, which isprovided by the vendor. I am advised that these goals have been achieved.

In results and surveys conducted for and reported to the Victorian Budget andEconomic Review Committee, they note that only two agencies—Justice, including police,and Health and Community Service—have not substantially outsourced the majority oftheir IT services. It is my understanding that the Victorian state revenue office experiencedno major problems during transition to the full outsourcing of all IT functions by Ferntreein 1996—to the point where IT outsourcing is no longer being pushed by central agencypolicy, as it now forms part of the usual business practice of agencies.

In Western Australia, a consortium with four related agencies established a three-year $25 million contract with the Ferntree Computer Corporation that will saveapproximately 11 per cent in mainframe operations costs. I understand the first year resultsgave good satisfaction with the relationship and the level of service and they are on targetfor anticipated savings. All the transferred staff remain with the company, and a secondconsortium of 11 related agencies with four data centres has been formed and has invitedtenders to outsource mainframe server and desktop support. Evaluation of tenders has beencompleted and negotiations are currently under way with the preferred tender ComputerSciences Corporation. Cost savings cannot yet be confirmed until completion of duediligence and detailed documentation of service agreements.

In South Australia the South Australian government has stated that the EDScontract will save taxpayers $100 million over the contract term. I understand the savingsin the first year are on track. The South Australian government’s contract is a singleservice provider contract from which South Australia will derive significant economic andindustry development benefits.

Internationally with the Department of Social Securities in the United Kingdom andIT outsourcing, in 1994 the Department of Social Securities Information TechnologyServices Agency announced that they would outsource their IT processing components ofservice delivery operation. During 1995-96 ITSA, as they are called, undertook andcompleted the outsourcing project under the full scrutiny of the National Audit Office, thelargest civilian computer operations in Western Europe and the UK government.

FINANCE AND PUBLIC ADMINISTRATION

Page 13: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 500 SENATE—References Friday, 4 July 1997

The IT outsourcing contract of £577 million at 1995-96 prices had an overallsavings target of £378 million. ITSA is on target for the achievement of savings, with £30million savings realised in 1995-96.

ITSA’s performance review indicated that the agency continued to pay 99 per centof its invoices on time. Ninety-eight per cent of services delivered to customers metprescribed service levels and were achieved in time and to budget compared with theinternal 1994 figure of 94.5 per cent. One thousand five hundred and forty staff hadsuccessfully transferred from ITSA to the vendors.

The UK National Audit Office conclusions in December 1995 indicated that arobust, competitive tendering process had been undertaken and technically compliant bidswere selected. Procedures to monitor service levels were established prior to outsourcing.The agency had 200 service level agreements with 11 principal customers. The agencytook appropriate steps to offset risk so that outsourced services would be responsive tocustomers’ changing needs. Sound contract management processes were put in place andcontinuity of service has been secured.

In an inland revenue IT outsourcing deal, a 10-year IT outsourcing contract withEDS estimated £1.03 billion was let for the delivery of IT services under an 18-monthcompetitive tendering process. This has since been revised upwards to £1.6 billion. Thework involved is the provision and support of distributed data and computercommunications systems, data centre services at 16 locations and application managementand development. Projected savings of 15 to 20 per cent of IT costs are anticipated overthe 10 years of the contract. The revised contract of $1.6 billion refers to anticipatedadjustments in the contract as implementation proceeded and new work under the terms ofthe contract. That is my overview, Mr Chairman.

Senator LUNDY—I wanted to ask Dr Macdonald for further details with respectto the Inland Revenue example. You just briefly stated that there were a few factors withrespect to the revised contract. Can you explain to the committee exactly what thecircumstances were which led to the upward revising?

Dr MACDONALD —As I indicated in previous testimony, we have not seen thecontract. We relied on information that we received from the high commission whocontacted the agency. So we are relying on secondary sources in that regard.

Senator LUNDY—Has anyone made any effort to get further information?

Dr MACDONALD —No, I have not.

Senator LUNDY—Do you intend to?

Dr MACDONALD —Not at this time, unless it is the committee’s wish that we

FINANCE AND PUBLIC ADMINISTRATION

Page 14: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 501

follow-up on it. We would be pleased to take it on notice.

Senator LUNDY—I think that would be worthwhile. With respect to the revisedupward figure for that contract, it would be useful to get details about such matters as atwhose direction those changed requirements were made, whether it came at a governmentlevel, a ministerial level or an agency level, and the circumstances surrounding that. Thepoint being that, if there was a policy change with respect to the services that InlandRevenue were providing, then to negotiate a policy shift in the confines of an existingcontract, obviously, the negotiating parties, particularly the corporation that has thecontract, are in a fairly reasonable position to negotiate any changes.

Dr MACDONALD —I would be pleased to take that on notice.CHAIR —Does any of the other participants wish to make a comment at this time

with regards to what Dr Macdonald has said and/or any other aspects that they might liketo add concerning international experience and/or domestic experience?

On this question about the success or otherwise, I would be interested to knowwhat is the principal objective from a government point of view and from OGIT’s point ofview about why you seem to be taking a headlong dive into the outsourcing pool. Whatare the real objectives? Also you might like to comment on some of the experience thathas been reported where the cost savings that you refer to are not as successful as youwould indicate.

Dr MACDONALD —As has been previously indicated, the government announcedthat the overall objective was to achieve a more efficient use of IT infrastructure and costsavings were an important component, subject to a market test, subject to meeting thebusiness needs of the agencies and subject to providing appropriate protection for the dataand security of the information that would be involved in the outsourcing.

The government also indicated that there were industry development opportunitiesassociated with putting large tranches of business out into the private sector at theconclusion of a successful tender, if that were the case. The government indicated as wellthat there were benefits in maintaining the currency of IT infrastructure, access to skillsand potential for rationalisation over the medium term of the infrastructure that had beenoutsourced.

CHAIR —How do you respond to the reports of the UK and US experience thatsay only 56 per cent of outsourcings studied could be considered to be successful?

Dr MACDONALD —Which study are you referring to?

CHAIR —There is a range of studies that have apparently been reported in themedia. I do not have the specifics.

FINANCE AND PUBLIC ADMINISTRATION

Page 15: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 502 SENATE—References Friday, 4 July 1997

Dr MACDONALD —The one study that I am aware of is Lacity and Willcocks.Ms Lacity has written extensively on it. My observation of those studies is that they covera range of times at which these contracts were let. Recalling that the outsourcing industryis about 12 years old, it is safe to say that in the early stages of contracting both partieswere sorting things out amongst themselves. I note in the Lacity and Willcocksconclusions that the more recent contracts seem to do better, although it is safe to say thatin many cases they indicated that it was too early to tell. My conclusion from that is thatwe have moved a fair bit from the early days of contracting; the processes that bothparties can apply are considerably enhanced and the success rate is enhanced as well.

CHAIR —The Deloitte study says that only 35 per cent of the 1,400 respondentsreported any benefit from outsourcing. In terms of those things, I wondered what workyou have been doing to analyse those reports and to then look at what lessons might belearned?

Dr MACDONALD —I have not seen the Deloitte study to which you refer, but thelessons we take from this—and they are pretty generic lessons from a number of studies—are that there are a number of preconditions for success. You must have a clearly definedunderstanding of what you seek from the outsourcer—what you are offering and what youexpect in the way of service standards. You must have both senior management andinformation technology involvement. You must have expert advice and assistance to makeit happen. The process must be closely and well managed, and the contract must bemanaged after it is completed. If those factors are in place, the opportunity for asuccessful outcome is enormously enhanced.

CHAIR —It would appear to me that there are a limited number of companies thatcould provide the sorts of services, in terms of government IT infrastructure. On the basisof what you just said, if you outsource, what is to stop them from tendering a price for thecontract, getting rid of the in-house capacity—and maybe eliminating a lot ofcompetition—and then, over time, putting add-ons onto the cost of the contract? That hasbeen claimed in a number of areas. How do you deal with that, in terms of your claimabout such a successful outcome being a foregone conclusion, as you seem to put it?

Dr MACDONALD —I believe what I said is that, if you take care in thespecification of your requirements, if you apply good, sound management principles to thenegotiation of the contract and if you follow on and administer the contract—and asuccessfully structured contract would anticipate different levels of changes and wouldhave provisions for the major changes that could be undertaken—then you anticipate thesorts of things that would allow a contractor to pile on the cost later when a change comesand you preclude him from doing so, because those things have been covered in theoriginal contract.

CHAIR —Would you suggest that the DVA contract was a good contract?

FINANCE AND PUBLIC ADMINISTRATION

Page 16: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 503

Dr MACDONALD —I would let the DVA comment on that. They are right besideme.

CHAIR —They can do that, but I am interested in your view.

Dr MACDONALD —I have a view that the DVA contract gave them the successthat they were seeking.

CHAIR —Can you repeat that?

Dr MACDONALD —I think it is a successful contract, yes.

CHAIR —Do you think it covered all the points that you just made about having aproperly constituted, properly managed contract?

Dr MACDONALD —My understanding of the contract is that it made provisionfor those things, yes.

CHAIR —Why is it that the Australian National Audit Office report would seem tothink otherwise?

Dr MACDONALD —I am going to ask DVA to comment on that, if you like,Senator.

Mr STUBBINGS —The audit office agreed with DVA that it was a success. Itdelivered the $10 million saving over the period of the Ferntree contract. We believe thatit supported the delivery of services to veterans.

CHAIR —The point of my question was that the ANAO report pointed out aboutthat particular contract that there was a need for clearer establishment about managementand responsibility, et cetera. It also suggested that you had not undertaken a formalevaluation. One of the recommendations was that a formal evaluation ought to have beenundertaken so as to identify the outcomes very clearly.

It acknowledged that you had a saving of $10 million, but I am looking to DrMacdonald as to the overall arrangement; how government agencies go down the road ofgetting successful contracts in place, if that is what they are to do. If that is beingchampioned as the best—I am not trying to detract from it but, from my reading of theaudit report, there are still some problems. If you look across the spectrum of governmentagencies that outsource or contract out services you would not say that it is the mostsuccessful area of government or Public Service management.

Mr STUBBINGS —The work that was done in DVA at the time, which essentiallywas in 1991, was seen as groundbreaking work. We agree with the audit office that there

FINANCE AND PUBLIC ADMINISTRATION

Page 17: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 504 SENATE—References Friday, 4 July 1997

were aspects that we might have done better. We believe we had sufficient management inplace that assessed the risk associated with the contract. In so far as there was a $10million saving, it was a contract over the five years that was in the order of $28 million.There was sufficient level of management applied that the department felt was appropriateto the risk that was there.

CHAIR —We are going get to your particular area shortly. I was really trying toget Dr Macdonald’s view about its success or otherwise. The point is that if that is adomestic situation, you then look at experience internationally and ask yourself: whatthings are we learning from? That is why we are pursuing the evaluation process—whatwe are learning from international experience that we can then translate into our area byway of improvement or at least making sure that we do not make the same mistakes.

Dr MACDONALD —I think the answer I gave earlier regarding what we havetaken from the report, such as Lacity and Willcocks, in terms of clear specifications andthe like, is what we have learned. We learn from each contract. As we adopt the whole ofgovernment approach and we do the clusters we anticipate that these will be incorporatedinto the contracts as they proceed.

Senator LUNDY—I would like to ask you about a couple of specific points thatyou made in your presentation this morning. You made a very brief mention of selectivetendering and a selective outsourcing model. Can you extrapolate on that?

Dr MACDONALD —There are two kinds. There is functional outsourcing, wheresomeone will take something like the entire payroll system, the entire human resourcessystem, the transportation system, or the communications system and outsource that to anoutsourcer. That is a functional type of approach. Another component of that is tooutsource one or more components of the IT infrastructure. For example, we are doing aselective outsourcing in the sense that we are not outsourcing the application’sdevelopment; what we are outsourcing is the IT mainframe, the mid-range and thedesktop. Any subset of that could also be considered as selective outsourcing. As well, foryears there have been facilities management contracts where agencies have had datacentres operated by others; they have outsourced printing to people who specialise in thatsort of thing.

Senator LUNDY—I have another general point from your submission. Thiscommittee has seen enough evidence up to this point to know that IT outsourcing is notsuccessful in every circumstance. We have seen studies which show that, for example, 56per cent of contracts in IT outsourcing could be considered successful in that they providethe savings and the level of service required. In Australia, we have heard evidence fromyourself that we have very few, if any, comparative models that the federal governmentcan turn to, to assess the potential for success of the contracts proposed under your model.Do you see your role as identifying the pitfalls and problems associated and analysing thenegative trends of IT outsourcing, or is it simply your job to focus on the policies andprogress the Minister for Finance’s agenda or the government’s policy?

FINANCE AND PUBLIC ADMINISTRATION

Page 18: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 505

Dr MACDONALD —Our role is to implement the cabinet’s decision, which is to,on a clustered whole of government basis, market test the government’s IT infrastructurein a responsible way which takes account of the appropriate risks that are involved—andthere are always risks involved; I have elaborated on them at some length—and, in thecase of a successful market test, to implement the cabinet decision to outsource theactivities. This includes the ongoing management of the contract. It is our job to ensurethat, in the event that the market test is successful, there is an appropriate contractualframework set up that provides the kinds of controls that are necessary to preclude theproblems which have arisen in the past from time to time.

Senator LUNDY—I just want to follow up that point. With respect to your role,you are there to progress a specific policy. This committee has consistently found that it isour research and our seeking information from other witnesses that have delivered the datathat presents the other side of the argument for IT outsourcing. Do you accept anyresponsibility, given you are charged with the role of analysing the risks, for actuallymaking that information public and presenting it to organisations like this in a way thatthey can conduct a real analysis?

Dr MACDONALD —We are having a discussion of my role at 10 o’clock thismorning. If you wish, I can elaborate on that now or we could defer the question untilthen.

CHAIR —Just so we can keep getting more people involved, we might invite MrMick Roche and Mr Mike McNamara to make their contribution at this point, and then wecan go back to some further questions in terms of the range of IT requirements of theCommonwealth and the extent to which it is already outsourced.

Mr ROCHE —Mr Chairman, I did not have an opening statement to make. Iwould be happy to respond to questions, though.

Mr McNAMARA —We have put in a brief submission that addresses some of thequestions that were put to us. I guess I would make a few points that flesh out some ofthe comments in that submission. The first question that we were asked to address relatedto the range of IT requirements of Defence. We have a brief statement there. I do not wishto re-read it, because I think it would only bore the committee, but I think the point Iwould make here is that there are a number of IT requirements that we have traditionallysourced from the private sector. We do not build our hardware. I think some of our friendsin the scientific area might have done so in times gone by, but these days it iscommercially available.

We used to build a lot of our systems in-house. We no longer do that. We rely tothe extent we are able to on commercially available software or require some modificationto that software, and that is usually a collaborative arrangement. Indeed, we have hadsome very successful recent initiatives which have seen strategic alliances between

FINANCE AND PUBLIC ADMINISTRATION

Page 19: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 506 SENATE—References Friday, 4 July 1997

Defence, commercial systems integrators and software suppliers that have had very goodoutcomes for us. Of course, more recently we have had a market testing competition forall of the operation of our Defence computing bureau.

Senator ALLISON—I would like to ask Dr Macdonald a couple of questionsabout the overseas experience again and the identification of what is core business. In yourexperience, in that process of identifying core business and contracting out that which isnot core business have many organisations identified IT as core business and had theyinitially not done so but then reversed that decision? Can you tell us what the experienceis overseas in that respect and also your own process or guidelines by which one identifiescore business?

Dr MACDONALD —I believe there is a discussion at one of the committeehearings on the nature of the core business. I think that, as I said in my opening remarks,generally across governments and the private sector, increasingly people are concludingthat information technology is not part of their core business unless they are aninformation technology service provider. That is why the market is growing so rapidly—from 18 billion now to 40 billion by the end of the year 2000, with a total potentialmarket of $100-plus billion. So I think this is a trend that is increasing. My minister hasstated that he considers that IT is not a core business, and indeed the government’sdecision to subject the IT infrastructure to a competitive process supports that.

Senator ALLISON—So you know of no examples where there has been a reversalof that decision and IT has been identified as a core business?

Dr MACDONALD —Not that I am personally aware of, no.

Senator ALLISON—The experience in South Australia that you referred to a littleearlier has been quite controversial. I am surprised that you cite that as being a successfulcase of contracting out.

Dr MACDONALD —I believe this testimony has come up before, Senator, andwhat I basically cited in here is what the South Australian government has said.

Senator LUNDY—Have the clusters been finalised?

Dr MACDONALD —Not yet.

Senator LUNDY—When will they be finalised?

Dr MACDONALD —When they are ready. It is a process that is ongoing. I do nothave a firm date. They are at various stages. We are progressing them and we areobviously working quickly to try to get them finalised.

FINANCE AND PUBLIC ADMINISTRATION

Page 20: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 507

Senator LUNDY—Are there any that have been finalised?

Dr MACDONALD —Not yet.

Senator LUNDY—Can you name the current clusters that are being consideredthat are not yet finalised?

Dr MACDONALD —I believe that we have talked about this in the past. If youwould give me a movement, we could check the identification of them. I understand thatquestion was posed on the 16th and we took it on notice. We will provide you with aresponse in due course.

Senator LUNDY—You took it on notice on the 16th?

Dr MACDONALD —I believe so, yes.

Senator LUNDY—And you have not got the answer yet?

Dr MACDONALD —Not fully, no.

Senator LUNDY—When will you be able to provide the committee with theanswer? I would like something a bit more comprehensive than ‘in due course’?

Dr MACDONALD —We are working as quickly as we can. As I said, these thingsare not yet finalised. There is considerable movement here and there. As they arefinalised, we are pleased to share them with the committee.

Senator LUNDY—Have management groups been meeting in all of the potentialclusters to attempt to finalise the clusters?

Dr MACDONALD —There are discussions ongoing with five of them, yes.

Senator LUNDY—I will come back do that point later. With respect to some ofthe examples you used in your submission, you mentioned Australia Post and the Unisyscontract. How familiar are you with what has occurred at Australia Post through their IToutsourcing experience?

Dr MACDONALD —I am basically giving you what was provided to me. I do nothave a detailed personal knowledge. It was provided by my staff after analysis andconversations with Australia Post.

Senator LUNDY—Perhaps I can progress this in looking at your role. Given thatthat is a significant example of an Australian IT outsourcing contract, do you think that itis your job to be familiar with those circumstances?

FINANCE AND PUBLIC ADMINISTRATION

Page 21: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 508 SENATE—References Friday, 4 July 1997

Dr MACDONALD —I think it is the role of my office to be aware of theoutsourcing deals that are going on around the country. I said that I cannot give you morepersonal information on that. If you require more detail, I would be pleased to take thequestion on notice and provide additional detail.

Senator LUNDY—Yes, if you could.

CHAIR —Mr Roche, would you like to explain the relationship between corebusiness and IT in the customs office?

Mr ROCHE —Our core business is customs related. We do not see the provisionof IT services as one of our functions. If it were not for the fact that we were thereproviding customs services we would not require IT. It is a support service.

CHAIR —So you see it just as a support service, something that—

Mr ROCHE —It is a support service in the same way that finance is, personalmanagement is, internal audit is, the provision of property is and so on. It is somethingthat we need to do our business. We certainly use it a great deal to do our business. But,if it were not for being a customs service, we would not have any need for IT.

CHAIR —So you would see it, in terms of the Customs Service, as different fromDSS, where it is fairly integral, I would have thought?

Mr ROCHE —Obviously it is integral to the way we do our business, but theactual provision of it is not our core business. If you go to our mission statement, ourstatement of functions and so on, you will see that it does not say amongst those that oneof the core functions of the Australian Customs Service is to provide informationtechnology services, any more than we are required to provide personnel services, orfinance and accounting services and so on.

CHAIR —But what about the Department of Social Security?

Mr ROCHE —I cannot answer for the Department of Social Security.

CHAIR —You do not want to express a view?

Mr ROCHE —No, I do not.

Senator LUNDY—I have a question with respect to Defence and the commercialsupport program. Before looking at the area of your own IT contract, which was won bythe in-house bid, can you describe reasonably briefly the market testing process you wentthrough, the nature of the development of the commercial support program and how thatcontributed to the ability of your in-house people to successfully prepare and obviously

FINANCE AND PUBLIC ADMINISTRATION

Page 22: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 509

win the contract for your IT? How integral was it to the point that you actually reachedwhere your in-house people won the contract?

Mr McNAMARA —You said ‘briefly’, so that is a little constraint. Let me try toget through the outlines and then perhaps you might want to question me in more detail.The aim of our commercial support program is to provide non-core support services tocore Defence activities in the most cost-effective manner. It gets back to the definition ofwhat is ‘core’ and ‘non-core’. I do not know whether this sounds frivolous to thecommittee, but Tony Ayers, the secretary to Defence, says that the core business ofDefence is killing people. He has won an award from theCanberra Timesfor that.

Senator LUNDY—So he should.

Mr McNAMARA —That has been translated by one of my colleagues who wears auniform as the perpetration of state condoned violence. That is the core business ofDefence. We refined that a little to define ‘core activities’ as those that are so integral tothe operational effectiveness of Defence that performance by other than Defence personnelwould diminish or put their effectiveness at unacceptable risk. So that is the frameworkwe are looking at.

We have erected a competitive tendering model which competes the in-housedelivery of the service with commercial service providers to find the most acceptableoutcome. There are some constraints that I could go into that reflect particularly theDefence experience—we cannot put civilians in harm’s way as a consequence of ouradherence to some additional protocols to the Geneva Convention. I could go into all thatdetail, but that is probably not germane to the committee’s consideration in this context.

What we have done, though, is have a very visible methodology that has beenagreed—I am not sure whether people from Finance are here—to with our colleagues inthe Department of Finance so that people know the rules of engagement, if you will, sothat both the private sector and indeed the in-house providers know how we operate in thisregime.

Senator LUNDY—In relation to the lead-up and I suppose the development overtime of the commercial support program, to what degree did that influence or provide theability for an in-house bid not just to be possible but also to operate in a competitivemutual environment and actually have some success? Perhaps I can contextualise this. Iam thinking of other models where market development has not occurred with respect to apotentially outsourced service and how critical that is—what I see as a marketdevelopment process, be it in-house or in the private sector—to actually coming up with asituation where the expressions of interest and subsequent tenders suit and are wellmatched to the needs of the department or agency.

Mr McNAMARA —I guess I would argue that because we had a robust and

FINANCE AND PUBLIC ADMINISTRATION

Page 23: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 510 SENATE—References Friday, 4 July 1997

visible methodology that people were quite aware of—there was a good deal of assistanceto the process from people both within the defence organisation and in the private sector—in the context of our market testing of the operation of the Defence Computing Bureau,we also engaged in a good deal of public consultation with the in-house people andindustry on the nature of what we were requiring. I think some of the prerequisites that DrMacdonald talked about earlier are very much prerequisites we would agree with in thatcontext. We certainly put our money where our mouth is in our operation. I am havingsome difficulty in answering your question because I am not absolutely sure what you aredriving at.

Senator LUNDY—Perhaps I could ask it like this: what was the time frame withrespect to the commercial support program in the process of consultation that you havejust described?

Mr McNAMARA —Fine. I can answer that more readily. Let me take you backwhere we started from. We had four separate large computing entities in Defence that wewere going to market test separately. It clearly was not a sensible way to go when wecould reap some economies of scale internally, so we amalgamated those entities to formthe Defence Computing Bureau. We excised from the operations of the bureau theapplications and sent them back to their, if you would, owners, the people who reallywanted the applications within Defence.

Senator LUNDY—Sorry to interrupt, but what was the rationale behind that?

Mr McNAMARA —The starting point of our process is what is called the activitydefinition stage, putting a fence around what we are talking about here. We define exactlywhat we are looking at. When we looked at the applications, we determined that they wereof varying age and genealogy in the sense that some of them had been built in-house andsome were the result of modified commercial software, if you will, and it would have, wethought, been a fairly risky operation to incorporate those into a market testing initiative.

It would have taken us a good deal of time to describe them, and we were not surethat that made business sense, whereas the operation of a computing bureau is not reallyrocket science stuff. It is important and vital to the operation of Defence—do not get mewrong—but it is not of the same degree of complexity in this case. We took the view thatwe would excise those, that we would form a largish bureau because of the economies ofscale that are inherently involved in the operation of larger entities as opposed to smallerones. That was the particular rationale.

Senator LUNDY—Okay. Can you continue with the time frame that you weredescribing earlier?

Mr McNAMARA —We formed the Defence Computing Bureau on about 6 June1994, says he, recalling it. At the same time, we had a small project team under myguidance, established to market test the operation of the bureau. The bureau was not undermy guidance; that was particularly important. Some parts of it use to be. It was put to one

FINANCE AND PUBLIC ADMINISTRATION

Page 24: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 511

side because we needed to have a process that put a Chinese wall between the bureau andthe project team that undertook the market testing.

That team engaged in a good deal of interaction with the bureau operators in thesense of deriving service level agreements that Andy has already referred to. That is acomplex task because we started from ground zero. We did not have a framework there.Those service level agreements with the bureau and with the owners of the applicationstook some time to derive. We separately had conversations with our friends in industry tomake sure that they understood where we were going. That was a managerial process thattook some time because of the complexity of what we were doing.

Senator LUNDY—Did you consult with DVA with respect to service levelagreements?

Mr McNAMARA —Not with respect to service level agreements. It was withrespect to their initial outsourcing exercise that you have heard about today—the firstone—and they did provide us with a good deal of helpful material. I would have to re-search my grey cells to find out exactly how we took that on board.

Senator LUNDY—No, it is okay—keep going. So, after you conducted markettesting, you consulted with industry. That occurred over a couple of years?

Mr McNAMARA —Over a period of a couple of years.

Senator LUNDY—Over a two-year period?

Mr McNAMARA —Yes.

Senator LUNDY—At what point in time did you feel that the department wasready to actually embark on the process of calling for expressions of interest or a requestfor tender?

Mr McNAMARA —Perhaps I left that out. By the time we formed the DefenceComputing Bureau in June 1994 we had already taken that view. In fact, the inception ofthe Defence commercial support program is traced back to about 1991. It was in ourminds at that stage that we would do market testing of ‘something’—it was undefined atthat stage—in the computing bureau context.

Senator LUNDY—Okay. So by 1994 you knew where you were heading?

Mr McNAMARA —Yes.

Senator LUNDY—Between 1994 and the successful tender being let to your in-house group, what was going on during that period of time?

FINANCE AND PUBLIC ADMINISTRATION

Page 25: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 512 SENATE—References Friday, 4 July 1997

Mr McNAMARA —It was the derivation of the service level agreements, it wasconsultation with industry, it was the derivation of the contractual material that we neededto put together—the statement of requirement and the request for tender. We hadnumerous public information sessions and invited potential players. We were embarrassedat times because of the audience; it seemed like a cast of thousands was going to bid forthe process. That would not have been sensible. We simply did not need a large numberof bidders in this process because there is only going to be one winner. But we spent agood deal of time in consultation to make sure that what we were asking for wascommercially sensible to both the would-be in-house providers and to the private sector.

Senator LUNDY—That competitive process that you embarked upon: do you thinkthat that process was essential to the outcome or the integrity or the credibility of theactual contracted outcome? How important was it to go through two years of consultationsand public meetings canvassing the issues with the industry players—that sort of process?

Mr McNAMARA —We believe it is absolutely vital that the decisions in this areaare visible, defensible and auditable. For that reason, we needed to make sure that therules of engagement were very clearly understood by all players. Indeed, the eventualrequest for tender that we issued was in the form of four floppy discs. I think it would beabout 800 pages if you had the time to print them out. The first draft of that material wasthree discs, so we had a one-third increase in volume as a consequence of thecommunication and consultation process.

Senator LUNDY—Right. In terms of that process, do you have a record of thetime line and the steps that you undertook to reach the conclusion of securing a successfultender?

Mr McNAMARA —Do you mean the date milestones or do you mean whathappened on the way through?

Senator LUNDY—Date milestones and descriptions of each step.

Mr McNAMARA —I do not have the dates in my mind, but we could producethem for the committee without any difficulty.

Senator LUNDY—I think if you could take the time to do that it would be veryuseful.

Mr McNAMARA —Yes, that is not a problem. I could probably sketch out fairlybriefly, if you wish, what absolutely happened. We issued a request for tender eventuallyas a consequence of our public consultation process. We received three commercial bidsand an in-house bid. It was then subject to an internal tender evaluation team process inDefence, guided by a senior higher review committee. The outcome of that went to an ITacquisition council which included representatives of other agencies, some of whom are

FINANCE AND PUBLIC ADMINISTRATION

Page 26: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 513

here today. That was endorsed by a senior Defence official, and you have seen theoutcome so far. The preferred tenderer has been selected. We are in the final stages ofnegotiating the agreement with that tenderer.

Senator LUNDY—How did you get to the point of having three preferredtenderers and the in-house bid? How did you conduct that selection process, given thatyou had a cast of thousands?

Mr McNAMARA —We didn’t. We used the market. We provided as muchmaterial as we could to would-be bidders. A number of people came to us at the time andsaid, ‘Thank you very much. We’re not going to bid. We understand the nature of whatyou want. It is not within our core business,’ or gave other reasons.

Senator LUNDY—So that selection process just happened through natural attritiononce the information—

Mr McNAMARA —We would like to think it happened through the provision ofinformation that allowed the bid-no bid decision to take place.

Senator LUNDY—Can you explain the role of the IT acquisition council in thatcontext?

Mr McNAMARA —We were concerned to make sure that we were not kiddingourselves as to the outcome. We wanted to make sure the decision that we had arrived atwas subject to some external scrutiny from people who were involved one way or anotherin similar exercises. We had representatives from Dr Macdonald’s staff, the AustralianTaxation Office, the Department of Administrative Services, the Department of Finance,the Department of Industry, Science and Tourism, and an independent consultant—whichis par for the course in IT acquisition councils.

I should mention that we did this in two stages—I have probably dropped one outthere. We did this when we were just about to issue the request for tender to make surethat that was acceptable to the members of the council and when the tender evaluationteam’s report was being considered—in other words, the eventual outcome.

Senator LUNDY—My understanding of the role of the IT acquisition council isgenerally one of scrutinising process rather than casting a view on the actual merit of thedifferent tenders. Is that a fair comment.

Mr McNAMARA —I am not the custodian of IT acquisition council policy, andother people probably know more, but my impression is that it is a body that advises thesecretary of the department of the business case that is being put forward. It hastraditionally been used in the acquisition of large systems or what have you. Its role hasnot hitherto been utilised in this context—not always anyway—of outsourcing or market

FINANCE AND PUBLIC ADMINISTRATION

Page 27: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 514 SENATE—References Friday, 4 July 1997

testing initiatives. But it scrutinises the whole business case and members of IT acquisitioncouncils do not see themselves constrained in any way.

Senator LUNDY—Perhaps I could ask DVA the role that the IT acquisitioncouncil played in their recent contract with ISSC.

CHAIR —Senator Lundy, we have a session with DVA.

Senator LUNDY—Okay; I will make a note and come back to that.

Senator ALLISON—Could Defence give the committee some idea of where thesavings of $13 million per year were achieved—what savings might be related to staffnumbers, to reorganisation and management, and to advances in technology? Since yourbid is in-house, perhaps you know better than anybody else where those savings can beachieved.

Mr McNAMARA —It is in all of those areas. The number of staff involved in thedelivery of the service has probably more than halved since the inception—they will comedown quite normally. The intensity of the use of the available technical infrastructure hasincreased. As I said earlier, we started this process without defined service levels. We arenow able to say that one does not need a Rolls Royce when a Holden will do. We havemade sure that we are not overservicing the customer, because the customer is nowdefining the service, whereas previously that did not apply.

I mentioned earlier that we have rationalised the operation of the separate entitiesthat we started with to form the Defence Computing Bureau. We had a separate entity formanpower—Defence is a bit old-fashioned in its terminology; I am sorry about that—forlogistics and for finance, and we crunched them together in the first place to form theDefence Computing Bureau. So the savings are in all of the above.

Senator ALLISON—Could this have been done whether or not you had anoutsourcing program under way?

Mr McNAMARA —It could have been.

CHAIR —Perhaps the ABS, the tax office and CSIRO would like to comment withregard to the link between core business and the use of information technology. Would theATO like to be the first to comment?

Mr HIGHFIELD —My response would be similar to that of Mick Roche inrespect of Customs. We regard our core business as administration of the tax laws and inthat context we would emphasise our knowledge of the tax system and our understandingof government taxation policy as being the sorts of key competences that we would

FINANCE AND PUBLIC ADMINISTRATION

Page 28: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 515

emphasise in respect of our organisation.

It is true that we rely very considerably on information technology to administertax laws. One might well say that you could not run your business today with theresources that you have today without information technology. It is probably also fair tosay that the use of that technology extends outside the tax office, because we havelinkages with tax agents and Australia Post. But, be that as it may, we certainly would notregard ourselves as existing to provide information technology services. We are there toadminister the tax laws, and we use IT as a major enabler to achieve that.

Mr AITKEN —I guess ABS sees itself a little differently. We are basically a dataprocessing organisation, and the provision of IT infrastructure is key to the collection andprocessing of a lot of our statistical data. The senior management at the ABS seethemselves as very closely involved in the management of the IT infrastructure, anddecisions on implementation of new technologies and changes in processing techniques areseen as the responsibility of senior management. That is the difference between us andsome of the organisations where data processing and the provision of IT infrastructure isseen as non-key.

CHAIR —Where would it be different in the case of ABS and, say, some sectionsof DSS in terms of data collection?

Mr AITKEN —Data processing—not the paying of pensions—is our business atABS.

CHAIR —Perhaps DSS might like to express a view about that?

Mr PALMER —I am the First Assistant Secretary, Infrastructure ServicesDivision; I am actually the Commonwealth Services Delivery Agency and am talking forboth in the delivery of the services. The core business is the delivery of Social Securitypolicy outcomes, which involves the delivery of allowances, pensions and benefits toeligible persons. Certainly we are very similar to the tax office and Customs in that IT is avery important, very key enabler in what we do, but it is not the core business.

CHAIR —In terms of the data collection that you have to do, the input and output,do you see that you need a greater involvement, or could you just outsource it?

Mr PALMER —I think we need to ensure that the appropriate controls are there,particularly with respect to the strategy that is adopted. But, with the appropriate contractsin place, I believe that infrastructure could effectively be outsourced.

CHAIR —What if you enter into a contract for, say, five years for the supply of ITinfrastructure—which is longer than the life of a government—and policy changes occur

FINANCE AND PUBLIC ADMINISTRATION

Page 29: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 516 SENATE—References Friday, 4 July 1997

that might affect the level of payments which you make, or the way in which thepayments are made?

Mr PALMER —I think the important distinction here is that we are talking aboutthe outsourcing of the infrastructure. As policy and governments change, it is theapplications that are the items of change.

Mr ROCHE —The idea that contracts might span the life of more than onegovernment is not a novel concept at all. We take a large number of business decisionsthat involve contracts going beyond the life of the government. Accommodation, hiring ofstaff and so on are just a couple of the examples.

CHAIR —There is a bit of a difference, though.

Mr ROCHE —I do not think so, because we certainly would be providing, in anycontracts that we signed for outsourcing our IT, the capacity to vary the volume of workthat we do, the capacity to change the way we do the work and so on. It is essential that acontract provide that.

CHAIR —Yes, but I guess I would think that, in the case of IT infrastructure andsoftware, say, for the payment of benefits to social security recipients, you would not beable to consider the leasing of property as being in the same league. There was anexperience in, I think, Florida where, as a result of a government policy change to thelevel of the benefits or the way in which the benefits were paid, it ended up costing thatparticular government a lot of money. If you contract out or outsource your ITinfrastructure and software, what happens when government policies change? It may bethat you cover that in the contract, but apparently that does not happen in some areas.

Mr ROCHE —That may not have happened in some areas, but I make the pointthat the investment that you make in IT, whether it is through outsourcing or whether it isthe purchase of computer equipment and the installation of desktop equipment or thebuilding of large-scale computer equipment, it is an investment that has a recovery time ofmany years. Typically we would be seeing with our larger applications a payback timethat might span 10 years. It is open, of course, to any government or new government tomake different rules and we have to accommodate that as best we can, but that is part andparcel of working for governments. I really do not see that outsourcing introduces anyadditional complications. Indeed, if you have got the contract structure right, you in facthave a better chance to vary the resources that can be applied to your particular processingneeds than if you are necessarily doing it in-house.

CHAIR —I do not profess to be an expert on IT infrastructure, but it apparentlywas a problem in some areas and has been a problem in a number of others where thesuccess rate has not been all that good. I do not know whether the DSS representative hasanything they would like to add. I am still curious about whether ABS see that it is

FINANCE AND PUBLIC ADMINISTRATION

Page 30: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 517

somewhat important to them in terms of the control they have over their IT infrastructurein their data collection et cetera. I would have thought some of the data collection, say inthe case of DSS, was fairly important and not dissimilar to that of ABS. You are dealingwith people both in terms of payments and in terms of information being taken in. So Iwould still be curious as to how that is going to be managed and if you have any furtherviews.

Mr PALMER —Just to comment on what Mr Roche says, over many years wehave delivered a very significant program of government change with major releases ofpolicy change every three months or so. The infrastructure that we put in place, forexample, back in 1982-83 with Stratplan has stood us in good stead over many years. Infact, there was a recent consultancy report by Dr Gus Taloni indicating some verysignificant returns on that investment. I think that whether it is in-house or whether theinfrastructure is provided externally would not make a significant difference to thatcapability, provided, firstly, the contracts are in place and, secondly, there is still a verygood control of the strategic direction in IT to ensure that leverage of modern technologycontinues to be delivered.

Senator LUNDY—I would like to follow that up with DSS. Could you give adescription of what IT you currently outsource?

Mr PALMER —We outsource quite a significant amount. In terms of what wecontract out and in terms of our major contracts, we outsource the maintenance ofhardware and software, we use contract programmers very significantly, we outsource theproduction of pensioner concession cards and the outward handling of our mailing and weoutsource things such as cabling. We recently had a very large systems integrations projectwhich was outsourced to BHP IT. That contract is still ongoing.

We recently outsourced the facilities management of our voice services. The firstpriority of that is for the facilities management of our teleservice centres. We also recentlyannounced the outsourcing of our human resource and financial systems, the SAP contractunder OGIT. They are some examples. That is a very significant expenditure. I havepreliminary figures for the last financial year. It is in the order of $70 million.

Senator LUNDY—What percentage of your IT budget do you currently outsource,in dollar terms?

Mr PALMER —We are working on that. I would prefer to take that on noticebecause it is a very complex question. It is not just a matter of the expenditure in mydivision and the applications division; it is a matter of expenditure across the wholedepartment, and now the Services Delivery Agency.

Senator LUNDY—With respect to that outsourcing that is in place, has been inplace for a while and is obviously growing in areas where you require a specialised

FINANCE AND PUBLIC ADMINISTRATION

Page 31: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 518 SENATE—References Friday, 4 July 1997

service, are there any guidelines with respect to procurement of those services andAustralian content or Australian companies having access to those contracts? Is there anyconsideration in that regard?

Mr PALMER —We follow the normal purchasing guidelines with respect to that.

Senator LUNDY—Can you also take on notice this question to provide thiscommittee, along with that other question you have on notice, with details of what ITcontracts are currently in place with IT outsourcers, the service that they provide, theduration of the contract, the value, if that is appropriate—I will leave that with you—andthe name of the company. I also put that question on notice to the other departmentspresent.

CHAIR —We intend to break for coffee at 10.30. We might just go back toOGIT’s role and see whether we can chase that around a little further in the next fiveminutes. Senator Lundy, I think you were pursuing this.

Dr MACDONALD —Can I just give a brief summary of the role of OGIT?

CHAIR —You certainly may. We might take your summary and see whether wehave time for a question, and then we will break for coffee.

Dr MACDONALD —The role of the Office of Government InformationTechnology in relation to outsourcing is to coordinate the formal market testing processesacross agencies for the outsourcing of the Commonwealth’s IT infrastructure, and toensure that an open competitive process is followed with the standard framework beingused for tender specification, evaluation and contracts. The corresponding cross-portfoliomeasure entitledEfficiency of whole of government information technology infrastructureprovides a description of the processes and savings.

Given the scale and complexity of potential outsourcing, we felt it was essential toensure that a robust, consistent, well-structured and professional process would be adopted.Major outsourcing vendors have highly skilled technical financial negotiating teams withconsiderable experience, and Commonwealth departments and agencies have limitedexperience in this sphere at this scale and require assistance in contracting and contractspecification evaluation, contract negotiation, and service and performance standardsspecification to safeguard the Commonwealth’s interests and ensure maximum savings.

So the role of OGIT in this context is to provide a pool of experts with extensiveoutsourcing experience to provide leadership advice and strategic direction to theoutsourcing project and to assist them in their contract negotiations; to develop andprovide a contractual costing and project management policy framework to assist agenciesin this market testing and due diligence process; to play a lead role, at least in the initialcontracts, in the contract development and evaluation of vendor proposals and negotiation

FINANCE AND PUBLIC ADMINISTRATION

Page 32: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 519

with vendors and modelling to support the interactive negotiations; to ensure thatknowledge and experience from across all competitive tendering processes are passed onto individual clusters; to provide assistance to smaller agencies, which will not have thenecessary skills in-house; and to provide strategic policy advice and reports to thegovernment and steering committees on the progress against the whole of governmentoutsourcing objectives.

Senator LUNDY—With respect to that role, how do you reconcile some of theprinciples, goals and descriptions you have just delivered to the committee with theapproach that Finance has taken on piggybacking their contract with the DVA contract?There seem to be some inconsistencies.

Dr MACDONALD —I do not think there is, Senator.

Senator LUNDY—I will go back to the point I made earlier: if OGIT’s role is toprovide advice, support and expertise to the agencies, do you see your role as alsocanvassing and I guess collating data about the failed IT outsourcing examples?

Dr MACDONALD —As I said earlier, we try to keep our eyes on the market tosee what lessons we can learn from the experience that comes from anywhere.

Senator LUNDY—In terms of this Senate inquiry’s role in seeking detail aboutthe pros and cons of this process, we understand there are obviously some examples outthere that show some benefit both in the public interest and in savings. Have you in factcompiled any comprehensive database that identifies both the failures as well as thesuccess stories with IT outsourcing?

Dr MACDONALD —No, we have not.

Senator LUNDY—Do you think that would be a useful information source in yourconsiderations in the advice you give to agencies?

Dr MACDONALD —I am not sure that a comprehensive database is required.What has happened is numerous other people have undertaken studies. We deal withindividual cases that we find interesting. We pull them together.

I would just like to go back to a point that was made in the previous session, if Ican, just to emphasise the fact that the government’s decision is not to outsourceapplications development. The issues that were raised that a number of departmentsresponded to had more to do with the consequential changes in new programming ofapplications rather than affecting the infrastructure per se. So I think we have to be carefulwhen we are talking about what the government’s initiative is and to recognise that it doesnot include the applications development—that is, the programs which run on theinfrastructure which deliver the goods. The application development is not within the

FINANCE AND PUBLIC ADMINISTRATION

Page 33: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 520 SENATE—References Friday, 4 July 1997

scope of the outsourcing in this initiative.

Senator LUNDY—You spoke about OGIT playing an advisory role. With respectto such a database containing the good examples and the bad examples, you mentioned anumber of times in your opening address that one of the justifications for thegovernment’s decision as to OGIT’s role was global trends in outsourcing, as though theglobal trend to outsource IT were justification in itself.

Dr MACDONALD —I do not believe I said that, Senator. I believe I said in myopening remarks that IT outsourcing was not new. It is a global trend. The impression Iwas trying to convey is that we are undertaking a process that many others are alsoundertaking.

Senator LUNDY—The argument that it is a global trend and that therefore it is agood idea has been consistently presented to this committee as some form of justificationfor the decision.

Dr MACDONALD —I believe there are other forms of justification that wereferred to.

Senator LUNDY—I know there are, Dr Macdonald, and you have expressed themvery consistently. But my point is that to make a continuous reference to global trends butnot to have conducted any analysis of the experiences as a result of that trend seems to bea flaw in the picture OGIT presents, and therefore OGIT is presenting a biased picture toagencies and to government about the benefits of the trends, particularly in relation toother experiences.

Dr MACDONALD —I cannot accept that allegation. I believe that we have done asurvey. We have looked across what has been going on elsewhere. It is true that we donot have a detailed database of the successes and failures. As I have said before, what wehave taken from the experience of others—the successes and the failures—relates to howone structures the deal, the sort of analysis that has to go on, how one manages theundertaking to lead to a competitive market test. In the final analysis, if that competitivemarket test does not lead to a lower cost solution that meets the needs, then we will nothave to undertake it. I am also advised that there were questions placed on notice on 3June that are relevant to this, to which we have already responded.

CHAIR —At this point we will take a short break. Before we do, we have receiveda submission from the CPSU. Is it the wish of the committee that we authorise forpublication that submission? There being no objection, it is so ordered. We will take a 10-minute break.

Short adjournment

FINANCE AND PUBLIC ADMINISTRATION

Page 34: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 521

[10.49 a.m.]CHAIR —I call the committee to order. So we can endeavour to cover all the

topics that we have on our agenda for today, I would like to move on to the tenderingprocess and the role of in-house bids. That is not to say that we will not go back andrevisit some of the points that we have already looked at.

Senator LUNDY—With respect to OGIT’s role, the previous section, I wanted themajor departments to canvass reasonably briefly and get on the public record their views,their contact points with OGIT and how useful the role that OGIT has played has been inthe exploration of IT outsourcing issues to date.

CHAIR —And would they like OGIT to leave the room before they comment? Wecan certainly do that. We might just go around the table commencing with DVA. If peoplewant to put on the record their view of OGIT’s role, feel free to do so.

Senator LUNDY—Perhaps as a further prompt: if you can see a broader role or anarrower role of OGIT serving a better purpose. So I am after just some views on whatyou are looking for from OGIT as well.

Mr LYON —In our submission to the committee, we did canvass what we saw asOGIT’s role. We were well advanced with our plans to outsource DVA’s computinginfrastructure. The Office of Government Information Technology were supportive. Theyprovided us with some assistance in the preparation of the request for tenderdocumentation, which was quite useful. They also had a representative on the acquisitioncouncil who played a role.

We see OGIT’s role certainly as being a facilitator, a consultant and a coordinator.There are advantages in a number of areas, like in the area of telephones, which we havebeen quick to pick up. So, from my point of view, I think they are the prime roles, atleast, that I would see OGIT playing.

CHAIR —We move now to Defence.

Mr McNAMARA —I would echo almost verbatim Mr Lyon’s comments. Ourinteraction with OGIT has been remarkably similar to that of the RepatriationCommission. That is all I wish to say at this stage.

Mr PALMER —The Commonwealth Services Delivery Agency’s interaction hasbeen very similar to date, seeing OGIT as one of coordination, facilitation and a source ofexpertise in certain areas. We have worked closely with them on a couple of majoroutsourcing bids in terms of the Telstra voice management contract, and the humanresource and financial systems.

CHAIR —I am not sure whether Mr Petrovic from the CPSU wants to make a

FINANCE AND PUBLIC ADMINISTRATION

Page 35: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 522 SENATE—References Friday, 4 July 1997

comment on OGIT’s role but, if you do, feel free to do so. I might ask the representativefrom the Public Service and Merit Protection Commission to comment.

Mr HARDING —I am the leader of the structural change team and I have notreally got anything to add about the role of OGIT. As far as we are concerned, they arecoordinators of IT initiatives across the APS.

Our contact has been different from other agencies. As a central agency, we havebeen substantially involved with OGIT in relation to the staffing aspects of IT outsourcing.That has been our principal area of contact with them. I think that contact has beenworking very effectively.

CHAIR —Would Customs like to comment?

Mr ROCHE —It is always a difficult question for agencies to ask them how theyfeel about a coordinating agency. I will have to come clean and say that, as one of theauthors ofClients first, we recommended the establishment of the office of the ChiefGovernment Information Officer, which is Dr Macdonald’s position.

We have found overall that OGIT has performed a useful role in the bringingtogether of the threads of IT within the Commonwealth. Before I mention the outsourcingof data centres and so on, I would like to mention that I think they have done someexcellent work in relation to communications where they have got access for governmentagencies to telecommunications plans and so on that have resulted in some increases inservice and reductions in cost.

I also mention the work they have done in relation to acquiring on a across-agencybasis financial management, personnel management and registry systems. In relation tooutsourcing, they have been a helpful source of information for us. We have, in fact,drawn on some of the legal expertise that they have access to.

We in Customs are going down a slightly different path to the general route. Weare outsourcing a vertical slice of our operations rather than a horizontal slice through thedata centre, the desktop and so on, so we probably are able to draw a little less on theirexperience on a cross-agency basis. But I would say that, on the whole, the relationshiphas been a helpful one. We have contacts at very senior levels. I talk frequently to DrMacdonald, Mr Maclean and other senior officers in OGIT.

Mr HIGHFIELD —I think it important to recognise that reports such as clientsfirst gave gave a very strong emphasis to the potential for greater efficiency in the use ofIT and a significant potential for improvement in the way government services aredelivered. It placed a lot of emphasis on a whole of government approach to achievingthose particular outcomes.

FINANCE AND PUBLIC ADMINISTRATION

Page 36: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 523

It is my view that the development of a whole of government focus, whether it bein relation to the provision of IT support or in relation to the way services are delivered,can only be developed in an environment where agencies are prepared to work together. Itis my observation that there is a very strong culture of agencies effectively doing theirown thing over many years. I see it as very central to the role of an agency like OGIT tofoster whole of government approaches. I believe that, in the short number of years that ithas operated, it made achievements on that particular front in what I regard as fairlydifficult circumstances.

There is certainly a lot more to do, but I believe that there is significant potentialin the area of whole of government approaches. I think that in the circumstances we—and,to my observation, a number of other agencies—have been able to work well with OGIT,particularly recognising the context of some fairly difficult time frames that have beenimposed. That is all I have to say.

Mr COLEMAN —Our role with OGIT, I suppose, is twofold. From our auditperspective, we have been assisting OGIT in doing, in a sense, some real-time audits ofsome of their tender processes. We believe that has been successful, and I think itprobably points to some things we can do more broadly across other agencies.

From our own IT outsourcing experience, we have actually outsourced our ITservices. Primarily because we started this process some time ago, our involvement withOGIT has been minimal. There have been a series of briefings, and we have kept theminformed and so forth. They have been supportive of the approach, but there has not reallybeen detailed involvement with OGIT.

In terms of its broader role, we certainly would see OGIT playing, as some of theother speakers have mentioned, a facilitation role. From where we sit, we sometimes see alot of reinventing of the wheel in some of these areas. We certainly see OGIT playing arole in reducing that and identifying good practice, better practice, across agencies andbeing able to share that with others.

CHAIR —Any comment from the Ombudsman’s office?

Mr WOOD —Our contact with OGIT has been minimal. I really do not have anycomments to make.

CHAIR —Any comments from the representative of the Privacy Commissioner?Mr THORP —The Privacy Commissioner’s role is really to ensure compliance by

agencies and contractors with the Privacy Act in the specific context of IT outsourcing.My understanding is that we have found OGIT to be extremely helpful in achieving thoseaims. There are currently discussions under way to see whether it might be possible toapply some of the IT savings to assist the Privacy Commissioner in assuring adequate andgood compliance with the Privacy Act.

FINANCE AND PUBLIC ADMINISTRATION

Page 37: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 524 SENATE—References Friday, 4 July 1997

CHAIR —Representatives of the Australian Archives?

Ms SCOTT—Our role is similar to the Privacy Commissioner’s role. Basically weare looking at IT outsourcing in relation to compliance with the Archives Act. While wehave had only informal contact, we are looking at that contact to be able to provide abasis for providing advice to agencies in relation to protecting records in outsourcingarrangements.

CHAIR —Mr Aitken, ABS.

Mr AITKEN —On the communications side, the ABS has found the relationshipwith OGIT worth while and it is ongoing. On the outsourcing initiative, the ABS has beeninvolved initially as a test agency to assist with the questionnaire design. In fact, Ipersonally assisted with the data collection task undertaken by OGIT on temporary transferto OGIT for three months. At the ABS, the scoping study was interesting. It is anextremely comprehensive data collection and was made easier in the case of the ABSbecause for some time we have had total cost recovery in place and collection of costinginformation was fairly straightforward for us.

I guess the thing that it brought home to us was that it identified that about only 65per cent of our effort in the IT bureau goes towards ongoing day-to-day ‘keep the shipafloat’ activities and about 35 per cent is new initiatives. I guess in future we will belooking towards OGIT to assist us with work such as service definitions, the drawing upof service level agreements and assistance with market testing.

CHAIR —Mr Witheridge, from Communications and the Arts.

Mr WITHERIDGE —The Department of Communications and the Arts also tookpart in the IT scoping study. We have stepped back from participating in one of theclusters at the moment, but that is specific to the department’s circumstances. We arebasically fully committed in a few projects that are going on. We have a move to a newbuilding that involves a new LAN infrastructure within that building. We also have afinancial management system going in in a very short implementation time at the momentand two initiatives in the arts program to do with the Australian cultural network and artsinfo. So, on that basis, we have chosen to wait until those projects are out of the waybefore starting in our process.

CHAIR —Mr Wilson, from Transport and Regional Development.

Mr WILSON —We have had some involvement in this whole of governmentapproach from the outset, like Mr Roche and the tax office commented about. Weprovided a submission to theClients first report in which we drew on our experience ashaving a genesis in the old mega-department of transport and communications, which hadaviation, transport and communications. We had a lot of experience in separations and

FINANCE AND PUBLIC ADMINISTRATION

Page 38: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 525

setting up various GBEs. Our submission to theClients first report suggested that we hadseen lots of areas of duplication in the IT area through all these separations and that wewere in favour of a whole of government approach in looking at means of providing ITservices across the APS.

Since that time we have had considerable involvement, like most other agencies, inthe communications area, where we have received advice from OGIT and they havestructured some fairly good deals that we have taken advantage of from a whole ofgovernment perspective. We have been participating in the shared systems process inlooking at common finance, human resources and records management systems.

We also, as with Communications and the Arts, participated in the OGIT scopingstudy last year. That was a very useful exercise helping us to identify all of our costs,systems, et cetera.

We are now involved in discussions with OGIT and with a number of otherdepartments about prospectively forming a cluster to move forward on the market testing,but we have not made a lot of progress in that area at this stage. Overall, we have beenseeking guidance from OGIT. We do not have a lot of experience in IT market testing,and we are looking to them to provide us with guidelines, access to experience and adviceon how we should go about that.

Mr POTTER —We have been dealing with OGIT for a while. Their work intelecommunications has been particularly useful to us, and we are also doing a bit of jointwork with their people. We have good contact levels from the top right down to theoperational level.

We have found that their understanding of some of the peculiarities of scientificagencies, as opposed to service delivery agencies, has been useful and we are havingongoing discussions there. We have also found them very helpful in trying to form asuitable cluster of scientific agencies. So our relationship has been good.

Senator LUNDY—Does anyone have any specific comments about the clusteringproposals, the clusters as they are currently being identified and the process of actuallyprogressing and finalising the clusters?

Mr WILSON —We are in what is known as the desktop cluster. There are anumber of prospective partners involved in that process. I do not know how many clusterswill be formed.

We have had a number of discussions to identify the most appropriate mechanismsfor forming cluster partners, and they have looked at business synergies, operationalsynergies, geographic synergies and technology synergies. It is an interesting area to dealwith. OGIT have been helpful in coordinating a number of aspects of those particular

FINANCE AND PUBLIC ADMINISTRATION

Page 39: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 526 SENATE—References Friday, 4 July 1997

synergies. They have helped us in at least identifying prospective partners that we are nowdiscussing.

The whole thing is a very difficult area and the outcomes could be very differentfor a number of different reasons, depending on what agencies see as their keyrequirements. OGIT have been very helpful in at least helping to draw out thosepossibilities for us.

CHAIR —Do any other departments want to make a comment about that?

Mr HIGHFIELD —We are clustered with the Department of Employment,Education, Training and Youth Affairs. We have a working relationship with DEETYAwhich predates the announcement of the clusters. That includes, for example, them leasingspace in our computer centre where their mainframe operations are run. It will also extendto some further rationalisation of how we use real estate for the provision of our main andsecondary sites. It is also likely to extend in the very short term to going to the market toseek additional mainframe capacities. We have and are developing a relationship with ourcluster partner which we feel is conducive to us proceeding to the next steps.

Senator LUNDY—In previous hearings with this committee, evidence waspresented which indicated that a factor in the consideration of the nature of the clustersrelated to actual processing power. An IBM term for measuring processing power calledmips was used and discussed at the committee. Are any of the department IT managersfamiliar with mips as a measurement of computer processing power and the actual size ofclusters relating to a particular number of mips? In the evidence, 400 was used as being afactor in the structuring of clusters. Is anyone familiar with any of that?

Mr LYON —I think there is certainly a place for clusters, and our experiencewould tend to support that. The economies that come from significant economic groupingsare certainly worth pursuing. I also visited the United States veterans’ affairs department,which is a huge organisation, and it has been through a process of consolidating itsactivities around 400 mips—in fact, it was bigger than 400 mips—in terms of achievingeconomies of scale for its organisation. I think it is something that is pretty wellestablished and now accepted in the industry. There are also savings in the area of desktopoperations, but the key is to bring together the right synergies.

Senator LUNDY—So with your recollections and your experience, where did themeasurement of 400 mips come from; who advocated 400 mips?

Dr MACDONALD —Perhaps I could assist the senator in that. I do not think thereis any magic—

Senator LUNDY—I am actually more interested in the departments’ views.

FINANCE AND PUBLIC ADMINISTRATION

Page 40: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 527

Dr MACDONALD —Of course.

CHAIR —Dr Macdonald might like to make a comment, and then we can certainlyproceed to ask the departments if they would like to make a comment.

Dr MACDONALD —I was going to make the point that 400 mips is not theprimary principle for consolidation. What happens is that, increasingly as the technologyadvances, the ability to get a higher processing power in a significantly smaller mainframeis advancing. I believe whenClients firststarted they talked about 200 mips, and theAmerican government in their initial foray were talking about 325 mips. They are now upto 400 mips. It is not a primary principle for consolidation but what it does represent is alarge aggregation of processing power that you know you can get scale economies from.So we try to get it but, if it were 390, you would not say, ‘No, don’t do it.’ It is verymuch focused on getting a large amount of processing power together so that you can getthe economies.

Mr ROCHE —Senator, if I could make a comment from the point of view of theClients first report. There was certainly an amount of evidence that was produced to usthat suggested that significant economies of scale did cut in at a point in the power ofmainframes, and at that stage I think we were looking more towards 200 but technologyhas moved apace since then. I guess you can see it when you look at departmentaloperations these days. There are a significant number of computer centres around whichwere designed to be filled with computer equipment and are currently occupied verysparsely by computer equipment. Our own computer centre is a good example where thecomputer equipment has been steadily shrinking although its power has been increasing.Our own computer centre is only occupied to the extent of about one-third of the floorspace and that obviously has a very significant effect on economies of scale.

CHAIR —Any of the other departments wish to make a comment?

Mr WITHERIDGE —I would just like to make a comment that the measure ofmips is really a mainframe measure rather than desktop or even low to mid range. So thatsort of consolidation is quite relevant when you are talking about a mainframe operationbecause you can reduce the number of operators you have. Where you have a desktopenvironment, of its nature computing power is distributed out to everyone’s desks; so yourcapability to support those individuals who are using technology that may or may not befamiliar to them is at issue, not the actual size of the equipment.

Mr PALMER —I would just point to another example with the social security datacentre consolidation program, where over the last few years we have moved from datacentres in each capital city to two centres—one in Canberra and one in Sydney—with veryconsiderable savings.

CHAIR —And quite a few job losses.

FINANCE AND PUBLIC ADMINISTRATION

Page 41: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 528 SENATE—References Friday, 4 July 1997

Senator LUNDY—Just one more point—

CHAIR —Senator Lundy, one quick question because we want to keep moving on.

Senator LUNDY—Just one more question on the use of mips, I suppose, as afactor in the structuring of clusters and perhaps this question is best directed at DrMacdonald: with respect to the existing corporations or companies that have the capabilityto service an outsourcing contract that was of the magnitude of 400 mips, do you seeOGIT’s role as identifying the companies which have that capability; have you done so;and to what degree have those assessments shaped your pre-tender and request forinformation processes?

Dr MACDONALD —I am advised that this was answered three times—on 8 May,3 June and 16 June. If you like, I can get the specific references for you.

CHAIR —We might try to do that. We actually have a position a bit later in theday where we can probably deal with that to some greater degree.

Dr MACDONALD —I can pull the references—

Senator LUNDY—I am actually familiar with the responses that we hadpreviously. What I am asking this time is to what degree and to what extent was theconsideration of the capability of a given company to service a 400 mips contract inOGIT’s considerations and structures?

Dr MACDONALD —I do not believe it came in directly. Let me say there were anumber of companies, both domestic and international, that we felt were capable of takingon a data centre of that size. We did not specifically troll through the industry to match it.

Senator LUNDY—Just for the record, where did the mips calculation andmeasurement come from? You mentioned it has been utilised in the US—

Dr MACDONALD —As I pointed out, there was nothing magical in the 400 mips.We were looking for larger aggregations of processing power that would enable us torealise economies of scale.

Senator LUNDY—And it was used in the US IT outsourcing process?

Dr MACDONALD —As both Mr Roche and I have pointed out, it is sort of amoving target. It started out in the United States at 325—

Senator LUNDY—I understand it is not specific—

Dr MACDONALD —I cannot comment, frankly, on the rationale that the

FINANCE AND PUBLIC ADMINISTRATION

Page 42: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 529

Americans use. I am simply not aware.

Senator LUNDY—But the point I am making is that the 400 mips—as a guideand as a factor in your considerations—is something straight out of the way outsourcingwas dealt with in the US.

Dr MACDONALD —I believe you are putting too much emphasis on the 400 mipsnumber. Basically what we were looking for were larger aggregations. As I said earlier, itwas not a hard and fast rule. As Mr Roche pointed out,Clients first identified 200 mipsand the technology has now moved in. It simply represented a threshold level at whichone could start to realise significant economies of scale and it moves up as the technologymoves up, as we move to CMOS type mainframes and things like that.

CHAIR —Senator Allison has one quick question on this and then we must moveon.

Senator ALLISON—Dr Macdonald, I am just interested in OGIT’s role in termsof anticipated cost savings. I wonder if you can tell us the current expectation in terms ofacross-the-board cost savings available for outsourcing IT.

Dr MACDONALD —I believe that has been answered on a number of occasions.The budgeted savings are $231 million over the budget forward planning period.

Senator ALLISON—Why did that alter from your initial estimate of $1 billion?

Dr MACDONALD —I believe I have answered that already. I can dig it out of thehearings, if you like. I prefer to refer directly to that. I answered that on 3 June—

CHAIR —Just while we are waiting to get that answer.

Senator ALLISON—Perhaps I can move on to the next question, Dr Macdonald:commentators have said these figures have been plucked from the air; what is yourresponse to that?

Dr MACDONALD —The government has stated publicly that there will be $231million worth of budgeted savings. I cannot comment on what commentators have said.

Senator ALLISON—What is your process in arriving at that figure?

Dr MACDONALD —I believe we have been through that in some detail on 3 Juneand I would be happy to pull forward the reference to put it again to this committee.

Senator ALLISON—What advice do you give agencies in terms of theirestablishing a clear-cut case for not contracting out their IT?

FINANCE AND PUBLIC ADMINISTRATION

Page 43: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 530 SENATE—References Friday, 4 July 1997

Dr MACDONALD —We will put in place a process that will establish the basisunder which the agency defines its requirements, establishes its cost base line and thenundertakes a competitive market test.

Senator ALLISON—If there is a clear-cut case for not tendering, how will thataffect the savings which are designated in the budget?

Dr MACDONALD —It is the government’s belief that the savings are conservativeand achievable.

Senator ALLISON—What happens if, in individual agency cases, they are not?

Dr MACDONALD —The government believes that the savings are conservativeand achievable. However, as we testified on 3 June, if the savings are not achieved, theyare taken out of the department’s operating budgets. The savings are protected. Thedepartments also get to keep any savings beyond what is taken out as a result of thebudget decision.

Senator ALLISON—We heard earlier from Defence that some of their savingswere due to reductions in staff numbers, some to technological advances and others tomanagement. Has your department made any assessment of the across-the-boardpercentages in those three key areas?

Dr MACDONALD —We would support the Department of Defence’s assertionthat there are benefits to be achieved in all those areas.

Senator ALLISON—Have you quantified that view?

Dr MACDONALD —Not specifically in those terms.

Senator ALLISON—Would that not be necessary in order to make an assessmentof what the overall savings might be that you have already assessed?

Dr MACDONALD —As I said on 3 June, there was a process laid out wherebythe costing was exposed to an indicative market pricing and the business case was built onthat.

Senator ALLISON—I am sorry, I did not catch the last part of that.

Dr MACDONALD —We identified the costs, but they were functional costs interms of the technology. They were compared against the indicative pricing as to what thatwould be in a competitive market tendering process, and then that was the basis for thebusiness case, as we have previously testified.

FINANCE AND PUBLIC ADMINISTRATION

Page 44: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 531

Senator ALLISON—I do not understand what you have just said. Could you—

Dr MACDONALD —What I am saying is that the comparison was not done onthe basis of the references made by the Department of Defence. It was based on a forwardprojection of the total costs of IT operation, broken down by functional components. Thatwas the basis upon which it was done.

CHAIR —Does that clarify that?

Senator ALLISON—Not at all. I am sorry.

Dr MACDONALD —I will take that question on notice, and try to do a betteranswer for you.

CHAIR —We are some way behind time, and technology is not working too wellhere at the moment. I will move to the tendering process and the role of in-house bids andthe people who are to contribute there. First, I would like to ask the AustralianInformation Industry Association if they might like to make some comment in that areaand if they might like to also comment on the Department of Finance piggyback exerciseon DVA.

Mr UPTON —I would like to begin by volunteering a little about the relationshipthe association has had with OGIT. I realise the previous question was directed togovernment agencies, but I will put a bit of context around that and say that, for a numberof reasons, the Australia Information Industry Association has, historically, supportedoutsourcing. So we took a very close interest in the steps that led up to theClients firstreport and, subsequently, in the establishment of the Office of Government InformationTechnology.

To say that we supported outsourcing is not always, as you would appreciate, thesame as saying that we agreed with everything that happened. The consistent need theindustry has had is to have a consultative and open dialogue with the government agenciesresponsible for carrying it out. From our point of view, I would like to put on the recordthat we have had a very constructive relationship with OGIT—at times robust but certainlyalways open. We would like to place that on the record as an appreciative comment. Weexpect to continue that relationship.

A range of issues still require clarification. Certainly there are going to be somefurther points where the industry will need explanation, clarification or, in some cases—potentially—to disagree with aspects of it. That is to be expected in any relationship. Iwould like to reiterate the fact that we have had a good, robust, open dialogue with OGITthroughout the whole process.

Perhaps I could turn to the second part of the question, which is about in-house

FINANCE AND PUBLIC ADMINISTRATION

Page 45: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 532 SENATE—References Friday, 4 July 1997

bids. It probably comes as no surprise to anyone that the industry association isfundamentally opposed to in-house bids. We have got a number of problems with that.Some of them have been addressed, of course, but on the whole we take the view that it isextremely difficult to achieve an equitable comparison between bids in-house andexternally sourced. Sone of our areas of question go to things such as who funds the bidprocess? If an in-house bid fails, who carries the cost of that failed bid? Do they carry thecost of that bid into the next bid? How are we going to measure the industry developmentobligations that the government has stated as being a primary objective of the wholeoutsourcing initiative? How will an in-house bid involve SMEs, how will an in-house bidhelp regional development and how will an in-house bid specifically help Australianindustry development, which the government has placed on record as being high priorities?They are some of the questions.

We note that, while it may be possible to adjust the cost of the in-house bid toaccount for things such as the organisational structure, taxation, debt and regulatoryneutrality, the lack of accurate accounting and management systems probably means thatthe full operating costs are never going to be accurately estimated. Without wishing tomake any particular point, it is often said by departments that they do not actually knowwhat the delivery of their in-house IT is worth to them each year. I just take that as apoint which suggests that there is room for improvement in accounting and costing of ITfunctions.

I think there would be other instances where costs can be misdirected or hidden inthe wrong cost centres, and in these cases I believe that existing operating costs wouldhave been underestimated. I suppose that is the kind of background to why we have takenthe stance that we do, which is to oppose in-house bids. I repeat again, however, the issueof contract failure. Unless the in-house bid team is somehow legally separate, it seems tous, there cannot be a contract between the parties and there cannot therefore be a way ofpenalising the in-house team for not having achieved agreed standards. We are alsoconcerned, I suppose, about the effective longer-term monitoring of a successful in-housecontractor.

However, the association notes that the government does intend to allow in-housebids, so the second part of our concern is that we believe there is a very clear need forassistance from organisations such as the audit office to assist agencies to comply with theCommonwealth’s competitive neutrality policy, most recently set out earlier this year. Thatis a summary of our position on in-house bids. I will leave it there, Mr Chairman.

CHAIR —Mr McNamara, would you like to make some comment in respect of in-house bids?

Mr McNAMARA —Under our commercial support program we have had in-housebids as part of the landscape since the inception, and they have been successful in onecase in three. In other words, they have won a third of all competitions we have run so

FINANCE AND PUBLIC ADMINISTRATION

Page 46: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 533

far. We see the points of the Australian Information Industry Association—points whichhave been made to us previously and we also have had some robust dialogue with theassociation over these points—as a useful element of our armoury.

Under section 134C of the former Industrial Relations Act, we negotiated arestructuring agreement with the unions that saw in-house bids as being required in allcases where the unions sought those. That has not always been the case but it has been onoccasion. We have also had this structure subjected to a couple of scrutinies by theIndustry Commission, which is not known as a charitable body, I am sure people willagree, and they have seen a case in some areas for the continuation of in-house bids. Butone needs to have a view of this across the whole of government, and I am reallyspeaking for the Defence experience.

On the competitive neutrality principles, we have no difficulty with that, nor do wehave difficulties with some other points that Mr Upton made. I guess the point we cannotagree with is a legally separate entity within the Defence organisation. We have put afence around in-house bids, monitor their performance, report regularly to higher Defencecommittees, and indeed in the budget context to government, on progress with in-housebids. I think the only point I would finish with on in that context is that our assessment todate has been that, far from failing, in-house bids have been overachieving.

CHAIR —Mr Upton, why would it not be a fair comment that in-house bids are asignificant part of any department’s armoury in ensuring proper competitiveness?

Mr UPTON —Could I just get a further understanding of that question. I am notsure exactly what you are driving at.

CHAIR —Where there might only be one, two or three private providers, whywould it not be fair for a department to say, ‘We want an in-house bid just to make surethere is some measure for us.’ There could be collusion with the limited number of privateproviders. It would not be the first time that that has happened.

Mr UPTON —Let me deal with the latter part of that question first. Unless youhave specific examples of where there has been collusion in private sector bids, I do notthink we would accept that that is a very likely outcome.

CHAIR —I can recall that there have been one or two examples in the buildingand transport industries. I did not specifically mention information technology.

Mr UPTON —To answer the other part of your question, we do not believe thatthe process of tendering out is likely to do other than find out the best price, the bestquality and the best technology available. It is a pretty competitive marketplace and thewhole point of market testing is to have that demonstrated.

FINANCE AND PUBLIC ADMINISTRATION

Page 47: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 534 SENATE—References Friday, 4 July 1997

CHAIR —In the case of, say, the capacity of private providers, it would be fair tosay that there is the possibility of a limited number that could actually be in a position toprovide the types of infrastructure that is required by governments, isn’t there?

Mr UPTON —In some sense, the number is always going to be limited. I am notsure what the limit is, but it seems to me that there is an adequate number of potentialsuppliers to ensure that they will in fact engage in sharp competition.

CHAIR —Again, I do not have specific examples in the information technologyarea but, in the submarine contracts, for instance, there was a major problem withovercharging. Why is it not a fair position for any department to have, that they wouldwant an in-house bid to guarantee that there is a proper competitive process going on? Atthe end of the day, is it not the case that the in-house bid also has to compete with thebids from potential external providers?

Mr UPTON —From the association’s point of view, the points that I made earlierunderscore our reservations about whether or not it is possible to achieve that competitiveneutrality—in other words, the question is whether you can accurately gauge the costs ofan in-house bid.

CHAIR —Do you have a comment about that, Dr Macdonald?

Dr MACDONALD —First of all, it is important that the costs be totally accountedfor. In a sense, if a department clearly defines what its costs are—the internal staff havedone an excellent job in being efficient, in getting their costs under control and inidentifying all the costs—then, de facto, the in-house bid is the cost baseline that thedepartment puts out as the basis for a competitive tender. So, in fact, if the costs are wellknown, if the department is efficient and it puts the cost baseline out, that says to theindustry, ‘This is the best we can do internally,’ and industry bids against it. In a sense, anin-house bid is a process whereby the cost baseline can be continually refined during thecompetitive process.

CHAIR —Do any of the other departments wish to make a comment?

Mr ROCHE —I would support what Dr Macdonald had to say. I do not think thatthe question of in-house bids can be subject to a general rule. The Department of Financehas recently issued an exposure draft on competitive tendering and contracting. I findmyself in agreement with the position on in-house bids where it says that ‘in-house bidsshould be decided on a case by case basis, taking into account the costs and benefits ineach case’. It gives a list of relevant issues to consider—whether the in-house bid mightassist in achieving further internal reform and so on.

I think that is not a bad guide. I guess I would add to that list of issues to consider

FINANCE AND PUBLIC ADMINISTRATION

Page 48: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 535

whether the in-house bid might have access to some of the flexibilities that an outsourcermight have access to. I am thinking here particularly of flexible remuneration, which is aparticular feature of the IT industry in the private sector but less so in the public sector,and access particularly to skill development and career development opportunities thatwould flow from work in a larger organisation that is dedicated to information technology.Again, an in-house bid might not have that access.

In the case of Customs we elected not to go with an in-house bid, but what wehave done is to say that we have an in-house baseline. We have a good handle on ourcosts because we have an activity based costing system in place and we will be using thatas a test against which tenderers for our outsourcing are evaluated. If they cannot meetthat and provide a better service or alternatively provide a similar service at a reduced costthen we simply will not do it.

I do not agree with the AIIA in that one of the reasons for not allowing an internalbid is that a department does not have a good handle on its costs. I think that is anindicator for not going to an outsourcing proposition until you have a good handle on yourinternal costs.

CHAIR —I want to go back not only to the Australian Information IndustryAssociation and the tendering process that you covered earlier but also to the issue ofpiggybacking.

Mr UPTON —The issue of ensuring that open and transparent policies arefollowed in tendering out for government work has been paramount in our mind. The issueof piggybacking has been raised at various levels in the membership. The focus of ourconcern has been to ensure that whatever the rules are that we are running to have beenclearly spelt out and consistently applied. One of the assurances that we have from theMinister for Finance is that this will be the case in future, that the requirements thattenders be let in a competitive framework will be enforced in future cases of outsourcing.I think that is where we would leave it. We have an assurance that that will happen.

CHAIR —Have you had a look at this exposure draft of competitive tendering andcontracting?

Mr UPTON —I would have to say that I personally am not greatly familiar with it.I may have to defer to my colleagues here on that subject.

CHAIR —We will not ask you any questions on that then.

Senator ALLISON—Mr Upton, you speak about the hidden costs of in-housecontracting. Have you given any thought—I will ask the same question of DrMacdonald—to the hidden costs from contracting out? I suggest that these might belitigation, variations to the contract, the cost of re-entering the market should a

FINANCE AND PUBLIC ADMINISTRATION

Page 49: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 536 SENATE—References Friday, 4 July 1997

government agency decide that this is not working, monitoring itself, technology and theinflexibility that might come from, say, a five-year contract period? Can you make somecomment on that? I would like to ask that of Dr Macdonald.

Mr UPTON —I think that it is certainly true that, whichever course you go, youwill run risks of different kinds. What we are asking now—this is the focus of ourconcern—is that we compare the same things with the same things. I suppose what wehave set out is our identification of some of the issues that seem to us not to beparticularly clear about in-house bids. But I think, from the discussion that has been takingplace around the table this morning, it is also clear that a properly constructed contractualmodel will address those sorts of issues.

We have had evidence—I do not remember from exactly whom—from departmentsabout their ability to cope with the changes in government policy, changing requirementsat the end of the contract and changes in the scale of the operations. I guess that inentering any contract there is obviously the possibility for legal risk. That is something theCommonwealth experiences across all jurisdictions. It does not prevent it from enteringinto large scale contracts with suppliers in all sorts of jurisdictions. So while I hastily saythat I am no legal expert, I think that there should not be particular risks here that cannotactually be addressed in the framework of a sound contractual arrangement.

Senator ALLISON—Perhaps I can ask you, Dr Macdonald, whether OGIT hasdone any studies of the sorts of increases in contract figures due to variations. Has therebeen work done by your department into the trend? We often hear about outsidecontractors contracting low and then building up the value of that contract throughvariations. What is your experience?

Dr MACDONALD —As I indicated earlier, Senator, we have looked at a numberof these contracts and have tried to learn from the experiences of others to ensure that thecontractual framework we put in place takes appropriate account of volume variations,unanticipated changes, risk sharing and the like. We are confident that we can build intothe contract the appropriate contractual guarantees that will allow us to make a decisionknowing what the implications of the cost are, or—in the case where one simply cannot—to have a procedure whereby they can be determined.

Senator ALLISON—Just getting back to the question that I raised, will you acceptthat, whilst there might be some hidden costs with in-house bids, there are other hiddencosts with not heading in that direction?

Dr MACDONALD —No, that is not precisely what I was saying. You asked me aquestion about changes in volumes and things like that and accounting for that sort of riskin a contract. I was simply saying that one can provide for that in a contract. I would alsogo on to say that in the case of an internal operation, one faces risks of policy changes,additional volume variations and the like. What I was responding to was the fact that, in

FINANCE AND PUBLIC ADMINISTRATION

Page 50: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 537

terms of these sorts of changes, you can provide for them contractually.

Senator ALLISON—I am sure that you can, but my question to you was whatwas your experience so far with contracts that have been awarded?

Dr MACDONALD —As I said earlier, when we have looked across the experienceof others, we have tried to extract lessons learned, where they have been, in order toconstruct a contract that takes appropriate account of those factors in advance of themarising.

Senator LUNDY—Mr McNamara, could you give a description of the fence thatyou described around the group that conducted the in-house bid with respect to Defence’sIT contract? Could you explain to the committee what Chinese wall type structures youhad to address the required competitive neutrality circumstances?

Mr McNAMARA —If you believe a picture is worth a thousand words, I couldtable this document, which purports to summarise our process in the commercial supportprogram. While it has got some Defence-speak in it, I can probably translate that as well.Basically, the structure we put in place here was to establish what we call a centralmanagement review team to manage the process. They were physically separate from thepeople who ran the in-house bid, just as they were separate from the people who werecompetitively tendering from the private sector. Indeed, the in-house bid team was locatedbehind locked doors. I use that term advisedly, because I saw it once—walked past it—down at the Woden churches centre, perhaps getting some guidance from someone else.They were absolutely, to all intents and purposes, as one with the commercial sector inthat regard. They themselves had to be locked away from the normal operations of theDefence computing bureau, because the material they were dealing with was commerciallysensitive and could not be revealed to us any more than it could be to the private sector,or by the private sector to them, in turn.

So to all intents and purposes we had a Chinese wall between the managementreview team—the project that managed this process—and the in-house bid team. That stillpertains. That process ensures that we have a robust and defensible arrangement here thatis well known to the private sector, and indeed it has been discussed innumerable timeswith the private sector, but not just about IT matters, of course, about the whole spectrumof market testing of Defence non-core activities.

CHAIR —How was your in-house bid funded?

Mr McNAMARA —It was funded from within our Defence resources. We are notsupplemented by Finance for market testing anything and we have to find that money outof our single appropriation. By the same token, as a nice incentive for us, we retain thesavings from the process.

FINANCE AND PUBLIC ADMINISTRATION

Page 51: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 538 SENATE—References Friday, 4 July 1997

Senator LUNDY—Can I ask for comments from other departments, based on thatdescription of setting up a Chinese wall and in-house bids being prepared in that way?Can I get some indication from the other major departments in particular as to theapplication of a similar sort of model in a competitive tendering situation?

CHAIR —Just before we do, Mr McNamara, you said you were allowed to keepthe saving that was arrived at from a successful in-house bid.

Mr McNAMARA —Sorry to interrupt, Senator, but it is savings from thecommercial support program itself. Regardless of the outcome, whether the outcome istransferring the function to the private sector or running it internally, we retain thesavings—full stop.

CHAIR —I assume all departments are made aware of that? Could some of theother departments comment on that point?

Mr LYON —The Department of Veterans’ Affairs has a three-year running costarrangement with the Department of Finance which was negotiated between the twoorganisations. Savings arising from exercises like this, if you like, contribute to the overallrunning cost arrangements within the departments. They are held within the department forthe three-year period that we have this agreement. It is quite similar to the Defence globalfinancing arrangement.

Mr McNAMARA —If I could just clarify and add to my answer. The commercialsupport program was implemented in 1991 as a consequence of a report from aninterdepartmental committee. That committee had a number of agencies, including Financeand others, on it. They agreed that we should retain the savings as a consequence of theprocess. So it is fairly widely known I guess.

Senator ALLISON—What happens to your in-house team and its contract withyour department if the in-house team achieves greater efficiencies than it might havepredicted? Where does the saving go?

Mr McNAMARA —It is retained within the portfolio.Senator ALLISON—So the in-house team has to hand it over, nonetheless?

Mr McNAMARA —Yes, they are not free to reinvest it for their own benefit. Thein-house team is subject to what we call a project management directive and that is afairly prescriptive document which to all intents and purposes is a contract. Obviously, totake up Mr Upton’s point before, the Commonwealth cannot sue itself. Defence cannot suean element of its own operations, but it is, to all intents and purposes, strictured andconstrained by that in-house directive and is monitored quite carefully to ensure that itdoes at least achieve its outcomes.

FINANCE AND PUBLIC ADMINISTRATION

Page 52: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 539

Senator ALLISON—What are the advantages of having this contract in-house?

Mr McNAMARA —The first advantage I suppose is a cost saving one because ithas been the best value for money outcome in each case where it has been retained in-house. I am talking generally here and not about our recent IT exercise because I shouldemphasise that is just coming into operation now. But there are other benefits. You haverotation of staff arrangements, particularly with our colleagues in the military who rotatethrough some of these elements, and it is part of their career structure. We also have, andI would not want to overstate this, some greater visibility on the nature of the operations.Where we have contracted material out we do not have any particular difficulty with thateither. The essential effort is that the internal people are very keen to compete with theprivate sector, but not always so. In many instances they are very pleased to havegenerated that outcome, even if life is tougher than it used to be. If you are saving 33c inthe dollar you are clearly not doing business the way you formerly did, and that is ouroutcome so far.

Senator LUNDY—I cannot even remember what my question was originally. Ihave a question for the AIIA. What are the average profit margins of the companies yourepresent with respect to IT outsourcing contracts?

Mr UPTON —I am afraid I do not have an answer to that, but I can take thequestion on notice and try to give an answer.

Senator LUNDY—Thank you.

Senator ALLISON—I am interested in your views about commercial inconfidence and I wondered whether you agreed with Mr Harry Evans’s remarks aboutcommercial in confidence. Have you had a chance to read those remarks?

Mr UPTON —I regret that I have not.

Senator ALLISON—Perhaps I can just—

CHAIR —We might just deal with those issues when we get to this sectioncovering accountability et cetera.

Senator ALLISON—Fine.

Senator LUNDY—With respect to AIIA’s opposition to in-house tendering, howspecific is that opposition to the model currently advocated by OGIT and the minister? Towhat degree does that opposition extend across looking at other models of outsourcing, amore selective approach to outsourcing, for example?

Mr UPTON —I am not sure where the question is leading.

FINANCE AND PUBLIC ADMINISTRATION

Page 53: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 540 SENATE—References Friday, 4 July 1997

Senator LUNDY—Neither am I yet.

Mr UPTON —If you looked at our historic position on it, you would see that it hasbeen around a lot of the unclarities that have been there around in-house bids. I think Iwill just restrict it to that. We still think there are considerable unclarities, ambiguities anduncertainties for industry. Having noted previously the government’s intention to have in-house bidders, it would assist the association’s members if the fact that there was going tobe an in-house bid or there was not going to be an in-house bid was made plain fairlyearly on in the process. That is probably just a ‘where we stand’ request.

Senator LUNDY—What is your position with respect to the statements by theminister to date with this current outsourcing process?

Mr UPTON —To which particular statements are you—

Senator LUNDY—Regarding in-house bids.

Mr UPTON —I am afraid I do not have them in my mind at the moment. As faras I understand it, the minister has indicated that in-house bids will by permitted. That isin fact the government policy to which I am referring.

Senator LUNDY—In advocating the position that you do not think that that suitsthe interests of your membership, because of all the reasons you have stated, have youadvocated an alternative approach to IT outsourcing that would reconcile some of youropposition or differences with the department or with OGIT in this regard?

Mr UPTON —No.

Senator LUNDY—So you are just looking at what is on the table and restrictingyour comments to that?

Mr UPTON —That is right.

Senator LUNDY—Do you think there would be any benefit in canvassingalternative models of outsourcing at this point of time?

Mr UPTON —There may be, but the point is that we are dealing with what isaround. Like anybody else, we have to deal with the policy position as it stands at themoment.

Senator LUNDY—In the recent estimates hearing it was indicated by Mr Macleanfrom the Office of Government Information Technology that the AIIA will be called uponto play a role in advising government on issues relating to outsourcing. Have you seenthose references and comments by Mr Maclean?

FINANCE AND PUBLIC ADMINISTRATION

Page 54: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 541

Mr UPTON —Yes, I have.

Senator LUNDY—What is your interpretation of those comments?

Mr UPTON —We took it as being a response to requests we had made to beinvolved in a couple of matters around outsourcing. One was the industry developmentissue to which I had referred before, which was to get clarity about what the government’sintentions were in relation to industry development and also, in relation to this in-housebid issue, how it was intended that the government should handle industry development inthe context of in-house bids.

As I have indicated, that is a work in progress because we have been engaged indiscussions with officers of the Department of Industry, Science and Tourism and theOffice of Government Information Technology to endeavour to work out what sort of aframework would have been put there. Once again, it is same principle position that wewould take—which is, that it would be helpful for all parties if there were a clear andconsistent enunciation of whatever it is that is intended to happen. Right at the moment,we did not believe that there was that clarity around the industry development obligations.I am aware that this is going to be touched on later this afternoon.

Senator LUNDY—Yes, we will come back to it.

Mr UPTON —But it is the prerogative of the Department of Industry, Science andTourism to address those issues, which is why I alluded to the fact that we were talking tothem. It is OGIT’s responsibility ultimately, I assume, to ensure that this is put into thecontractual framework. So it is part of our longer term exercise of seeking to clarify thecontractual framework.

We had an undertaking from the Office of Government Information Technology toconsult the association and the industry about the ultimate contractual framework thatwould be embodied in the requests for tender. That, too, is a work in progress that has notbeen laid out. So we are, I suppose, expectedly awaiting consultation around those issues.We have had some preliminary discussions, but it is far from finished. So once again Iwould have to say that we are not aware of the full nature of what is on the table, but weexpect to be.

Senator LUNDY—The process is in train and you are now participating actively?

Mr UPTON —Yes.

Senator LUNDY—We have heard at previous hearings of this committee and atalso estimate committee hearings the very varied nature of the IT support services withindepartments and the very varied nature of existing outsourcing with IT. Do you think it isfeasible to apply blanket approaches to what constitutes a reasonable structure in your

FINANCE AND PUBLIC ADMINISTRATION

Page 55: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 542 SENATE—References Friday, 4 July 1997

view, say, to in-house bids across such a diverse and almost idiosyncratic IT infrastructurein the Commonwealth department to date?

Mr UPTON —I may be answering the wrong question, but I think that there is anelement of flexibility implied in what we are doing at the moment which suggests that weare going to have to ultimately get down to case by case detail. That is a sense that isimplicit in the observations that have been made by others this morning.

You may start with a general framework, a set of principles from which to drawdown—and that is the thing that the association is primarily concerned to get in place—but at the ultimate level one size sooner or later does not fit all and you have to thenapply the principles. I suppose the standpoint that we are operating from is that, if theprinciples are clear and clearly understood by all the parties, the application can thenproceed to recognise differences.

Senator LUNDY—I think you have answered the question in the sense that thereare differences between the departments and this inherent, I suppose, contradiction thatany broad principles that you apply as an approach still have to have a high degree offlexibility. I am looking for some acknowledgment that that high degree of flexibility mayin some cases involve a process that embraces in-house bids or the retention of thoseservices within the department, depending on the idiosyncrasies of the services that theyprovide.

I feel like you have just said as much to the committee. I am looking for someacknowledgment that, because you do need that high degree of flexibility, as anassociation you are actually thinking a bit more laterally than, for example, yoursubmission indicates.

Mr UPTON —A partial answer is that the association has always run also theparallel position that you do not outsource if the business case does not support thatdecision. Implicit in making that remark is the proposition that you first of all do athoroughgoing business case, including full costings and so on, and if the business casedoes not support outsourcing, then you do not do it. But if the business case does establishthat you are going to gain a benefit from outsourcing, we would then go on to say thatthere should not be an in-house bid.

CHAIR —Can we move back to the specific matter of the DVA outsourcingarrangement. Would you briefly outline your arrangement in so far as the DVA’s contractis concerned?

Mr LYON —In our submission to the committee I set out some of the keyelements that covered the DVA experience in this area. Our experience is, of course, muchwider than just dealing with the IT area. Back in 1991, concluding with a contract in1992, we outsourced our mainframe operation. That contract went to Ferntree. It was for

FINANCE AND PUBLIC ADMINISTRATION

Page 56: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 543

five years and was a fixed price contract, so we definitely know that we achieved theoutcomes in terms of price that we set out to achieve. The contract was audited by theANAO, and within the management of the Repatriation Commission and the Departmentof Veterans’ Affairs we concluded that it was very successful. So much so that when thatcontract was due to be relet we widened the coverage to include desktop local areanetwork support, wide area network support and telephones, leaving in-house theresponsibility for applications development and database administration.

Before we entered into the new contract, we again asked ANAO to undertake anaudit—which they did; it was published in audit report No. 21 and was a helpful report—to enable us to make certain that we embarked on a new, more comprehensive contractagainst today’s best practice principles. We did that, and a contract was signed with ISSCon 14 February of this year with a handover on 28 April 1997. The handover was a littlemore complex this time around, because it involved the transfer of the mainframeoperations from Ferntree to ISSC, as well as the transfer of the in-house operations. Weare in the early stages of the contract but, so far, the signs are quite promising.

CHAIR —With regard to the ANAO audit report and some of the matters theyraised—and I guess your department is probably one of the most experienced departmentsin so far as outsourcing of IT is concerned—section 3.3 on page 9 of the report said thatthe lack of adequate documentation regarding responsibility boundaries at the NCC doesnot appear to have caused DVA major problems or additional expense. They say that isdue primarily to the good working relationship you had with the supplier. If that had notbeen the case, it would appear there could have been quite a potential for a significantcost burden and major problems to have occurred. In terms of those areas, how have youdealt with them subsequently?

Mr LYON —The ANAO report was looking backwards at the contract we had withFerntree, which goes all the way back, as I said, to 1991-92. Without questions, you learnas a result of your experience. A comment from the ANAO which we very much agreedwith—indeed, it was our conclusion as well as theirs—was that, when looking forwardwhen entering into a contract in 1996-97, which is where we were going, we needed toupdate the contract and, if you like, modernise it. That meant addressing in more detailsome of the management arrangements.

The fact is that we did not have any significant problem with Ferntree. Therelationship was excellent, and I believe we obtained more value from the contract thanwe initially expected. There was one significant occasion when we needed more capacityand, if we had had an in-house operation, we would not have had access to the increasedcapacity that we needed. So that was a significant benefit.

In terms of the new contract, I think the committee has access to those details,because we published quite extensively what the requirements were, how the contract wasto be managed and a whole range of other things necessary for good contract management

FINANCE AND PUBLIC ADMINISTRATION

Page 57: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 544 SENATE—References Friday, 4 July 1997

in the RFT. The committee has access to that document. Indeed, that document has beenmade fairly widely available, and I believe it has now been picked up by otherorganisations in a range of contracting out situations.

CHAIR —I know DVA gets mentioned in a number of documents. I find itinteresting that we get a range of guides—the MAB-MIACBefore you sign the dottedline, Guidance for managers, et cetera. There seems to be a lot of reading for managers todo.

Mr LYON —Just on that point, we have been involved in these sorts of exercises,particularly in the health area, where we spend $1.5 billion. We are the largest singlenational purchaser of health care in the country, and that model is widely seen as the wayto obtain best treatment outcomes and efficiency gains.

CHAIR —So a lot of your experience went into the development of thesedocuments, I assume.

Mr LYON —Yes.

CHAIR —When you first tendered the service out in 1991-92, what process wasused?

Mr LYON —We had an acquisition council, which I chaired. That had on it otherdepartments—certainly including the Department of Finance. We prepared the tenderdocumentation in terms of requirements from a business management point of view,because that is one of the very important things that one needs to do in these sorts ofexercises. It was made available to industry. The acquisition council oversaw the tenderprocess, and a recommendation coming out of that was made to both the RepatriationCommission and the minister.

CHAIR —I want to ask one question about the ANAO report, but I will come backto that in a minute. Senator Lundy has a question.

Senator LUNDY—Could I just go back to my question I was going to ask earlierabout the acquisition council. In other evidence to this committee—or perhaps it was tothe estimates committee—Mr Maclean, from the Office of Government InformationTechnology, stated that IT acquisition councils did not play a role in the government’soutsourcing plans. Can you describe quite precisely what considerations the IT acquisitioncouncil made? Then I will go to Dr Macdonald and ask him to explain who, if the ITacquisition councils are not going to play a role, will play the role that is about to bedescribed?

Mr LYON —I guess the overriding role of the acquisition council was to oversightthe overall DVA process. That was quite consistent with the rules applying in a whole of

FINANCE AND PUBLIC ADMINISTRATION

Page 58: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 545

government situation. We had two acquisition councils, in a sense. The first one looked atwhat capital acquisitions DVA needed. You will note in the material I have given you thatthe infrastructure within DVA was quite mixed, and quite a bit of it needed modernising.The second acquisition council oversighted the tender approach.

OGIT was on the committee. We also had DIST, which was responsible forevaluating the industry elements of each of the tenders. We had the Department of Financeand also the Department of Administrative Services. The Department of AdministrativeServices had to leave at one stage in the process when there was a bid from another partof the Department of Administrative Services. But, after a short-listing process, and whenthat ceased to be a problem, we again had Purchasing Australia, which is an element ofAdmin Services, present in the committee.

We also had on the committee an independent person to help us evaluate theprocess, the tenders: Mr John Peck from Palm consulting. Mr Peck had been a deputycommissioner within the Department of Veterans’ Affairs quite a few years ago, so heknew our business. He had also been involved in a number of other strategic planningexercises, and is quite knowledgeable in this industry. Of course, we also had staff fromwithin the Department of Veterans’ Affairs: our budget manager, Mr Stubbings, who isresponsible for IT within the department; and a division head responsible for thecompensation program. That is about $4 billion of the $6½ billion business, if you like, ofthe department. So we had a lot of experience there to help in the evaluation of theprocess. That included looking at the documentation that was to go to industry and thenreviewing the recommendations of the evaluation group which we put into place.

Senator LUNDY—Did the acquisition council pass judgment on the process thathad been followed by the department?

Mr LYON —Because it was intimately involved in the process, individualmembers raised issues and they were taken into account. So it was a value added processbased on the contribution of individual members.

Senator LUNDY—Is process evaluation specifically identified as one of theacquisition council’s roles?

Mr LYON —I believe it is, but I would need to go and check. Certainly that wasthe way in which we ran the acquisition council within Vet Affairs.

Senator LUNDY—Certainly, in looking at previous evidence, it is the view of MrMaclean from OGIT that it is quite specifically a role of IT acquisition councils to look atthat process. Dr Macdonald, can you describe who or what will perform the role outlinedby Mr Lyon under the new outsourcing guidelines?

Dr MACDONALD —Those are the responsibility of the Department of Finance,

FINANCE AND PUBLIC ADMINISTRATION

Page 59: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 546 SENATE—References Friday, 4 July 1997

and they are under development. I am not intimately familiar with the exact status. If I cantake that question on notice, we will refer back to them.

Senator LUNDY—So you are looking at a new structure to perform that role?

Dr MACDONALD —There are consequential changes, yes.

Senator LUNDY—To IT acquisition councils?

Dr MACDONALD —There are consequential changes to IT acquisition councils,yes.

Senator ALLISON—I was interested that you state in your submission that youhave kept in-house IT security, access control, database administration, applicationdevelopment and support functions. Why was that and how many staff were involved?

Mr LYON —Mr Stubbings will provide some supporting comments. We lookedfairly carefully at DVA’s IT infrastructure requirements in total and we came to thejudgment that, in the area of infrastructure, there is a competitive market and there aresignificant economies of scale. Our experience with the mainframe operation definitelysupported that.

When it came to applications development and database management, we believedthat it was important to retain more direct control in some of these areas. We alsorecognised that in-house costs are quite different from what they are in the infrastructurearea in our set of circumstances. In any event, the market for our types of applications isquite different from what it is with the provision of infrastructure. Mr Stubbings mightlike to add to that.

Mr STUBBINGS —I cannot give you the numbers. I can take that on notice. It isnot a large team—

Senator ALLISON—Just a rough proportion.

Mr STUBBINGS —In the security area, I think we have in the order of eightpeople. Those eight are spread around the states as well as some people in the nationaloffice. But the principle is that we retain access control over who it is that would accessany DVA data and in fact who would access the systems that DVA operates. For example,ISSC will seek approval from us to have someone operate the system on our behalf. Sothat is part of the principle of managing the privacy aspects—that we seek to manage whoit is that has access to the system. The same principle applies for database managementarrangements: it is DVA data about veterans and we seek to manage that ourselves.

Senator ALLISON—Is it fair to say that the staff you have retained are more

FINANCE AND PUBLIC ADMINISTRATION

Page 60: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 547

senior?

Mr STUBBINGS —No, not at all.

Senator ALLISON—Can you tell the committee about the staff that you haveretained for monitoring purposes; how many have been kept on for that purpose and whatlevel do they operate?

Mr STUBBINGS —You mean the contract management arrangements?

Senator ALLISON—The monitoring of the service.

Mr STUBBINGS —We already had a small team in place to manage thearrangement with Ferntree. What we have done, given that we have increased the scope ofthe contract, is that we have taken on one extra staff member who will look at some ofthe performance issues at a more detailed level because of the nature and scope of whathas been outsourced.

Senator ALLISON—You talk in your submission about the fact that you adopteda clean break approach rather than a phased approach. Why did you decide to go thatway?

Mr LYON —We have had very extensive experience now with outsourcing. Forexample, we had some 9,000 staff in the repatriation hospitals and on 1 October of thisyear, with the privatisation of Lady Davidson hospital, we will have no staff directlyinvolved in hospital care. We adopted a brokered job approach in the case of the sale oftwo hospitals: Greenslopes Hospital in Brisbane and Hollywood Hospital in Perth.

The advice I gave to the government of the day and the present government inrelation to IT was that the brokered job approach was not as effective in ensuring thatexperienced staff take up the opportunities that might be available for them with theincoming employer. That really came out of our experience. I am aware that quite anumber of our staff in the hospitals would have been employed by the incoming owner,which was Ramsey’s Health Care Pty Ltd, but chose not to because that meant they couldaccess their voluntary redundancy entitlements. So they went and took a job somewhereelse in the health industry. From my point of view, I would have liked to have seen moreof them, if you like, holding up their hands to go to the new owner.

CHAIR —We might cover that a bit more when we get to the employmentimplications area. Before we go to lunch, I just invite the ANAO to make some commentson the DVA contract and particularly as it relates to your report.

Mr GREENSLADE —Mr Chairman, I will just emphasise and pick up some of thepoints made by the DVA. The focus of the audit that we undertook was a management

FINANCE AND PUBLIC ADMINISTRATION

Page 61: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 548 SENATE—References Friday, 4 July 1997

audit of DVA’s outsourcing contract with Ferntree and also to look at lessons for thefuture. As Mr Lyon said, the audit did find that, overall, DVA had been very successful inoutsourcing the data centre with the actual costs of the agreement being in line with thecosts projected at the time that the decision was taken to outsource. We found that therewas also a very good working relationship with the supplier. There were areas forimprovement which we thought DVA should pay attention to: the new outsourcingarrangement, in particular with regard to conduct of formal evaluation early in thelifecycle of the contract; ensuring that the new contract does reflect the outsourcingexperience gained from the arrangements with Ferntree; and also the point alreadydiscussed about adequate documentation of the management arrangements with thesupplier.

Picking up the earlier point, we did ensure—looking forward—that these pointswere fed in to the new arrangements. We discussed the findings early on with DVA so asto provide timely input to the request for tender for the second contract. In addition, weundertook a general review of the request for tender at DVA’s request in terms of theextent to which our findings were reflected in the tender document.

We have not undertaken a review of the transition to the new supplier or looked atthe management arrangements for the new supplier. The audit report does mention that webelieve a number of wider lessons can be learned from the audit, and we will be puttingtogether a better practice guide on management of IT outsourcing.

Mr LYON —Mr Chairman, one last comment that I might mention: we are alsowell down the process of selling the last repatriation hospital in Sydney, Lady Davidson.The staff at that hospital were consulted on what was the best way to separate becausethey had also seen the experience of Greenslopes and Hollywood hospitals. They made itoverwhelmingly clear to us that they preferred the clean break arrangements.

CHAIR —Would any other department like to comment with regard to DVA’sexperience as to any proposals they might have or have already carried out?

Senator LUNDY—Can I also ask if any of the departments are intending to fieldan in-house bid?

Mr HIGHFIELD —We have not reached a formal position on that particular issueat this stage.

Mr ROCHE —As I mentioned earlier, we have decided that we will not accept anin-house bid.

Mr PALMER —We have not yet made a decision on the matter.

FINANCE AND PUBLIC ADMINISTRATION

Page 62: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 549

Mr GREENSLADE —We have entered into an outsourcing arrangement for partof our IT. We did not enter into a formal in-house bid, but we did cost the in-houseservices in the process we went through.

Mr WILSON —The department has not determined a position at this stage.

Mr WITHERIDGE —Neither has our department.

Mr POTTER —We have not made any decision at this stage.

Mr AITKEN —We have not taken a decision on a formal in-house bid either. Weare still trying to determine the rules of engagement for market testing and whether acomparison of known in-house costs against vendor bids is sufficient.

Senator LUNDY—That goes to another question I would like to again put to theforum: who is undertaking a process of benchmarking your IT costs and to what degreehave those existing costs been calculated at this point?

Mr LYON —In mentioning what we did in Veterans’ Affairs, we did an extensiveanalysis of in-house costs. We in fact involved staff in the approach to be taken and weengaged an independent firm of accountants to validate the costs that came out of theprocess. We took that step very seriously, and it reinforces the point, I think, that has beenmade by Mick Roche and ourselves that you need to understand your benchline costsbefore you embark on an outsourcing exercise.

CHAIR —We might go around the table with respect to that question and havepeople indicate whether or not departments have done or are intending to do that, whetherit has been discussed and, if it has, what is the process, as Senator Lundy has asked. Wewill start from Defence and then go to DSS.

Mr McNAMARA —I sound like a cracked record repeating what Mr Lyon hasalready said. We did exactly the same thing and got a good handle on our costs and thedetailed breakdown. That is no easy task. Mr Upton is not with us anymore, but he had avalid point: the system we all inherited in the public sector did not give us a good feel forin-house delivery costs, structures, or what have you. That has certainly been rectified.That has been one of the cultural and structural changes that this process has brought on.

Can I also make a plug for our friends in the Department of Finance. You have ablue book there calledPerformance improvement cycle: guidance for managers. It looks atbenchmarking as one of the options, an alternative to competitive tendering andcontracting. I might say that we in Defence have some reservations about it being analternative. It can be a complement too, but there is nothing like the chill wind ofcompetition to force you to think very hard about how you do business. That has been ourexperience.

FINANCE AND PUBLIC ADMINISTRATION

Page 63: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 550 SENATE—References Friday, 4 July 1997

Mr PALMER —We are continuing to refine the costing model and baselinecosting. We are planning to keep that up to date throughout the period.

CHAIR —What process are you using to do that? Are you employing externalservices or are you just doing that in-house?

Mr PALMER —We will be employing external services to assist us. We havepreviously had Nolan and Norton benchmarking.

Mr ROCHE —We have a fairly detailed cost model. I mentioned earlier that weare using an activity based costing system. It has been in place now for probably 18months or so. It got a very good looking over by external consultants when we moved tointroduce cost recovery for customs services earlier this year.

IT costs obviously are a substantial component of our overall costs and weretherefore given a very close look by two firms from the big six accounting firms: one whoacts as our internal auditor and a separate firm of consultants. The Australian NationalAudit Office also reviewed the cost model, so we have a fair degree of confidence aboutit.

Mr HIGHFIELD —Our answer is very similar to that of DSS. We are continuingto refine our costs.

CHAIR —Same process?

Mr HIGHFIELD —Broadly, yes.

Mr COLEMAN —As part of our IT outsourcing, we did a baseline costing of ourcosts. But we recognised early on that the then existing structure was really inappropriate.So, as part of that process, we put together a revised structure in consultation with the ITstaff. We then costed that model, and that is the cost we did include in our RFT and wentto the market with. The market bid against that.

CHAIR —Is anyone doing it any differently from what has basicallybeen outlined thus far?

Mr AITKEN —At the ABS, we have undertaken the distributed systemsbenchmarking study by the Gartner Group—a benchmarking arm of the Gartner Groupcalled ‘Real Decisions’—and we have subjected ourselves to that benchmarking studythree times now. We measure fairly well up the scale on the complexity level and we havebeen shown to be about world best practice against the costs at the complexity level.

CHAIR —Did you do that in-house?

FINANCE AND PUBLIC ADMINISTRATION

Page 64: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 551

Mr AITKEN —It was done by Gartner Group consultants.

Mr POTTER —Because of the nature of our operation, we find it quite difficult tofind a similar organisation to benchmark ourselves against. What we have done is we havecontributed to things like strategic research in this area and we have looked at ourstructures and costs in relation to what other organisations do. A lot of time is spentmaking adjustments for the differences that we have, and there is a wide range ofvariation within the organisation. That makes it quite difficult to do.

Senator LUNDY—I have one more question to finish up on. We heard evidencethis morning about the necessity to have an open process that is able to be scrutinised—particularly from Defence—and the value of public consultation. Can I put the question toDr Macdonald: why has the decision been made not to release the business case?

Dr MACDONALD —I believe that has been responded to several times, Senator.The government has said it is a cabinet confidence.

Senator LUNDY—Even though the merits of having that sort of information onthe table has been demonstrated?

Dr MACDONALD —It is a cabinet confidence.

CHAIR —We might have to deal with that issue, Senator, in another forum and atsome other time in a sitting of the Senate. I thank the officers of DVA for being here. Ialso thank people for bearing with us, as we are running behind time.

Luncheon adjournment

[1.19 p.m.]

CHAIR —We will now move to the issue of employment implications ofcontracting out. I invite the PSMPC to start this session.

Mr HARDING —I want to provide a short outline focusing on the clean-break andphased approaches, and provide a bit of background to those approaches. Without trackingback too far into the history of it, the Public Service and Merit Protection Commission inabout September last year published some general guidelines on outsourcing. I emphasisethat those guidelines are on outsourcing generally, not just on IT outsourcing. Thoseguidelines outlined two approaches to outsourcing: the clean-break approach and thephased approach.

The guidelines indicated that the clean-break approach was the preferred approach,but the guidelines also made it clear that it was up to agencies to decide which of the twoapproaches they would follow, so that flexibility was built in. The guidelines set out in

FINANCE AND PUBLIC ADMINISTRATION

Page 65: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 552 SENATE—References Friday, 4 July 1997

broad terms the content of the clean-break approach and the phased approach. I will justoutline those and come back in a little more detail to some of the implications of that.

The clean-break approach comprehends the notion that there will be no negotiationof jobs for affected staff and, by implication, no negotiation of conditions that they mighttake with them anywhere they went. Staff are expected to be dealt with under the existingAPS redundancy provisions, which means they might be voluntarily retrenched,redeployed or involuntarily retired. Those are the three options under that framework. Staffare not prevented from working for the new supplier under that approach. The essence ofthe clean-break approach is that the employer discharges its obligations to its employees—redundancy obligations, effectively—and leaves it at that.

The other approach outlined in the document was the phased approach. I probablyshould make the point here that there are different permutations of the phased approach. Ithink it was outlined in our document in a fairly broad way. The way it was outlined therewas that the phased approach provides for staff to be considered for jobs with the newsupplier before the handover date.

The guidelines suggested that there may be a provision in the contract requiring asupplier to fill vacancies first from among the affected staff. That is where some of thepermutations start to come in. The agency would negotiate with staff and theirrepresentatives terms and conditions of employment which would be offered to the staffand have separate discussions about that matter with the supplier.

It is expected that the people who get jobs with the new supplier would resignfrom the APS to take up those jobs. Those who do not do that would be subject to thestandard redundancy provisions with the possible consequences I outlined above in relationto the clean-break approach—redeployment, voluntary retrenchment or involuntarilyretired.

Some of the permutations of the phased approach revolve around the extent towhich there is a process in place which requires a new supplier to employ existing staffand, for example, the extent to which terms and conditions are negotiated amongst theparties. For example, it would be possible to have a phased approach where there is norequirement on the new supplier to take any staff, although there might be an agreedprocess about how the supplier does take the staff it wants to take.

The permutations in relation to terms and conditions could run from a completelyopen negotiation to a set menu being laid out of what the terms and conditions will be.That concludes my summary outline of the guidelines. I would note that previoustestimony in front of the legislation committee, I think, has indicated that Minister Faheyand Minister Reith are tasked with determining the employment approach to the IToutsourcing.

FINANCE AND PUBLIC ADMINISTRATION

Page 66: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 553

Mr PETROVIC —This afternoon I intend to outline the issues that concern ourorganisation in the area of the employment implications of IT outsourcing. Those are setout in part 8 of our submission. Before I do that though, I point out to the committee thatthe submission that you have before you is probably most accurately described as analmost final draft. The reference list is missing and there is actually a piece ofcorrespondence that is referred to missing, but that will be supplied to the committee onMonday.

The other thing I might mention before I start on the employment issue is that,after commenting on that issue, I would like, with the leave of the chair, to comment onthe in-house bid issue, which was canvassed before lunch.

Proceeding to the employment issues, there are four areas of concern for us. Thefirst is job loss from the public sector. There are 2,800 jobs in scope for this issue. Secondis the nature of the arrangements that the government intends to use to, I guess, managethe loss and transfer of those jobs. The third is the role of our members’ entitlements inthe cost savings which were talked about this morning, and the final one is the nature ofthe conditions that our members will be working under with the private sector outsourcers.

Going to the first of those, there are, as we understand it, about 2,800 jobs inscope. All of those will be lost from the public sector. There is to be some level oftransfer of jobs to the private sector providers. One hears a number of differentpercentages for that level of transfer. If you look at the DVA example, it sits somewherebetween 50 and 60 per cent, in which case there will be a net job loss of 900 to 1,000, ifmy arithmetic is correct.

In relation to the actual transfer arrangements, we have heard from Richard aboutthe two options that are being canvassed, the clean break approach and/or the phasedapproach. As far as we are aware, the government is yet to express a distinct preferencefor the approach that is to be taken in IT outsourcing, and in particular to set out what itsversion of the phased approach might be for IT outsourcing. As we understand it, there isa decision in course to set out the shape of the phased approach, but we have yet to see aresult of that.

We note also that there has been a recent announcement, on Monday, in relation tothe superannuation arrangements that apply when Commonwealth functions are sold oroutsourced. That really goes to the access that employees who find themselves being maderedundant or involved in the phased approach to the employer’s super contributions have.As the legislation currently stands, that access is blocked. If they are offered what istermed an equivalent job under the legislation, that blockage is, as we understand it, to beremoved. Certainly we welcome that. We believe that is a step in the right direction. Thatmakes the level of employee choice a lot wider than it would have been prior to that.

In relation to the cost savings and the role that the loss of entitlements plays in

FINANCE AND PUBLIC ADMINISTRATION

Page 67: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 554 SENATE—References Friday, 4 July 1997

that, we note with some concern from previousHansardtranscript that the costings thatwere modelled for IT outsourcing were based solely on the phased approach. I might addthat it is not clear to us exactly what model of the phased approach was used. Weunderstand that it was somewhat like the DVA hospitals model, but that is about as muchinformation as we have. Those savings have basically been, for want of a better term,locked into agency budgets, certainly over the three-year period that is set out in thecurrent budget papers. But I understand that the savings are still said to be $920 millionover nine years.

The savings predicated on a version of the phased approach are, in that sense,locked into agency budgets for some time in the future. If agencies choose—as a numberhave done already—to adopt a clean break approach, as I understand it, that is entirely amatter for the agency concerned, and the money for redundancy payouts is to be foundfrom within agency budgets. In our view—I think it is quite obvious, in fact—that willcause further cuts over and above the ones that are already programmed for IToutsourcing. If those are significant, from what we have seen in our experience of lastyear’s round of cuts, that means extra redundancies to pay for more redundancies.

The final area that I wanted to talk about was the conditions that would or mayapply to former Commonwealth employees within the employment of outsourcingcompanies, which is an issue that has not had a great deal of attention in this debate thusfar. In our submission, we have talked about the adoption of something like the EU-UKapproach known colloquially as the TUPER approach—which stands for Transfer ofUndertakings (Protection of Employment) Regulations—which is pursuant to an EUacquired rights directive.

That gives some guarantees about the bargaining rights and employment conditionsof former government or public sector employees that have been employed by outsourcers.We certainly would be of the view that a measure like that would be most appropriate inthis case and, given this government’s substantial contracting out and outsourcingagenda—as it appears to us anyway—may be appropriate in a wider context. That endsmy comments on the employment issues.

In relation to in-house bids, as discussed before lunch, there are a few points that Iwould like to make. The first is to note particularly the position of the AIIA and theirconcerns about a level playing field for in-house and outside bids. Our organisation hashad that debate a number of times in other areas. The question I always ask, and have yetto get a reasonable answer to, is: if the concerns about internal bidders having some sortof an unfair advantage are real, where has it happened, where are the examples of thingslike that going wrong, messing up the bidding process and acting to the disadvantage ofagencies?

Whatever else we have heard from the Defence people about the CSP process, aspart of that process, in-house bids are guaranteed through an industrial agreement. Our

FINANCE AND PUBLIC ADMINISTRATION

Page 68: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 555

organisation, as far as I am aware, has never heard of any complaints from bidders aboutthe probity or efficacy of that process as it relates to in-house bids. So we find that sort ofposition very strange and simply not understandable.

In the UK, where there has been a great deal of competitive tendering andcontracting out at all levels of government, the UK government actually looked atlegislating for some sort of legal separation within places like local councils or whateverfor the purposes of running in-house bids and decided not to do so because it thought itwas a waste of time. So the experience is not borne out and, again, we would ask for whatsort of evidence that position is based on.

In relation to fair accounting practices and cost shifting, I guess the observation Iwould make is that that may or may not occur. I suppose you have to look at it on a caseby case basis, but in relation to an outsourcer I would have thought that what thecontracting agency sees from the outsourcer is a price. The competition is done on price,and they pay a particular fee to the outsourcer. Whether the outsourcer then, behind thatprice, is shifting their costs around or doing things like running a loss leading contract orwhatever, the agency does not know. It is eminently plausible, I think, given that anumber of certainly the large multinational outsourcers have global operations and a verylarge number of employees. In that sense, internal cost shifting would not be implausible.So, again, we would have to say that is not a fair criticism.

To finish off on the issue of in-house bids, I might just mention one issue that wasnot covered in this morning’s session, which was I suppose the reality of the situationbefore us in relation to IT outsourcing. Whilst it is true to say that in-house bids arepermitted, our organisation has significant concerns about the support that in-house bidsmight get certainly within the Public Service and in particular from OGIT.

The first point to make is that there are no resources available to agencies to mountin-house bids. I think we heard from Defence that they funded their in-house bid fromwithin their budget, but I guess the point I would make in response to that is Defence is alarge agency which can take advantage of its economies of scale or whatever, but thesituation that faces agencies in relation to the government’s IT outsourcing initiative is thatthey are clustered together. There have to be cross-agency bids if there are to be in-housebids. There has to be coordination between agencies, and agencies have to make sure thatapples are compared with apples for the purposes of putting an in-house bid together. As Ithink Dr Macdonald would only too readily tell us, the competition for that work will bevery fierce. That being the case, if those bids are not adequately resourced, they simplywill not happen. So that is one point.

The other one is that, in terms of assisting agencies to mount credible in-housebids, to put the information together, to present it in an attractive way, a user-friendly wayor whatever, there seem to be no resources, particularly from the OGIT side, to do that.Certainly we note with some concern that there is quite a large allocation of resources, it

FINANCE AND PUBLIC ADMINISTRATION

Page 69: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 556 SENATE—References Friday, 4 July 1997

seems to us, in OGIT in relation to assisting agencies with the outsourcing side of theprocess—with the formulation and negotiation of contracts, with identifying the issues andthe like—but there does not seem to be a commensurate level of resources in relation tomounting in-house bids. All of that, we say, adds up to a fairly hostile climate for in-house bids in the APS. Quite frankly, we would be surprised and delighted if in-housebids were mounted but, certainly, the general climate seems to us to be quite hostiletowards in-house bids.

CHAIR —On page xi of the 1995 publicationClients first: a challenge forgovernment information technology, there is a dot point relating to people issues. It says:

The Department of Finance, in conjunction with the Department of Industrial Relations and thePublic Service Commission, pursue a whole-of-government agreement with the Community andPublic Sector Union and other unions covering the transfer to the private sector of staff covered byoutsourcing agreements.

What happened to that?

Mr PETROVIC —Our understanding, and perhaps Mr Harding might like tocomment—

CHAIR —I would like to hear several comments from several people, particularlyone who participated in the authoring of that document.

Mr PETROVIC —Our understanding is that the decision of government, for wantof being more specific, is that issues like that are to be left to individual agencies. That isour understanding of the employers’ position.

CHAIR —Perhaps the Public Service Commission might like to comment?

Mr HARDING —As much as I can say on that is that, as far as I am aware, theintention to pursue that process has evaporated.

CHAIR —Did you say ‘has evaporated’?

Mr HARDING —Yes. There is not now that intention.

CHAIR —What is the intention now then?

Mr HARDING —I think it is much more along the lines that Mr Petrovic hasoutlined, which is that there would be a framework for the process but that frameworkwould provide flexibility for agencies or clusters to make their own arrangements.

CHAIR —Why was there change?

FINANCE AND PUBLIC ADMINISTRATION

Page 70: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 557

Mr HARDING —I am not aware of what the reason for the change would havebeen.

CHAIR —You are not aware of why things changed?

Mr HARDING —No.

CHAIR —Mr Roche, would you like to make a comment?

Mr ROCHE —I do not know that anything changed. It was one of a number ofrecommendations. The intention of the group in making that recommendation was to tryand get a consistent approach. The emphasis was not so much on a whole of governmentagreement but, rather, on a consistent approach agency to agency so that each agency wasnot required to negotiate its own set of conditions, if you like.

CHAIR —That would have been a reasonably fair thing to do then, wouldn’t it?

Mr ROCHE —What has happened is that, in practice, that is now starting toemerge. There seems to be emerging an approach that is fairly consistent, although withvariations from agency to agency in the way it is gone about and, certainly, a consistencyof conditions upon transfer with a fairly widespread adoption of the clean-break approach.I think the government’s announcement on superannuation also goes to part of that issue.

CHAIR —I can recall a comment during the estimates process—I think it wasidentified by the Department of Industrial Relations—that there is a potential fordepartments now, in terms of industrial arrangements, to negotiate their own wage levels,et cetera. How do you think that fits with a consistent approach across the government inso far as this arrangement is concerned?

Mr ROCHE —I am not sure that they are necessarily related. Theserecommendations were made back in March 1995 when there was a—

CHAIR —The concern for workers must be, though, that they could findthemselves in a situation where there was consistency in terms of conditions that may betransferred which could suddenly become inconsistent. You could get a flow from theprivate sector, which apparently is the case; that is how much of these savings arereached. I would assume that the private sector has less conditions, lower wages and fewerjobs.

Mr ROCHE —I certainly do not think that the first two are the case. It does notseem to be the experience that we have seen to date.

Mr HARDING —It is certainly the case that since the introduction of the

FINANCE AND PUBLIC ADMINISTRATION

Page 71: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 558 SENATE—References Friday, 4 July 1997

amendments to the Workplace Relations Act, and particularly since about March or Maythis year, departments have a great deal more opportunity to negotiate certified agreementswith their staff. But the expectation is that those certified agreements would be negotiatedwithin the confines of government policy parameters. I would have thought that one couldreconcile the two issues by indicating that there is a pretty clearly expressed intention thatthere be an overall framework applying to the IT outsourcing. It would be expected thatagencies would operate within that framework.

CHAIR —Would DSS like to make some comment about how it has handled thatissue?

Mr PALMER —We obviously consider the human resource issues as veryimportant. We are now awaiting the finalisation of the framework and within that, we willmake our decisions.

CHAIR —Would any of the other departments like to make a comment about howthey have dealt with it?

Mr COLEMAN —We adopted a clean break approach, consistent with thepreferred position of the PSMPC at the time.

Senator PAYNE—I wish to ask a question about another issue. Taking up thepoint that Mr Petrovic made about the CPSU’s view of the percentage take up of staff bythe private sector, would it be the AIIA’s view that that is an accurate representation ofwhat Mr Petrovic said?

Mr DURIE —You would have to remind me of exactly what he said.

Senator PAYNE—I think Mr Petrovic said 50 to 60 per cent.

Mr PETROVIC —That was a figure that consistently appears in the OGITmaterial. The example I gave from DVA, if my arithmetic is correct, lies somewherebetween 50 and 60 per cent.

Mr DURIE —I would have to reserve my position on that. I do not have my headaround those numbers at the moment. I would be happy to take it on notice and comeback to you.

Mr ROCHE —We have had discussions with a number of tenderers for theCustoms outsourcing. A very common refrain that we have heard is that the experience ofoutsourcers is that they struggle sometimes to get the number of staff that they would liketo get. Certainly that has been the experience of EDS in relation to South Australia, wherethey stood in the market place with offers to all staff that were in scope and believed thatthey could have happily accepted more than they got. Dr Macdonald might want to

FINANCE AND PUBLIC ADMINISTRATION

Page 72: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 559

comment on that.

Dr MACDONALD —My understanding is that EDS took up 98 per cent of theavailable staff when they outsourced the South Australia deal.

Mr DURIE —I would like to make a general comment about employmentopportunities. I would echo Mr Roche’s observation that the industry is growing, andgrowing rapidly. Employment growth in the industry overall at the moment is about sixper cent a year. Our informal surveys of our members indicates a considerable number ofvacancies for particular skills. I can share that information with the committee on notice ifyou like.

Our counterpart in the United States has reported recently that there are somethinglike 200,000 vacancies in the industry there. I would expect the take up rates to be prettyhigh, but I cannot be absolutely exact about what they might be.

Senator ALLISON—I want to change the subject to funding in-house bids. Couldwe ask each agency to indicate what level of funding they thought was appropriate if theydid support an in-house bid and get some evidence on the necessity for that support.Perhaps we can start with Dr Macdonald’s advice in this respect.

Dr MACDONALD —The cabinet decision was that there would be no centrallyprovided funding of in-house bids. It would be incumbent on each department, as part oftheir decision process, to make those funds available.

Senator ALLISON—So you gave no advice to any agencies about how they mightdo that?

Dr MACDONALD —No.

Mr PALMER —As I indicated this morning, we are yet to make our decision onthis matter. We will be assessing the costs and the funding situation in the course ofmaking that decision.

CHAIR —Mr Palmer, you say that you are going to make an assessment on thecosts of having an in-house bid. When you make that assessment, what if the assessmentsays, ‘We don’t have the funds. In terms of our total budget, we don’t have the additionalmoneys to make a proper in-house bid’? How do departments deal with that?

Mr PALMER —That is a typical situation of determining how you are going toapply available funds.

CHAIR —Or you may not have an in-house bid? Funding could preclude you fromhaving an in-house bid. That is what you are saying.

FINANCE AND PUBLIC ADMINISTRATION

Page 73: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 560 SENATE—References Friday, 4 July 1997

Mr PALMER —I am saying that funding is something we would take into accountin looking at the overall issue. I am sure the board of the services delivery agency wouldbe taking that into account.

CHAIR —Aren’t you saying though that you would make an assessment of thedollars and, if it were too dear, you would not do it? Is that right? Otherwise, why assessit? Why not just say, ‘We’ll do it’?

Mr PALMER —In making such an assessment, you would be looking at a rangeof factors—cost being one of them. At the end of the day, it is a matter of making thefunds available.

Senator ALLISON—Can we continue with the other departments. It is worthhearing from each agency.

Mr SEYMOUR —As you heard this morning, we have not yet made a decision asto whether we will or will not mount a bid. In the event of the possibility that we do, Ihave temporarily set aside funds for that activity.

Senator ALLISON—What do those funds represent in terms of a proportion ofyour total cost? What is the level of funding that you would see as appropriate?

Mr SEYMOUR —Approximately one per cent.

Mr COLEMAN —We did not proceed with an in-house bid, so I guess the issuedid not really arise.

CHAIR —Some departments have not got to that point about making a decision,but you might like to comment on how you might go about funding it should you getthere.

Mr WITHERIDGE —The issue for us is much more about, if we are left to ourown devices, our capacity to establish the Chinese walls. In our case, we have the verysame individuals who are providing the service who would do an evaluation and whowould be capable of mounting an in-house bid. So we do not have that separation thatwould be necessary. We are too small.

Mr WILSON —It would be a similar situation in our department. We have a verysmall IT area. It is a little larger than Peter’s but, again, we have considerable difficultytrying to find resources to put aside to do that. The other point I would make is that inconsidering an in-house bid we probably would be looking from the perspective that wasmentioned by somebody earlier this morning, that an in-house bid itself is looking at yourbaseline cost and doing some benchmarking and, at the end of the day, getting in the bidsfrom prospective outsourcers and comparing those to your internal costs. That is a less

FINANCE AND PUBLIC ADMINISTRATION

Page 74: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 561

formal way of considering an in-house bid itself.

Mr POTTER —As I mentioned before, we have not really considered thepossibility of an in-house bid. I would expect that when we considered that, if we werewanting to make in-house bids, we would have to provide funding and we would amortisethat over the lifetime of the likely bid to see whether it was a sensible thing to do with themix of things. Being a non-mainframe agency it is a little further out for us than it is for amainframe agency.

Senator ALLISON—Regarding another of Mr Petrovic’s points, the question ofredundancy packages, how they are funded and superannuation, if, once again, we can goto you, Dr Macdonald, for what your advice has been to agencies in this respect?

Dr MACDONALD —They are funded by the agencies.

Senator ALLISON—Have agencies been asked to put aside budgets for—

Dr MACDONALD —That is a resource allocation issue and I simply do not know.I would have to ask the Department of Finance.

Senator ALLISON—Anyone from around the room?

Mr HARDING —The redundancy payments would be funded by agencies, but thesuperannuation payouts come out of the superannuation funds themselves, so they are nota call, as I understand it—I am not from the Department of Finance—on agencies’ funds.

Senator ALLISON—As I ask you around the room, would you think about thesituation in Victoria at present where we have had contracting out in local governmentnow in its third year and the blow-out that has occurred in several hundred million dollarsworth of superannuation payments. I would ask you to bear that in mind when yourespond.

CHAIR —I think Mr Harding said, in terms of superannuation, that it comes out ofthe Commonwealth superannuation fund as different to each agency’s budget. Theagencies, I think, are responsible for providing for their own redundancy costs, but thesuperannuation payments will come straight out of the Commonwealth fund.

Senator ALLISON—It would be good to clarify that because of the situation inVictoria and the shortfall.

CHAIR —I do not know whether ANAO might be able to offer some informationor advice on that, or the tax office?

Mr ROCHE —Customs is just a line department; the superannuation entitlements

FINANCE AND PUBLIC ADMINISTRATION

Page 75: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 562 SENATE—References Friday, 4 July 1997

are, in fact, paid out by the superannuation office and they do not come out ofdepartmental funds. They reflect two things: one is the employee’s own contributions, andthere is a further sum of 2½ times the employee’s contributions which represents thenotional government contribution. At the moment, in the CSS, that is not funded, so it isactually a cash payout. But viewed in actuarial terms that amount is, I think, said to beroughly equal to the liability the Commonwealth would face if the employee continuedthrough to retirement and drew a pension. In a sense it is an earlier payout, but it certainlydoes not represent to my knowledge a greater cost to the Commonwealth.

Senator ALLISON—Can I just clarify that? Is this not a greater cost overall? Theproblem in Victoria is that that has had to be realised much sooner than it wouldotherwise because of the enormous number of redundancies, and that is what has causedthe problem. The debt is the same—it is just that it has been brought forward and had tobe paid quickly.

Mr ROCHE —Yes, it does bring it forward. But I do not think that is certainly sogreat as to be significant, to my knowledge, in terms of the government’s overallbudgetary position.

Senator ALLISON—It is certainly very significant in Victoria.

Mr ROCHE —Yes. You need to talk to someone from the Department of Financesuperannuation branch to get a detailed readout on that.

CHAIR —It may be a question that we can put in writing to them in terms of howthat issue is to be addressed. Does DSS want to make any comment on redundancypackages?

Mr PALMER —I will need to take advice from our resource management area onthat issue. I will take it on notice.

CHAIR —Do any of the other departments quickly want to make a comment withrespect to that? That is not an issue you have to address at this point in time?

Mr AITKEN —The OGIT scoping study collected information from agencieswhich would have assisted them to assess the cost of redundancy packages. There werequestions about age, length of service et cetera in that scoping study.

Mr SEYMOUR —We clearly recognise that it is an issue we have to address. Forthe moment it is an out year issue and I have not gone to that level of detail of ensuringthat we have provided adequate funds for it.

Mr ROCHE —The Customs Service has provided for the necessary redundancies.

FINANCE AND PUBLIC ADMINISTRATION

Page 76: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 563

Senator ALLISON—How did you do that?

Mr ROCHE —Simply earmarked the funds.

CHAIR —In terms of the calculations, though?

Mr ROCHE —It is a fairly straightforward calculation. We are able to assess thenumber of people involved within scope and we do have some figures from previousoccasions on the average cost of redundancies. It is simple multiplication.

Senator ALLISON—So there is a line item in your budget for redundancies, isthere?

Mr ROCHE —No. Agencies these days have their running costs voted in one lineand you will not see a distinction in those running costs for different components. Theonly division is in fact between salaries and other running costs, and that is an artificialdistinction. It is quite permissible for the Department of Finance to move funds betweenthose two elements of your running costs.

Senator ALLISON—So there is a sum of money in there for the next financialyear?

Mr ROCHE —We have earmarked internally the necessary sums of money.

Senator ALLISON—But other agencies have not?

Mr SEYMOUR —I just confirmed that for the ATO. We recognise we have to doit. We have not yet done that.

Mr COLEMAN —Certainly we had to earmark redundancy moneys within ourown budget. As Mr Roche said, the calculations are quite simple. We just had to have abest judgment call about the people who would take redundancies and those wouldpossibly take up employment with the contractor and set that money aside internally.

Senator ALLISON—Mr Petrovic has suggested that there will be furtherredundancies in order to pay for this lot. Can you comment on that?

Mr COLEMAN —Only in relation to the ANAO, and that is not the case in ouragency. There have been no earmarked redundancies to pay for the redundancies flowingfrom our IT decision.

Mr ROCHE —It is certainly not the case in relation to Customs Service. As Imentioned earlier this morning, we will not proceed with the outsourcing unless the costof it comes in at or below our current costs and we get a better service. In terms of the

FINANCE AND PUBLIC ADMINISTRATION

Page 77: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 564 SENATE—References Friday, 4 July 1997

costs of the current exercise and the cost of outsourcing, we will take account of the costof redundancies. So it will be self-funding within the total exercise. It will not affect anyother staff.

Senator ALLISON—In what way will you take into account the cost ofredundancies? How will you factor it in?

Mr ROCHE —It is part of the financial equation over the five-year period.

Senator ALLISON—So you will simply divide it up by the five-year period andadd it on to the—

Mr ROCHE —The financial comparison will be done on a five-year basis and a10-year basis using discounted cashflow techniques. That will incorporate the cost ofredundancies.

Senator ALLISON—Dr Macdonald, will that be consistent with these agencies?

Dr MACDONALD —That is the normal procedure for a business case analysis totake a discounted cashflow of all the costs over the period of a contract.

Senator LUNDY—I want to clarify a point with respect to the costs likeredundancies and so forth in any outsourcing venture. I think it goes to that point DrMacdonald made where it became clear in questioning previously that those costs in thatinitial transition phase were spread across the out years in terms of the projected savingsidentified by Finance in the outsourcing of IT. To what degree were the departmentsinvolved in preparing those calculations of spreading the transition costs across the out-years for the purposes of calculating the savings the government is hoping to achieve inthe first, second, third year, et cetera? Were any of the departments involved in thatexercise?

Mr ROCHE —Departments simply completed questionnaires. The actualcalculation of the outcomes of those questionnaires was a matter for OGIT. While they didthat on the one hand, I imagine that most departments would do what we did and do theirown internal calculations to see how it worked for them individually, and that is what wehave done.

Senator LUNDY—Were any of the departments subsequently supplied with advicefrom OGIT as to how they implemented their formula of spreading those costs across theout-years?

Mr SEYMOUR —No.

Senator LUNDY—So at this stage you have not had the opportunity to apply

FINANCE AND PUBLIC ADMINISTRATION

Page 78: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 565

OGIT’s savings calculations to your own budgets?

Mr ROCHE —No, that is not true. We have got OGIT’s savings calculation inrespect of Customs, and it is within $100,000 or so of our own calculations. For all intentsand purposes, we get the same answer. I do not know precisely how OGIT did their workbut I know how we did ours, and I was satisfied with the answer.

Senator LUNDY—Has any other department been through that process?

Mr SEYMOUR —We are still in discussion with OGIT on that issue.

Dr MACDONALD —Mr Chairman, I believe on 16 June Senator Lundy put aquestion regarding the methodology of spreading the savings across the out-years and wetook it on notice at that time—just to clarify.

Senator LUNDY—Mr Petrovic, you raise a number of issues in your submission,obviously. A major point you make is the underlying economics of information technologychanging very rapidly, as does the technology itself. Can you provide to this committee aninsight or some information as to the degree to which efficiencies were achieved in thepast within the various agencies and their relationship to those broad efficiencies to ITspecifically? What I am getting at is the one and two per cent efficiency dividends that theagencies have been required to deliver in the past have had to be found somewhere. Towhat degree could those efficiencies have been attributed to IT efficiencies in the past? Iknow it is a difficult question and hard to quantify, but I am just looking for an indicationas to how effective IT has been in the past in actually delivering ongoing efficiencies andsavings to government.

Mr PETROVIC —Without wanting to sound like I am avoiding the question, Ithink that to some extent that might be better answered by some agencies. Certainly theexample that comes to mind quickly is the DSS one that was talked about earlier thismorning in relation to stratplan. That apparently yielded quite substantial efficiencies oversomething like an eight- or a nine-year period, I think.

Mr PALMER —It is closer to 14 years.

Mr PETROVIC —So there are examples like that. In terms of the way ourorganisation experienced the application of efficiency dividends, certainly in the agencies Ihave dealt with over the last few years there was always a running costs impact. There didnot seem, to me anyway, to be a total absorption of that impact in terms of IT efficiencies.There may have been some absorption but certainly not a total one. That capacity is there,certainly if you look at it from a technology side. I am not sure whether it was DrMacdonald but someone mentioned things like CMOS technology and so on. That means afall in processing costs. A discussion was had this morning about the barrier being liftedfrom 200 mips to 400 mips, and that is a good illustration of how the technology

FINANCE AND PUBLIC ADMINISTRATION

Page 79: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 566 SENATE—References Friday, 4 July 1997

progresses and how quickly it progresses. How you then quantify the impact that has inagencies in terms of the way they achieve efficiencies is probably more appropriate foragencies to answer than us. They tell us some things but not everything.

Senator LUNDY—Can I extend the invitation to agencies, if anyone has anythingto contribute now in that regard.

Mr SEYMOUR —In our modernisation project, which was negotiated betweengovernment, the Department of Finance and ourselves, we received funding for a 10-yearprogram and in return for that we had to return 3,000 staff savings back to government.We are in the final year of that project and the savings will be delivered.

Senator LUNDY—If anyone has got examples like that, perhaps you could takethat on notice. That would be useful for the committee, if there are any specific exampleswhere efficiency dividends generally have been achieved through information technologychanges or initiatives or special programs.

The other question I have in relation to that is this: in achieving those actualefficiencies, if IT outsourcing is proceeded with, have the departments been given anyindication from their respective ministers that the savings returned on IT will in some waycompensate for the annual demand for an efficiency dividend of some nature—one, two orthree?

Dr MACDONALD —I think that is a question for the Department of Finance toanswer. It is a global resource allocation issue.

CHAIR —That may well be the case. If anyone here wants to answer it theyshould, and they should not feel precluded from answering it. So, if there is anyone whowants to answer it, they should feel free to do so. No-one.

Senator LUNDY—Recently Minister Fahey released a press release on publicsector superannuation redundancy benefits which outlines basically a change in thegovernment’s position with respect to the superannuation arrangements and someredundancy arrangements for some IT people in the public sector affected by this process.How far does that changed position go towards what you have described in the past as aclean break or phased approach for your membership? What gaps still exist in what inyour view is considered an equitable process or equitable method for dealing with atransfer of employment or clean break?

Mr PETROVIC —The measures that were announced on Monday affect both theclean break and the phased approach, but I guess the effect on the latter would be moredramatic. What it is about, as Mr Roche mentioned a little while ago, is the 2.5 timesemployer super contribution. Under the legislation as it stood prior to that announcement,access to that component could be blocked under the phased approach if an offer of an

FINANCE AND PUBLIC ADMINISTRATION

Page 80: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 567

equivalent job was made.

That certainly was a matter of some angst for our members. They saw, rightly orwrongly that the phased approach was the favoured approach and that they wouldtherefore be forced into a situation where, whether they accepted a position with theoutsourcer or not, access to that 2.5 times employer super contributions would be blocked.What the changes have done is to remove that blockage and make the phased approach amore attractive choice in that sense. They have also freed up the opportunities for seekingemployment under the clean break a bit more. So that certainly builds significantly greateramount of equity and choice into the system.

What is still unanswered is the actual shape of the phased approach. The examplesthat were talked about earlier were things like the DVA’s hospitals transfer where therewas a phased approach employed. In that particular example, the phased approachincluded certain features such as: some level of severance payment, some carryover ofAPS redundancy entitlements for a fixed period with the new employer; and whetherthings like rec leave and long service leave were paid out or carried over—that sort ofthing. The model of the phased approach that agencies are to apply in IT outsourcing isnot clear to us. In terms of making a final assessment of whether we have a good set oftransfer arrangements or not, that is something we cannot answer until we see what theshape of the phased approach is. Our understanding is that a decision is to be announcedon that shortly, but we have yet to see it.

Senator LUNDY—Have any of the departments determined as yet whether or notthey will be proceeding down one path or the other with either a clean break or a phasedapproach?

Mr ROCHE —The Customs Service has advised its staff that it will be proceedingdown the clean break approach.

CHAIR —Any other departments want to make a comment about that?

Mr SEYMOUR —The ATO has not yet made that decision.

Senator LUNDY—We will take it from that that no-one else has either. Becausethat phased approach has not yet been defined in any great detail, how confident or howsecure are the departments in the information they supplied to OGIT that those savingsfigures actually bear some relationship to the process that is currently under consideration?

Mr SEYMOUR —I gave an answer earlier this afternoon on that. We are still indiscussion with OGIT on that issue.

Senator LUNDY—In throwing that to departments generally, I guess that otherdepartments are in the same situation—that that matter is still being discussed?

FINANCE AND PUBLIC ADMINISTRATION

Page 81: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 568 SENATE—References Friday, 4 July 1997

Mr ROCHE —Not in the case of the Customs Service, that has been settled.

Senator LUNDY—Thank you.

Mr PALMER —In the case of the Commonwealth Services Delivery Agency, asthe conditions become clearer we will be refining our costs model, as I indicated earlier.

CHAIR —I am just conscious of the time. I would like to move on to the next areathat we want to deal with—that is not to say we cannot go back and follow some of thesethings up—and that is the issue of the privacy implications.

Senator ALLISON—Mr Chairman, just before you do, there is one matter wehave not looked at, which is one thatMr Petrovic raised, and that is the conditions of staff who move across from publicservice into private organisations. Is there any evidence that anyone can give us todayabout whether those conditions change substantially or not; perhaps the AIIA can makesome remarks about that?

Mr DURIE —I am afraid I would not be familiar enough with either side of thefence to be able to make a comment.

Mr PETROVIC —I can offer a few brief comments. If you look at contracting outin general, you will see in the submission we have just put and in our earlier submissionto this committee in its wider guise, I suppose, there is some evidence that in the generalcase there is reduction of conditions and wages. The IT case is perhaps a bit different inthat, at least in the broad as we observe, the salary levels outside the service appear to behigher in many cases than they are within. However, there are significant differences: themost obvious one is job security and I guess superannuation entitlements is anothersignificant area.

In Telstra we have negotiated a certified agreement with ISSC in relation to theiroutsourcing. I suppose the shortest summary you could give of that is that there areswings and roundabouts. Issues like job security, superannuation entitlements and someother allowance type conditions may be significantly different as well. But you wouldhave to look at it on a case-by-case basis.

The other point to make is that trade union rights or organising rights can be anissue as well, particularly in places like the UK where there has been a substantial amountof outsourcing to large companies like EDS, in some cases there have been significantorganising problems within the outsourcer. I note that in our country the association ofprofessional engineers recently applied for a private sector award in the IT industry, andthat was opposed quite bitterly by a number of the companies in that industry. A decisionhas now been made for that award to be made. So organising rights may be an issue aswell.

FINANCE AND PUBLIC ADMINISTRATION

Page 82: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 569

Mr ROCHE —If I can make a comment from the Customs Service point of view:a number of tenderers for our contract have made presentations to staff. I certainly agreewithMr Petrovic that it is a question of swings and roundabouts but I think the assessment wehave made on what we have heard to date is that the packages taken as a whole on offerto our staff are at least equal, if not better.

Senator LUNDY—Just following up on that: I am not sure where the minister getshis advice from, but in his speech to a recent forum on this issue he makes the statement:‘In the private sector the sound IT skills found in the public sector are in demand and arehence rewarded accordingly compared to the public sector.’ I am not sure if where he says‘public’ he means ‘private’, but the minister is clearly advocating that there are greaterrewards through the process of outsourcing. I was just wondering—perhaps if I direct thisto Dr Macdonald—as to where the minister is getting his advice.

Dr MACDONALD —Basically, I think it reflects the testimony that we had earlierthat this is a growing industry and there is a strong demand for the services of people inthis area. There is a short supply across the entire IT industry, not only in Australia butglobally. The minister’s speeches reflect the fact that this is an opportunity for people toget comparable or better compensation in an industry that is growing.

Senator LUNDY—To what degree of detail have any studies or analyses beendone on the actual tenure of individuals that transfer from the public to the private sector?What sort of job security can they expect? Is there any data available on that issue that isbeing canvassed by Mr Petrovic or by OGIT?

Dr MACDONALD —To whom do you wish to direct the question, Senator?

Senator LUNDY—I am throwing it open to anyone who has any informationabout that issue.

Dr MACDONALD —The information we have is anecdotal in nature, but it pointsto very high retention rates of staff who have been outsourced to IT firms one or moreyears after.

Mr PETROVIC —Again, this is somewhat anecdotal, but in talking to ourmembers in the IT area, a great number of them have been there for a substantial periodof time. We have had a growing IT market for as long as I can remember, quite frankly,in one form or another, yet those people have chosen to stay in the public sector. I thinkthat tells you that perhaps remuneration is not the only issue; the simple fact of whether itis $80,000, $70,000 or whatever is not the only issue.

People have made a particular choice. In our view, simply in terms of the sectorthat people work in, whether it is the public sector or the private sector, a particular choice

FINANCE AND PUBLIC ADMINISTRATION

Page 83: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 570 SENATE—References Friday, 4 July 1997

has been forced upon them. I do not think the picture is quite as rosy as some peoplewould think it is.

CHAIR —I would like to keep moving along in terms of the other issues.

Senator LUNDY—I refer to the Transfer of Undertakings (Protection ofEmployment) Regulations in the UK. My understanding is that they regulate the transferof employment and attach quite specific conditions, including the carry over of conditionsof employment and all entitlements. To what degree do the TUPE regulations affect tenureand job security in the medium to long-term?

Mr PETROVIC —My understanding of the TUPE regulations is that to someextent they are there for a fixed period and then the world moves on. I think they areaimed as much as anything at preventing outsourcers from using lower conditions as away of underbidding. I guess there is a number of ways that regulations like that can beused. There is a number of questions that would arise about how you would do that in thecontext of Australian industrial law. That is a very thorny question that I would not wantto offer too definitive an opinion on at this stage.

Senator LUNDY—Have the departments or the Office of Government InformationTechnology looked at costings with factoring out direct labour costs and addressed thesavings margins without using labour as a source of those savings? Has that calculationbeen attempted or completed in any way?

Dr MACDONALD —I would have to take that on notice. I am not sure what theintent of your question is, to be honest.

CHAIR —Departments might like to take that on notice. I assume peopleunderstood what that was about—putting aside the cost of labour.

Dr MACDONALD —I am advised that that question is already on notice from 16June.

CHAIR —Although I know we can spend a lot of time asking questions aboutsome of the labour related areas, I would like to pick up a bit of the lost time we have interms of getting behind our program and go to the question of privacy, which has beenmuch debated. I would like to invite representatives of the Privacy Branch of the HumanRights and Equal Opportunity Commission and the Ombudsman to make a contribution.

Mr WATERS —I am sorry I was not able to be with you this morning. Iunderstand from Mr Thorp that there was just the one matter which he dealt with.

I would like to take this opportunity to table the answers to questions on noticethat Commissioner Scollay took at your 20 May hearing. Sorry we have not been able to

FINANCE AND PUBLIC ADMINISTRATION

Page 84: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 571

get them to you in advance. If you like, I could summarise briefly the contents of those.

CHAIR —That would be helpful. If you do that, we can then proceed to ask somemore.

Mr WATERS —The first question was from Senator Allison, asking about the sortof incidence of abuse that has occurred over the years with Commonwealth agencies,inviting us to comment on the parallel situation with contractors in the future. We havegiven some statistics in a table showing the number of complaints that the commissioner’sofficers dealt with since the commencement of the act in 1989, broken down into anumber of different areas such as disclosure or use for an unauthorised purpose, collectionand security issues.

Basically, what we are saying is that a very wide range of breaches of privacy havetaken place over the years. I would not like to give the impression that that is a majorproblem. Compared to the generally sound information handling practices, they are theexceptional cases where we have to step in and intervene. We would expect that,depending on the range of services that are contracted out, you would in future see asimilar pattern of allegations and then, in some cases, confirmed breaches occurring. Wewould not really expect the range of privacy risks being any different if the same servicesare being contracted out.

We do make the point that in relation to some types of sensitive data—I think thispoint was made in the original submission to your committee—privacy issues may arise inthe initial decision about whether it is appropriate to consider contracting out at all. Wegave some examples of areas of information handling like law enforcement and medicalrecords, where it might be considered on privacy and on other grounds that outsourcingwas inappropriate. We have given some criteria in the original submission which indicatesthe sorts of questions that agencies could ask themselves in order to try to answer thatquestion.

The second question we took on notice was from Senator Lundy. It reads:

If you were to provide specific advice to a private contractor in relation to a privacy issue and theyadhered to that advice and there was a problem, to what degree does that affect liability?

We have answered that in terms of the commissioner taking into account, in investigatingand determining any complaint, what advice the contractor had relied on, whether it befrom the Privacy Commissioner herself or from the agency. That would have a bearing notnecessarily on whether there was a breach but certainly on the remedies that we wouldthen suggest and any compensation that we might award. The assessment and the weightthat the commissioner gave to those factors would be reviewable as a matter of law in theFederal Court.

FINANCE AND PUBLIC ADMINISTRATION

Page 85: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 572 SENATE—References Friday, 4 July 1997

The next question was from the Chair concerning our proposal to expand section 8of the act and, more generally, the proposal to amend and extend the Privacy Act. Wehave answered that in terms of welcoming and confirming the government’s commitmentto extend the Privacy Act to contractors involved in handling personal information in theprovision of services to government. The Attorney-General’s Department is consultingwith our office in the drafting instructions designed to implement that commitment. Iunderstand that it is intended to introduce those amendments in the next sitting ofparliament.

There was a side question from the chairman about the broader issue of co-regulation. We have given you a little summary there of our current activity in relation toprivate sector codes of practice generally. I do not think they bear particularly on theoutsourcing issue, but we have just brought you up to date on that.

The next question was from Senator Mackay. It related to the sort of redress that isavailable against employees who make unauthorised disclosures, despite the best efforts ofthe agency to cover the issue. We have basically set out there the current position underthe act, which we would also expect to extend to contractors—which is, that the PrivacyAct scheme really bears on the actions of agencies and goes to the question of whetherthey have put appropriate security and other measures in place.

If, despite those best endeavours, an individual rogue employee makesinappropriate use of information, the Privacy Act is not really the mechanism for dealingwith that; it is the Crimes Act, the Public Service Act and regulations which provide theappropriate disciplinary or criminal remedies. We would not expect that to change underthe application of the act to contractors.

There was another question concerning resources. I think this is the matter that wasraised this morning. We are in discussion with a number of agencies about the provisionof supplementary resources to enable us to undertake both the education and awarenessactivities that we think will be necessary with contractors and also the ongoing compliancemonitoring. Obviously, in the context of the major cuts that the human rights commissionhas had to take recently, we would find it very difficult to do an adequate job in this areawithout some additional resources. So we are pursuing a number of options in that respect.

There was a question from Senator Lundy about who monitors and collatesinformation relating to breaches of security or breaches of privacy. There we have justadded to the answer which Commissioner Scollay gave by pointing out that, as in theprivate sector, there would be a lot of breaches of security that really never get reportedexternally. Agencies and contractors would, presumably, pick up and detect and then dealwith breaches themselves. There is no sort of guarantee that we would ever get to hearabout those. I am not sure that that is inappropriate, but the bottom line is that there is nosort of central way of assessing or estimating the total number of security breaches, eithercurrently with agencies or in an outsourced environment.

FINANCE AND PUBLIC ADMINISTRATION

Page 86: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 573

We have also appended to the answers the Hong Kong ordinance material that wepromised to give you last time. That concerns the provision in the Hong Kong dataprotection law concerning overseas processing of data and the way that they deal with thatissue.

CHAIR —In light of that submission—and thank you for summarising thequestions—I might ask the Australian Taxation Office, which has been one of these bodieswhich contains some fairly significant information, how it is dealing with the issue ofprivacy.

Mr SEYMOUR —In relation to the possibility of outsourcing?

CHAIR —Yes.

Mr SEYMOUR —The commissioner has thought about the issue and at this stagesees no issues which should prevent us proceeding down the competitive process. He doesnot see it as a barrier.

CHAIR —But how are you dealing with it in terms of ensuring that the recordsthat you have will be adequately protected?

Mr SEYMOUR —That would have to be addressed through the competitiveprocess dealing with the specifications of what our requirements are and the contract thatis then drawn up. In that, we will be assisted by the changes to the privacy law applyingto contracting companies.

CHAIR —Wouldn’t you have a standard position where you say, ‘We require thislevel of protection’? The tenderer may then say, ‘Here are the mechanisms through whichwe will do that,’ but don’t you have a fixed view about what requirements you need interms of what you want protected, how you want it protected and to what level it shouldbe protected?

Mr SEYMOUR —The detail of that we have certainly not worked through yet interms of how we would expect that to be carried of out under any contract.

Senator PAYNE—But in terms of the ongoing operation of the AustralianTaxation Office—I think this would be the chairman’s suggestion—you would haveprocedures in place to protect individual’s privacy which would be extrapolated into theoutsourcing process?

Mr SEYMOUR —That is correct.

Mr ROCHE —That is exactly right. We, the tax office and all agencies that dealwith confidential material have fairly high levels of protection on the data that we hold in

FINANCE AND PUBLIC ADMINISTRATION

Page 87: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 574 SENATE—References Friday, 4 July 1997

our computers and that we pass through our communications systems. There are all sortsof access controls—password controls, encryption where it is appropriate and so on. Thosesystems are set up to make it difficult, if not impossible, for anyone to get into them,whether they be our staff or contractors—and bear in mind that many agencies havesignificant numbers of contractors working for them now—so that we are actually tryingto protect our systems against any incursion. Those protections will all be in place whenwe move to an outsourced environment. We also include audit trails against those systemsso that, hopefully, any incursion into the systems will be detected and can be traced.Those controls are a matter of considerable interest to our internal auditors and they arealso a matter of considerable interest to the Australian National Audit Office.

Also, it is probably fair to say that the extent to which outsourcing staff mightactually access data is considerably overstated. While it is true that programmers andsystems analysts tend to be in a privileged position in terms of access, they still have toget through those access controls. It is not the case that outsourced staff are seeing rawdata, that they are sitting there watching personal details come in front of their nose allday. To actually get our data or the tax office data, they have to physically break into thatcomputer system, they have to break in through the logical controls in that computersystem.

Also, on top of all of those controls the contracts that we sign with outsourcers willinclude deeds of arrangement that cover privacy in the form recommended by theAttorney-General. In relation to security breaches, I draw your attention to section 70 ofthe Crimes Act, which does apply. Even though it states that it applies to Commonwealthofficers, outsourcing staff are in fact caught by the definitions. The penalty for breachingthat section is imprisonment for two years. So there are some fairly powerful controlsthere.

Senator PAYNE—I assume in relation to the agencies who would be involved inoutsourcing contracts that, where it was appropriate that the rights of individuals haveaccess to and correct any information held on them, they would be maintained as theycurrently exist?

Mr ROCHE —The arrangements would not change. There will be the same accessby people under FOI that enables them to access records and to make corrections whereappropriate.

Mr SEYMOUR —That would be the ATO’s understanding too.

CHAIR —Would the Commonwealth Ombudsman like to make a comment?

Ms SMITH —My comments are probably more general in that we have not as yetreceived any particular complaints as they relate to IT outsourcing. Probably the onlything we can anticipate is that it is the unexpected things that come back at a later point

FINANCE AND PUBLIC ADMINISTRATION

Page 88: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 575

with surprise. The sorts of things that we probably can anticipate will be of likely concernare the use of that information, so obviously the privacy issues that Nigel raised and theyare greatest when you are dealing with the sorts of information which has a personalsensitivity about it—the DSS, Tax, the employment type programs and child supportagencies are the obvious ones but a range of others; the possible sale of that informationin terms of commercial use of that information in other forms; access to that informationby citizens in relation to information that is important to them; and ownership of thatinformation at the end of those contractual arrangements. If the data is collected by a thirdparty and is then critical for ongoing policy development or even evaluating the suitabilityof the contracts into the future, you obviously need that data and information to beaccessible by you.

I also anticipate—indeed, we know that this area is becoming more certain—thatissues about tender arrangements themselves are of concern both in reality and in some ofthe cases that we are getting in terms of failure of degree specification up-front, change ofspecification, oral promises being given to certain parties, use of ideas—changingspecification but use of the ideas that have been gathered in the process and theintellectual property side of that—going to selective tenders when more open tenderswould have been more appropriate and conflicts of interest as to who is in and out. Thosesorts of things are not ones that we specifically have on IT but on other areas. One cananticipate that they will be the likely issues that come to the fore.

As I previously said, in terms of when you are looking to privacy or accountability,to my mind these issues become more important when you separate the types of publicinterest questions and accountability issues that impact on a citizen wearing their hat as acitizen, as opposed to wearing their hat as a consumer, in the market place. I think thoseconceptual differences have to be made.

Mr Roche, I think you indicated that, in terms of enforcement, there was theprospect of prosecution if the information was misused. Our finding has been that, in fact,some of those misconduct areas are the hardest to get enforcement on. The practicality ofprosecution can be the level of proof that is needed. If you are relying just on thatprosecution route, it can be very difficult and hard indeed. So there can be problems oftime gaps that occur if that is the mechanism that you are relying on only for either that tooccur or the end of the contract to occur as being your way of resolving that matter. Ifthat is your only mechanism of enforcement, it might not be a very satisfactory one for arange of lower level misconduct issues.

CHAIR —Mr Roche, you might like to comment on the issue that has been raisedabout where information may have been shifted offshore and about there being nopossibility of pursuing prosecutions.

Mr ROCHE —Firstly, I should make the point that we are not relying on theCrimes Act or the Privacy Act alone. There are a series of safeguards that are built in,

FINANCE AND PUBLIC ADMINISTRATION

Page 89: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 576 SENATE—References Friday, 4 July 1997

starting with access control to the computer system, access control to the specific systemor to the specific data and a audit trail of who has accessed that data. All of our sensitivesystems have those audit trails, so if there has been a breach, we are able to detect whereit has come from, and then prosecution at the end. We do take that action when it isappropriate.

In our tender specification, responding to your particular question, we havespecified that no data and no processing is to be undertaken offshore.

Mr WOOD —I am glad Mr Roche said they would not rely on section 70 of theCrimes Act. My recollection is that there have been two successful prosecutions undersection 70. In one of those, the person pleaded guilty at the outset. It is hardly the mosteffective protection against unlawful disclosure of information.

Ms SMITH —The only other comment I was going to make—I have not raised itbefore and it is, perhaps, by way of a parallel—is that it is interesting to look at the NewZealand arrangements. There has been a more open approach there in terms of some of theaccountability mechanisms that I would like us to parallel more fully here. The full rangeof administrative law—the FOI, the Privacy Act and the ombudsman—applies to theirstate-owned enterprises, which are the equivalent of our GDEs. Since 1989, that hasproven to be quite a constructive approach, in that, largely, the heads of those state-ownedenterprises, even though they once feared that it would be very costly, now see it as beinga useful, good management discipline.

Equally, the courts over there in New Zealand have really enforced the notionwhen it comes to commercial-in-confidence issues—and the last point I wanted to raisewas commercial-in-confidence issues—that the primary issue has to be one of publicinterest; the specifications of the contract and the performance points of the contractshould be made public and should be available, in the public interest. To override thepublic interest grounds of disclosure, there has to be a very strong argument ofcommercial prejudice. In other words, the onus of proof is put a bit the other way aroundcompared to how it is put in some of the debates we have been hearing of late.

Dr MACDONALD —I want to remind the committee that the minister has made acommitment that the processing in the outsourcing will be undertaken in Australia. He hasstated that publicly.

CHAIR —Would you like to make any further comment with regard to the—

Dr MACDONALD —I have no further comment.

CHAIR —Before we go to questions, I want to ask the Australian InformationIndustry Association whether or not they would like to comment on the Ombudsman’sviews in so far as the tendering process is concerned—the issues of selecting open

FINANCE AND PUBLIC ADMINISTRATION

Page 90: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 577

tendering and the problems of people putting tenders in and having bits and pieces ofthem pinched and used.

Mr DURIE —Probably only in general terms. As the Ombudsman says, that iscertainly amongst the concerns companies have and the industry has about tenderingprocesses, on whatever basis they are. Our position is we need an open and competitivetendering process. It is as simple as that.

Senator PAYNE—I have two questions. One goes back to the types of questions Iwas asking before, in relation to tender specifications. It concerns an issue that wouldinterest most clients of the agencies, that is, the security levels of storage of confidentialinformation. Given a perception that exists in the community—whether the perception iscorrect or not is another matter—of a fundamental difference between the level of securitythat attaches to the agencies and the level of security that attaches to companies that aretaking up outsourcing contracts, would there be a specific emphasis on storage security ofinformation in outsourcing contracts? Would any agencies be prepared to make acomment?

Mr ROCHE —We would not accept anything less than our present standards ofsecurity. We not only will be requiring adequate physical and logical controls over databut also will be going to the question of clearances of contracting staff.

Senator PAYNE—Security clearances?

Mr ROCHE— Yes.

Senator PAYNE—I have not had a chance to read all the responses from thePrivacy Commissioner on a question concerning education and awareness and compliancemonitoring which was raised at a committee meeting which I was not involved in. I thinkthe question was raised by Senator Lundy. In terms of that, Mr Waters, is the expectationof the Privacy Commissioner that individual agencies would take these responsibilities onthemselves and fund them from within their own operations or that the PrivacyCommissioner would have an overarching responsibility to attend to compliance and toeducation, awareness and training for outsourcing contracts?

Mr WATERS —I think it would be a mixture of the two. We have the precedentof the contracted case managers under the Employment Services Act where we gottogether with the Employment Services Regulatory Authority to prepare some guidanceand educational material for the case managers and we then participated in some of theinitial training. We then subsequently followed that up with audits of both ESRA andsome of the case managers. So we would expect to have a continuing overarching role butalso expect the agencies themselves to take on board a lot of that education andcompliance monitoring role.

FINANCE AND PUBLIC ADMINISTRATION

Page 91: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 578 SENATE—References Friday, 4 July 1997

Ms SMITH —In relation to our experiences with the ESRA and case managementarrangements, I certainly echo what Nigel has to say. We have found, in relation to thecomplaints we have received, given our extended jurisdiction over those case managers,that in fact the role that we are providing has changed somewhat. Rather than the moretraditional investigation, our role or time has been involved in providing advice to peopleabout a lot of the administrative procedures—about record keeping, rights, questions ofnatural justice and those sorts of issues. So in many ways our time has moved from, as Isaid, the investigation to an education-counselling role.

Senator ALLISON—Perhaps the AIIA can comment on whether voluntary codesby the private sector are being developed.

Mr DURIE —I will make some general comments. First, I think the industryrecognises the government as a customer and recognises its rights to set out itsrequirements. I think, as Mr Roche and other people have said, it will certainly bespecifying very clearly in its tender documents what its requirements are in relation to dataprotection, privacy, security et cetera. That will presumably then be written into thecontract and the industry is certainly comfortable with that.

On the question of the extension of the Privacy Act to cover contractors, again wenote that that is the government’s intent. We will be entering into consultations with AG’sand the Privacy Commissioner on the implications of that, which we have not workedthrough fully. So, I suppose from that point of view, the industry is reasonablycomfortable with the approach the government is taking either by way of contract or byway of extension of legislation. Obviously some detail needs to be worked out but, at theend of the day, the government is the customer.

Senator ALLISON—Just to clarify that point, there is now no need in your viewfor voluntary codes to be developed; is that right?

Mr DURIE —I would have to take that on notice in detail, but certainly ourintention at the moment is to work within the framework that the government is intendingto proceed with. That is by way of legislation and—

Senator ALLISON—Mr Waters, is that your understanding, too?

Mr WATERS —We have not spoken directly to AIIA, but we have been speakingto a range of private sector organisations about the wider issue of developing a code ofpractice or codes of practice for privacy in the private sector. Of course, the contractorsbidding for government services will be in the position of having to follow the statutoryprivacy rules in respect of their government contracts but currently being unregulated inrelation to the other work they do for other private sector clients. We would hope that, ina sense, having to address the standards required for the statutory side of their work willlead them to also put those same processes and apply those same standards in the other

FINANCE AND PUBLIC ADMINISTRATION

Page 92: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 579

areas and perhaps then give them the incentive to participate in the general codedevelopment process that we are now launching.

Mr DURIE —In terms of the extension to the private sector generally, that iscertainly an issue that the association and the industry generally are looking at, given thesituation in Europe and the very different situations in North America and in Australia.We are looking at the whole issue of privacy and how to respond to that. Obviously, thesituation regarding contractors and the government is going to influence our handling ofthat, but we have not yet formulated an industry position on the development of generalprivacy codes for the private sector.

Senator ALLISON—The budget cuts to HREOC which were announced a coupleof weeks ago, how will they affect your ability to engage in this discussion about privatesector privacy issues?

Mr WATERS —As I said earlier, it does make life difficult for us. We are havingto currently review the whole range of activities, many of which are statutorily required.We are going to find it extremely difficult to maintain an adequate level of coverage of allthose functions. For that reason, as I indicated, we are in a sense passing the hat round atthe moment to various agencies to see if we can get supplementary finance to help us.

Senator ALLISON—Will you be passing the hat round to the private sector aswell?

Mr WATERS —In the context of the national code development work, I guess thatis a possibility. But in relation to the outsourcing, it is really the agencies that we will belooking to. They are the ones that stand to make the savings; so we would expect them tobear some of the cost involved in the education and monitoring.

Senator ALLISON—Mr Durie, this is really a follow-up question on what youwere saying a moment ago: the decision of the government not to extend privacyprovisions into the private sector was due to the unnecessary increases in regulatoryburden on industry and presumably cost burden. Can you comment on the cost of theintroduction of the privacy regime for the private sector; what sort of compliance costswould be involved in such a measure?

Mr DURIE —I am sorry, Senator, do you mean in relation to contracts or inrelation to the extension of privacy requirements to the private sector as a whole?

Senator ALLISON—Perhaps they are two separate questions; perhaps you couldanswer them both.

Mr DURIE —In terms of contracts, I think it is part of the to and fro between thegovernment and bidders. In terms of the private sector as a whole, I would have to take

FINANCE AND PUBLIC ADMINISTRATION

Page 93: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 580 SENATE—References Friday, 4 July 1997

that on notice; I do not have a view. I suspect that organisations like the Business Counciland the Australian Chamber of Commerce and Industry might have a better grasp of thebroader issue.

Senator ALLISON—Thank you.

CHAIR —Can we just get an indication from Australian Archives in terms of yourability to get information from the private sector.

Ms SCOTT—Basically, we have been looking at outsourcing in terms ofcompliance with the Archives Act. The Archives Act is based on the concept of ownershipof records. We are advising agencies that where it has certain obligations in relation toproviding information or even accessing information for its own purposes, then it shouldestablish through its contractual arrangements the appropriate mechanisms to maintain thatownership of records and information.

The Archives Act actually has a prohibition on the transfer of custody orownership of records. Increasingly, we are having to look at what protections we mayeffect because the Archives Act was not actually formulated in an environment whichforesaw these sorts of arrangements. Now, particularly in the IT outsourcing environment,we have looked at the DVA model in relation to whether we consider outsourcing of thosesystems a transfer of custody of government information; therefore, what role the Archiveshas to play in either authorising that or condoning it through the mechanisms that areavailable to us.

The conclusion we have come to is that the appropriate protections are in placethrough their contractual arrangements in relation to their continued accessibility ofinformation for their business purposes and to serve their clients’ needs and also generalpublic accountability requirements. Even though the information could technically be saidto be outside the physical jurisdiction of the government, the control of it is stillmaintained by the department itself. The department or agency decides what records arecreated, what records are maintained, what records are disposed and who has access torecords. So in that environment we do not really have too many concerns. We have moreconcerns in the non-IT environment particularly where contractors are even creatingrecords, which previously would have been created by government agencies to which thereare established rights of access by the public and government generally for their broaderpurposes.

CHAIR —Do you want to give us some examples of the perceived problems youhave in those areas?

Ms SCOTT—We have been looking at the kind of Commonwealth ServiceDelivery Agency role, and in relation to records relating to provision of things likeemployment services where we are going to have the EPEs, or the employment placement

FINANCE AND PUBLIC ADMINISTRATION

Page 94: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 581

enterprises, providing services—that is, creating client files where that is clearly a functionwhich is being performed on behalf of government and therefore government has aresponsibility and is accountable for it—to make sure that the appropriate protections arein place. Those protections are obviously in place through legislation, through theEmployment Services Act.

But there is a whole range of other services which government is involved in, suchas types of services which involve the sorts of businesses that are currently being sold,like building management, property management functions and survey functions, where theproducts or tools of those contracts are records which were previously in the governmentdomain. What we are saying to agencies is, ‘You must think very carefully about whatsort of material you wish to establish ownership of under your contractual arrangements.Once you have established ownership then that basically brings it under the jurisdiction oflegislation like the Archives Act.’

CHAIR —Have you looked at any international experience in terms of what youare recommending?

Ms SCOTT—We have had discussions with representatives of other archives. TheDutch, for instance, were over here recently. Their laws are extremely different in relationto government information, in fact, they are probably a bit tighter than the Archives Act inthat context—government records are government records and there is no question aboutthat. I do not really think there is much that we can draw from, given the different modelsthat operate in relation to archives legislation internationally. Certainly, we have haddiscussions with South Australian state archives, for example, but we seem to find thatactually we may be even a bit advanced in dealing with this issue, from an archivalperspective, than some of the state governments.

Mr WATERS —After that I would like to support the point Archives are makingabout some forms of contract actually involving records being created and the informationnever having been held by agencies in the first place. In that situation you are talking notnecessarily about ownership but you are still needing to apply privacy, and presumably theArchives Act, to the information held and created in the course of providing the contractedservice. It may never have been near the agency in the first place, though I think it is a bitsimplistic to talk in terms of the information always being retained in the ownership of theCommonwealth.

Ms SCOTT—What we generally advise agencies is that there are a number ofprinciples. Where contracts for the provision of services on behalf of the Commonwealthare undertaken, those contracts should vest ownership of all records in the Commonwealth.Where the contracts are for the provision of services to the Commonwealth—and IToutsourcing would be basically in this category—the Commonwealth agency contractingout the service should basically consider the questions of what records need to beavailable in the context of ensuring that evidence of rights, interests and responsibilities of

FINANCE AND PUBLIC ADMINISTRATION

Page 95: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 582 SENATE—References Friday, 4 July 1997

government and the wider community are preserved and accessible, also, particularly inrelation to when you want to bring those services back in-house.

There are records which are transferred in IT outsourcing, and they are usuallyrecords relating to systems management. To date, in fact, Archives has authorised thetransfer of ownership of some records in the DVA outsourcing arrangement. But we arelooking to provide a general authorisation based on certain conditions being met by thecontractual arrangements across government so that we do not have to deal with it on acase by case basis, because it would obviously be beyond our resources to do so.

CHAIR —We will take a break for five minutes. When we come back we will notonly continue with privacy but also move into the accountability area as well.

Short adjournment

CHAIR —There are still some questions that relate to the issue of privacy, but wewould like to move on to the issue of accountability. The committee has received anumber of submissions, and they vary significantly from some we received from theprivate sector which say that they are more than happy to do the work but are notnecessarily all that happy about having to come before things like estimates committees torespond to questions about where they spent the money.

We have also had submissions from, for instance, the Clerk of the Senate, who hasexpressed the view that, if it is public money, it should be publicly accounted for and,therefore, subject to the normal processes that are currently gone through—although theynow seem to be being closed off to a greater degree. So the issue of accountability is oneof some concern to the committee and one to which we will need to give greatconsideration in addressing that. I might just ask the ANAO to make some comment withregard to the issue of accountability, and then we will move to some comments from otherpeople.

Mr GREENSLADE —Our main submission to the committee outlined a number ofissues we believe to be of importance in the context of contracting out governmentservices in general. They of course apply also to the outsourcing of informationtechnology services.

The ANAO does not prescribe to the view that the external provision of ITservices is, by definition, necessarily more efficient or cost effective than in-houseprovision. It is a matter of any decision to outsource being recognised as a strategicbusiness decision taken only where it represents value for money and it is consistent withthe strategic directions of the organisation as a whole.

Value for money should be judged against a range of factors including, but notlimited to, economic and financial returns, service efficiency and effectiveness, technical

FINANCE AND PUBLIC ADMINISTRATION

Page 96: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 583

capacity, adaptability, accountability and redress. I guess what we are saying in short isthat the decision should represent the best outcome for the Commonwealth. It isencouraging that this has been the general tenor of some of the discussion today.

The central issues from the ANAO’s perspective are to ensure that throughout anyoutsourcing arrangements an appropriate level of accountability is maintained, that theagency has followed sound administrative practices and that the performance of thecontractor is properly monitored throughout the life of the contract. It is important torecognise that the agency remains accountable for the delivery of the program outcomesand the proper use of public funds even though the day-to-day responsibility and controlover the services officer that is contracted out rests with the contractor.

While the contractor will be accountable to the agency for performance against theterms of the contract, the contract itself sets the boundaries of accountability. It istherefore critical to success of any outsourcing arrangements that the contracts oragreements clearly specify some of the matters that we talked about today, including thenature of the services to be delivered, the service delivery requirements and standards,project management arrangements, appropriate security arrangements, measurableperformance measures and penalties in the event of non-performance, and reporting andaccess provisions.

It is the last of these, reporting and access, that is of particular relevance to theANAO. Effective contract administration and monitoring will require reasonable access toinformation records and sometimes to assets generated by the contractor as part of theirwork for the Commonwealth. This is something we touched upon earlier. Such accessshould be sufficient to provide for the agency’s needs in ensuring its own, and ultimatelyits minister’s, accountability expectations.

There is also a need for the Auditor-General to have sufficient access to ensure theaccountability requirements of the parliament are met. In general, however, I shouldemphasise our requirements for access to contract related information, records and assetsshould be no more than is needed by the agency to fully meet its managerial andaccountability responsibilities and obligations.

In this regard, it should also be recognised that the management of any outsourcingarrangement requires good project management skills—an area where at times there isconsiderable room for improvement. The ANAO has done a number of audits onoutsourced arrangements which have suggested project management skills have not alwaysbeen up to the mark. On the other hand, we saw this morning that the DVA arrangementworked successfully. So there is a variable track record. This is clearly a very importantarea.

Coming back to access, in our view a preferred mechanism for providing access torelevant third party information and records would be the use of standard contract clauses

FINANCE AND PUBLIC ADMINISTRATION

Page 97: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 584 SENATE—References Friday, 4 July 1997

tailored as necessary by specific clauses that reflect particular circumstances. To this end,we have been discussing with the Minister for Finance and his department model clausescovering access to relevant information and records by both agencies and the ANAO forinclusion in the Commonwealth contracts. We would be pleased to provide the committeewith a copy of these clauses.

In terms of our audit program for next year and beyond, we will have regard to anumber of things that are directly relevant to IT outsourcing. These things are contestableservice provisions, and that includes competitive tendering and contracting; client servicequality; information technology; and significant new government programs.

By way of a concluding remark, the ANAO recognises that governments ofwhatever political persuasion are making increasing uses of third parties to delivergovernment services, including in the area of information technology. Clearly it isimportant for the Commonwealth’s interest to be protected in this environment. This canbe achieved only through careful planning, tight but flexible contract arrangements whichinclude measurable performance indicators, effective project management and thepresentation of key accountability mechanisms, including the role of the Auditor-General.Thank you, Mr Chairman.

CHAIR —Thank you. Professor Mulgan, would you like to make some comment,particularly in relation to the document you are responsible for that we have a copy of?

Prof. MULGAN —Thank you, Mr Chairman. As you will know—perhaps noteverybody else will know—I have been working on the issue of accountability andcontracting out parallel to the committee. I was able to make use of the submissions to thecommittee and I hope that my interim paper is of some use in return. I have not beenstudying IT, as such; so the remarks that I will make are more of a general nature,although they certainly apply to IT.

I really want to make two quick general points. The first point is to reiterate themain point of my paper which is that contracting out inevitably involves a reduction inaccountability, particularly accountability through the minister. This follows from thereduction in the ministerial control over departments, as we have just heard—the controlover the day-to-day administration of departments. This is most obvious, of course, whenthings go wrong. When things go wrong within an ordinary department, the minister canstep in, front up to the media and impose an immediate remedy. Where a service has beencontracted out, that option may well not be open to the minister. The minister can say,‘We won’t get those people again. We should have had that in the contract perhaps.’ Butthey cannot impose the immediate remedies which the public may wish for.

This reduction in control needs to be recognised. I am not necessarily deploring it.I think many people in favour of contracting out privately recognise that this is in fact theessence of contracting out, its rationale, and provides the basis for most of its efficiencies.

FINANCE AND PUBLIC ADMINISTRATION

Page 98: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 585

Private contractors are not as accountable day to day to the public through the ministerwith the ever present risk of making a mistake. They can be more flexible. They are notaccountable for their employment practices to the same extent and this provides theefficiencies which many of us seek. So it is a balance between accountability andefficiency. I am speaking very generally here, of course.

The importance of the reduction in accountability varies with the serviceconcerned, the degree of precision within the contract, the degree of monitoring that isspecified, the importance of the service. However, I do think it should be recognised, andI hope you will be able do that in your report. Where the minister cannot go with hisremedies, it is difficult also for parliament to go and it may also be difficult for theombudsman to go, and those special provisions may be made. But my main criticism wasof those supporters of contracting out who said, ‘The minister remains as accountable asbefore for the provision of this service, so therefore there is no effect on accountability;’whereas I think there is an effect on the day-to-day extent of accountability.

The second general point—which is not in my paper but the subject of another onethat I am working on which is relevant to this particular issue; this is again I think a fairlyobvious point, though one that is sometimes denied—is that there are no functions whichare inherently suited for contracting out and there are no functions which are inherentlynot suited for contracting out. There is a tendency in debates about contracting out to tryto divide up the functions of government into those which should stay in-house and thosewhich should go outside. We think of policy advice and regulation program supervisionstaying in and other non-core activities going out. The minister has said, ‘If it’s in theYellow pages, then it can be contracted out.’ We know, for instance, that security is in theYellow pages, but we are not contracting out the police.

It is dangerous oversimplification to think that you can divide the functions intothose for contracting out and those that are not for contracting out. The decision is in allcases a balancing process and has to be made on a case by case basis, depending on anumber of conflicting factors: the need for direct ministerial political control, the nature ofthe precise activity, the ease of specifying and monitoring performance, the degree ofcompetitiveness in the private sector market—factors of course which can be expected tovary over time.

This may be a very good time to be outsourcing IT. In 10 years time, it may be abad time and we may wish to be going in the other direction. That does not mean to saythat we should not have gone in this direction now. In the case of IT, I would be surprisedif there were not some cases where it is highly justifiable and the right thing to do tocontract it out. I would also be surprised if there were not some cases where it would be amistake to contract it out. That is my second point. Both are fairly obvious and simplepoints but they are ones which are quite commonly contradicted in these debates.

CHAIR —I would like to ask other departments to make some comment about that.

FINANCE AND PUBLIC ADMINISTRATION

Page 99: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 586 SENATE—References Friday, 4 July 1997

People might address their remarks to this question of accountability and the issue ofcommercial-in-confidence as well because commercial-in-confidence seems to becoming amore used phenomenon in terms of not providing information. I think the last Senateestimates demonstrated that it is becoming more common in use. I would be curious tohear from the departments as to why that ought be the case.

There have been points made to us—for example, in the case of contracts and thepublishing of contracts—that they can effectively be done once the contract is let. There isno need for information to be held in secret or as commercial-in-confidence because, oncethe contract is let, the other potential tenderers all know and everybody is aware of howthe contract was achieved because the information is readily available. I would like to hearsome comments from some of the other departments about that, particularly on the issueof commercial-in-confidence as a mechanism to avoid accountability.

Mr WOOD —We had some discussion on this previously at another committeemeeting. It has, indeed, been frequently used and quite often around the world in thecontext of access to information as a means of not providing it.

May I just make a very quick digression. I had the feeling in the discussion beforethe coffee break that some people are getting the sense that freedom of information willapply to contracts. Let us make it quite clear here and now that it does not in the currentcircumstances unless the contract specifies that the ownership and control of thosedocuments in the contract are those of the agency. That is the only tie which can makethat contracted information subject to FOI. It is a pity there is nobody from A-G’s here todiscuss that a bit further.

If one is going to access those documents, there are only two ways it can be done.One is through the contractual processes that Mick Roche described. The other one isthrough an extension of the FOI Act specifically to cover those circumstances.

Turning to the other issue of commercial-in-confidence—I think Philippa touchedon it briefly in her original comments—where people have tested these notions of therebeing an obligation of confidence, a number of jurisdictions have gone further and said,‘Anybody can claim that something is in confidence, but there have to be some tests thatapply to determine whether that in-confidence claim should apply.’

We mentioned the New Zealand circumstances under the Official Information Act,which we think is a pretty good test and which has been upheld by the courts in NewZealand. That essentially says that it is not just sufficient to say that there is an obligationin relation to the in-confidence material but it must also be shown that disclosure wouldbe likely to prejudice the supply of similar information or information from the samesource and it is in the public interest that such information should continue to be suppliedor it would be otherwise likely to damage the public interests.

FINANCE AND PUBLIC ADMINISTRATION

Page 100: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 587

Those are the two principal tests that are applied in those circumstances, which wewould find would be a relatively sensible test. If you then start applying that to some ofthe claims that have been made, you find that a lot of the arguments start to diminish. Inother words, very frequently people have said, ‘Just to supply the contract price would bea breach of confidence.’ History is littered with cases and examples in publicadministration where not only successful tender prices but unsuccessful tender prices havebeen disclosed to the public and it has not done any damage to the tendering process forsubsequent contracts. So there is a whole range of things which need to be tested quiteeffectively before one can sustain a general notion of commercial-in-confidence as being atest which is an ultimate one.

Mr WATERS —If I could add one specific point on this, we notice that in yourhearings on 19 May one of your witnesses ran an argument about privacy concerns aboutgiving details of tenderers. We would like to put on record that we think that that is amisunderstanding of the nature of the Privacy Act. The Privacy Act applies to individualsnot to commercial organisations. To use the argument that giving information about thetenders would breach the contractors’ privacy is inappropriate, in our view. By all meanstalk about commercial-in-confidence but do not try to make it a privacy issue.

Ms SCOTT—I know Attorney-General’s is not represented here but, with regardto the issue of FOI applying to records in the possession of a contractor, my understandingis that the Freedom of Information Act operates on the concept of possession and also onthe basis of the body possessing the records coming under the jurisdiction of the Freedomof Information Act. Under freedom of information just ownership will not give someoneaccess—even if that is specified in the contract. The advice we generally give to agenciesis that, where there are freedom of information requests in relation to Commonwealthrecords which are outside their physical jurisdiction, they should facilitate that accessthrough retrieving the records into their possession.

Mr WATERS —Our understanding of the government’s commitment to extend thePrivacy Act is that it includes the application of principles No. 6 and No. 7 which are theaccess and correction rights. In relation to Commonwealth agencies, those principles aregiven effect by the mechanisms in the FOI act. We are not yet sure how the Attorney-General’s Department propose to address that issue, but it is certainly our understandingthat, one way or another, they need to apply access and correction mechanisms in order toachieve the objective of extending the Privacy Act.

CHAIR —We would have liked to ask Attorney-General’s that today, but theydeclined the invitation to attend. Perhaps the AIIA might like to give us their views withregard to the issue of commercial-in-confidence and its use.

Mr DURIE —I would have to reserve my position. Can I take that on notice? Wehave not looked at that issue. The committee secretariat brought Mr Evans’s views to ourattention this morning, and we will review those and come back to you, if we may.

FINANCE AND PUBLIC ADMINISTRATION

Page 101: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 588 SENATE—References Friday, 4 July 1997

CHAIR —You would not like to express a view at the moment in terms of whatresponsibility a private provider might have or should have in terms of their expenditureof public funds?

Mr DURIE— Again, it comes down to what I said about privacy. The governmentis a customer. It needs to set out its requirements and tender and contract on that basis.

CHAIR —But, if you take it a step further, you may well be the provider of aservice which was formerly provided by the government to a client. So, in effect, it ispublic money being spent to provide a service to a customer further out. The argumentwhich says your customer is the government and let us not worry about the person who isreceiving the service—the customer out there—has been put to this committee before. Letme tell you, it is still of concern to us. We want to know whether or not you have giventhe customer out there the service. If we cannot have access to that information—or if wehave not got a process to get that information back before the government—we have aproblem because, at the end of the day, the parliament is responsible. That is the issue Iam interested in.

Mr DURIE— As far as the association is concerned, I note your concern, I willtake the issue on board and I will come back to you.

Mr GREENSLADE —Can I comment on behalf of the ANAO with regard to thecommercial-in-confidence matter. As I mentioned earlier in discussing accountability, oneof the key issues is the matter of access and disclosure. In our view, the question ofwhether or not commercial-in-confidence information should be disclosed to theparliament should start from the general principle that the information should be madepublic unless there is a good reason for it not to be. In other words, what we are saying isthere should be a reversal of the principle of onus of proof which would require that theparty arguing for non-disclosure should substantiate that disclosure would be harmful to itscommercial interest and to the public interest. It is very much supporting the line taken bythe Ombudsman’s Office.

Ms SCOTT—Just on the matter of where services are delivered by a contractor toa client of the government, in its published legal services guidelines, the Attorney-General’s Department does advocate that records which result from the provision ofservices on behalf of the government should remain Commonwealth owned. Therefore, thejurisdiction of the Commonwealth as it applies should be retained.

CHAIR —Dr Macdonald, would you like to make any comment in regard to this?

Dr MACDONALD —I have no comment on this. This is an issue for the Attorney-General’s Department.

CHAIR —As I said, we would have liked to have heard from them. Do any of the

FINANCE AND PUBLIC ADMINISTRATION

Page 102: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 589

departments want to make any comment with regard to how they see themselves dealingwith the issue of accountability and, in particular, the question of commercial-in-confidence and to what extent they have a view about its use in terms of the retention ofinformation?

Mr SEYMOUR —I will try to make some general comments. First of all, maybe Ihave been taking too simplistic an approach on the issue of accountability to date. I guesswhat I have heard said around the table might force me to rethink the issue.

The line that I have been taking so far is that today I am accountable for thedelivery of information technology services for the ATO staff to the commissioner. So Iam accountable to the commissioner. He clearly is accountable to the parliament.

I had not actually seen the possibility of the mechanism by which I was deliveringthose services—that is, the service being delivered by a company, instead of the staff whoI have line management of, was actually changing my level of accountability. I hear thisafternoon that it might be. I had thought what was changing was the mechanism via whichI was achieving that level of accountability. So I guess I need to think that through somemore.

Ms SMITH— Can I just add to that a little. Obviously, you are delivering a serviceby a different mechanism. What has to be very clear, I think, is that, if the parliamentdecides that the functions that are being provided are still of interest to them as aparliament and that they want the mechanisms available to them to show that transparencyor the watchdogs available to help them understand what is happening at a servicedelivery level, the mechanisms as they stand at the moment are not available in this newhybrid that we have got.

Certainly, as John Wood indicated, the freedom of information legislation and theombudsman legislation need to be extended if you want those mechanisms to follow thedelivery train of that. If the only mechanism you are relying on is commercial contracts, inmany instances, they do not clearly ensure that track is there. If the contracts were muchclearer in their statement that the department was the principal, it may be somewhatclearer in terms of the trail, but the contracts that we are seeing at this point in time areoften downplaying that arrangement by standard clauses which say that the third party isnot an agent for the Commonwealth, for example.

The commercial arrangements that come into play are set on certain specificationsand, unless the specifications are absolutely clear, they can be ambiguous also in terms ofthe accountability mechanism. So if parliament says that it wants transparency orconsistency or probity in the use of government money or the use of statutory powers orwhatever, and you want some of the other mechanisms to adapt to the new forms of thisnew service delivery, it becomes very important that the legislation surrounding theombudsman and the FOI and the ANAO are explicit in that and explicit in saying that

FINANCE AND PUBLIC ADMINISTRATION

Page 103: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 590 SENATE—References Friday, 4 July 1997

they can pursue the accountability issues in so far as they pertain to the governmentfunctions being performed by third parties. It could be a relatively simple deemingprovision that I do not see as suddenly taking over the private sector, but it is justextending the provisions in so far as they relate to the functions now being performed onbehalf of government.

CHAIR —Dr Macdonald, in terms of its coordinating role, does OGIT have anyview or does it express any view to agencies about the issue of accountability?

Dr MACDONALD —We rely on the advice of the Attorney-General and the auditoffice.

CHAIR —What advice has the Attorney-General given you as to how you shouldproceed to advise the various agencies?

Dr MACDONALD —We have provided no advice to departments yet but, asindicated by previous speakers, many of these issues can be addressed through standardclauses and head contracts, and there is a dialogue going on at this point in time.

CHAIR —You have not had any interaction with AGs about how you shouldformulate accountability clauses and commercial-in-confidence?

Dr MACDONALD —There are some ongoing discussions at the working levelwithin my office, yes.

CHAIR —So, in essence, any advice you give your departments—

Dr MACDONALD —I have no advice to provide the committee at the momentand, frankly, I am not—

CHAIR —No, I am not asking you about advice for the committee; I am askingyou about departments coming to you for advice.

Dr MACDONALD —To my knowledge we have not had any departments come tous yet for advice.

Senator ALLISON—Could the audit office advise the committee about whether itsees any problems in relation to its functions for an organisation with significantcontracting out, particularly in IT? Are there some areas that you cannot explore? Forinstance, at present we can ask questions about the consultants and the sorts of fees thatare paid to consultants in agencies. Is this still an opportunity in a contracted outsituation? Could a clause such as we have been talking about ever provide the same levelof accountability?

FINANCE AND PUBLIC ADMINISTRATION

Page 104: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 591

Mr COLEMAN —One of the issues that is very relevant—Mr Greensladementioned it before and we have discussed it with the committee previously—is thequestion of access by the Auditor-General to the records and information of third partyproviders, whether it be for IT or whatever. Our situation is a little different in that ourstatutory powers are currently very broad in terms of access to information and records.Effectively they talk about information and records of any person, and I think that hasbeen recently interpreted to mean just that.

What we have been suggesting to government—I would have to say thatgovernment has been a little reluctant to pick it up at this point—is that those statutorypowers should be reflected in a much more substantive and user friendly way, if you like,in contracts. We are suggesting that so that it is open, so that there is an understanding byall parties that there is a statutory power there, because that is generally not known acrossa lot of industries. The APS people do not know about some of these powers. That is anissue we have been exploring with the government. In a sense we could do our jobwithout that contractual thing because we have the Audit Act and, hopefully, in the futurewe will have the Auditor-General act which will give those powers.

Another issue that we have been exploring is a more practical issue that allows usto do our job, and that is access to the premises of third party providers. That is a little bitmore sensitive an issue. We have not got statutory powers for that. We cannot walk intothe premises of, say, BHP and demand to look at records relating to Commonwealthcontracts. Our argument is that to allow us to do our statutory job that would be a sensiblearrangement which would be provided for in contracts between the agency and the thirdparty provider.

Senator ALLISON—So the ability to do that is not currently contained in theAuditor-General Bill?

Mr COLEMAN —In relation to access to premises, that is correct. We accept thatit is a sensitive issue to open up access in a very wide unrestricted manner to a privatecitizen, so there are some sensitivities there, and we understand those. We have beendiscussing the issue of putting these sorts of arrangements in contracts. That is what wethink is an appropriate way to go.

Senator LUNDY—I would like to go back to an issue that has been raised earlierwith ANAO. The question was asked at a previous hearing about the sort of access youhave to information regarding tenderers on a particular contract and details about whereand when the implications of those contracts actually apply. Is that the sort of informationyou are saying should be accessible given that it is an integral part of providing theaccountability that we have had in the past?

Mr COLEMAN —From our position it includes all information and recordsrelating to the contractual arrangements between the Commonwealth and the third party.

FINANCE AND PUBLIC ADMINISTRATION

Page 105: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 592 SENATE—References Friday, 4 July 1997

Fortunately, from a statutory point of view there are no restrictions there. It is quite broad.In that sense it is satisfactory. It allows us to do our job. Whether it is done in acooperative manner or not is another issue. You might have to drag the information out ofthe third party if that is required, and that is obviously not desirable.

Senator LUNDY—Under the Auditor-General Bill, section 37, from memory,relates to the ability of the Auditor-General to get advice from AGs to release informationthat is claimed by the contractor to be commercial-in-confidence. Can you explain theapplication of that proposed clause and how it relates to the issues we have beendiscussing?

Mr COLEMAN —I will start by talking about the existing situation in relation tothe Audit Act, and that is that the Attorney-General has the authority to say that certainsensitive information can be withheld from an audit report. The current construction of theAuditor-General Bill is that the Attorney-General still has that authority but the Auditor-General can also make a decision as to whether the disclosure of information in an auditreport is in the public interest. So it is a public interest test.

One of the factors in deciding whether it is in the public interest is whether thecommercial interests of a body would be adversely affected. It is not just an issue ofwhether it is commercial-in-confidence, it is an issue of whether the disclosure of thatinformation would impact adversely on somebody’s commercial interest.

There is a range of other tests, including whether it is cabinet-in-confidencematerial, whether it adversely impacts on the Commonwealth’s relationship with the states,national security implications and issues like that. That has been subject to a lot of debateand discussion in the last two to three years, including in various Senate committeeinquiries. That is where it sits at the moment.

Senator LUNDY—I have another question with respect to accountability. Thereseems to be growing public commentary on the issue of security for IT, not just in anoutsourcing sense but in a general sense. What obligations and accountability currentlyexists for either departments themselves or contractors to actually declare that a securitybreach has occurred? I am not talking about the internal breach or act that would becovered by the Privacy Commissioner, for example; I am talking about the activities thatwould probably be covered by the Crimes Act in terms of hacking and utilising andmanipulating information.

I do not know whether I should direct this at you or perhaps throw it open to theforum. What mechanisms are currently in place to get those occurrences on the publicrecord and enable them to be addressed, firstly, as a policy issue and, secondly, to befactored into decisions like the broad outsourcing of IT? Is anyone charged with theresponsibility of canvassing security breaches within government information services?

FINANCE AND PUBLIC ADMINISTRATION

Page 106: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 593

Mr WATERS —As I indicated in my answer earlier, we do not see it as our job todo that in a comprehensive way. But certainly in the course of auditing agencies and, inthe future, contractors, in relation to their compliance with the security principle, IPP4, wewould typically ask for evidence of security breaches during the period being covered bythe audit and would take that into account and, where appropriate, report on it.

Senator LUNDY—What obligation is there under the current act for contractorsor, indeed, departments, to actually supply that information?

Mr WATERS —We could exercise our statutory powers in those circumstancesand require the production of that information. If we did not get it voluntarily, that is anoption that is available to us.

Senator LUNDY—Dr Macdonald, has OGIT played a role in advising on the issueof security in relation to IT in a holistic way for government information services?

Dr MACDONALD —I believe that Mr McLennan was asked a question as towhether or not OGIT some time ago did the overall security. The answer is, we don’t. Ithink we rely on A-G’s and the ANAO in this area. Depending on the nature of theadvice, that sort of reporting could be put into a contract as a term and condition if it werefelt by the various agencies that this was appropriate.

Senator LUNDY—Can I perhaps ask the agencies what processes currently existwhen dealing with security breaches of the type I am referring to? How would youenvisage that process being transferred across to the contractor? To what degree wouldyou remain involved in the management of those occurrences?

Mr COLEMAN —In terms of our management structure, clearly, one of theresponsibilities of one of my staff is security matters. We have certainly not looked tooutsource that, so all matters relating to security of IT are a clear responsibility of anANAO officer. We have a range of measures in place in the contract to protect theinformation of the office under an IT arrangement. It is an internal part of the projectmanagement arrangements to establish whether there have been any security breaches ofthe contractor.

Senator LUNDY—Are there any other agencies that canvass this area?

Mr SEYMOUR —I have a couple of thoughts on that. I think what happens underan outsourcing arrangement is that you give up some control of the way business iscarried out. When I got back, I was not aware of the possibility of giving up theaccountability. I certainly acknowledged I would give up control, because a companymakes decisions that I and my staff would make today.

In relation to security, I think you probably have to think about that in at least two

FINANCE AND PUBLIC ADMINISTRATION

Page 107: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 594 SENATE—References Friday, 4 July 1997

parts. One part is those breaches that would occur by ATO staff, and I do not see thatanything would change there. By that I mean we would still have the ability to detect mostof that. I would have to think about it some more to see if there would be someopportunity for our own staff to cause a breach which we would not be aware of.

The thought that went through my mind when you raised the question was theextent to which there may be some breaches either by external parties or by the contractstaff themselves, which we might have some difficulty detecting. I think that probablygoes to the heart of the issue that we just discussed here; that is the extent to which theagency will decide how much it will give up control of the security function. We in theATO are yet to embark on making those decisions as to what of our work we will includeunder the contract. So we have not yet made those decisions. We clearly need to workthrough those, and we must do so in time to properly specify our requirements. That is thebest I can do for an answer right now.

CHAIR —Does anyone else want to make a comment?

Mr WITHERIDGE —In the Department of Communications and the Arts, again itis a matter of scale. We would be hard-pressed to separate the function of managementand control. So we do currently outsource the management of access to the department’sservices from the Internet, so the actual logs of access come directly to me. I would notsee that as changing. Our contractor only has access to our systems while they are on oursite. So how that would work if our systems were off site and how effectively thatmonitoring was carried out is a matter that is an unknown for us.

Mr PALMER —Firstly, I think the situation is rather similar to the situation in taxin respect of the security. On a slightly different front, as I mentioned earlier, we do havesome outsourced contracts in the areas of mail handling and concession cards, which haveraised some quite significant issues of accountability along the lines that have beendiscussed. I guess they are more privacy issues rather than security issues, and there is noindication at any point of any intentional breach of security.

For example, there is the possibility—and it has happened—that we have hadmultiple inserts into the one envelope so that customers receive information that relates toanother customer. We have sought, when contracts are renewed, to improve the provisionsof the contract in terms of the reporting arrangements and the sticks and carrots that wemight offer in the contract for the performance of the supplier.

Senator LUNDY—If there was a whole of government approach to IT securitygenerally, I am presuming that someone at this table would know about it. Is that a fairassumption? I would hope so, because what I am hearing is that there is no whole ofgovernment approach to the issue of IT security and the security of the systems at themoment.

FINANCE AND PUBLIC ADMINISTRATION

Page 108: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 595

Mr SEYMOUR —I am not sure that is correct, Senator. My understanding is that acomponent of Attorney-General’s is responsible and they issue guidelines to the whole ofthe Public Service which we are expected to comply with.

Mr PALMER —We use standard clauses from A-G’s but have also been past thePrivacy Commissioner in our contracts.

Senator LUNDY—So we have a standard clause in A-G’s and we have guidelinesfrom Attorney-General’s to departments on this issue.

Mr SEYMOUR —This is called the Protective Security Manual.

Senator LUNDY—The Protective Security Manual. How does it specificallyaddress IT?

Dr MACDONALD —I simply wanted to say that the Defence Signals Directoratealso plays a role in the overall security of the government in areas relating to encryptionand the like. So they have a role to play as well.

Mr GROWDER —There have been a number of versions of the ProtectiveSecurity Manual available for departments for a number of years. It basically sets theguidelines that are to be applied within departments. Departments are quite free to makesome adjustments to those guidelines if they see that they want to, in fact, increase thelevel of protection that applies to them. Normally what happens in the case of the ANAOis that we have taken those guidelines and incorporated them to suit our owncircumstances.

Senator LUNDY—We have guidelines from Attorney-General’s that thedepartments utilise in the way that they see fit in applying to their own security needs.Am I making the right assumptions?

Mr GROWDER —Yes. Senator, they are obliged to meet certain minimumrequirements. I believe it is minimum, not maximum.

Senator LUNDY—What is the enforcement mechanism for compliance?

Mr GROWDER —The ANAO plays a role in this in the sense that security auditscan be performed on departments and reported to the parliament. We ourselves have hadthat in recent years. They cover a whole range of areas for the operation of IT within theagency itself. Normal practice then is, in reporting to parliament, that there will be someissues to be raised and some issues to be followed up on. There is a process of monitoringso that those particular weaknesses or whatever they may be are dealt with.

Senator LUNDY—Does the ANAO in its auditing of that security process analyse

FINANCE AND PUBLIC ADMINISTRATION

Page 109: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 596 SENATE—References Friday, 4 July 1997

or scrutinise the merits of the process, or do they just crosscheck with the guidelines thatthey have been complied with?

Mr GREENSLADE —When we are undertaking security audits, particularly in theIT area, we will, in determining our audit criteria, take account of the relative guidelines,DSD guidelines and so on. If I can step this back a little to the issue of how this impactson IT outsourcing, we are talking about whether any decision to outsource represents valuefor money. Is it consistent with strategic directions and with an organisation’s riskassessment? We would expect issues like privacy, security and so on to be part of thatbroader consideration. There are requirements on organisations at the moment to takeaccount of those security considerations.

For example, in any auditing we did of an outsourced IT arrangement, we expectto include whether the security had been effectively addressed in the contract and whetherindeed the contract was delivering the department’s expectations in terms of security. Interms of our accountability function, we would certainly be addressing those matters, but Iwould certainly expect to see departments themselves address this up front. I believe thesesecurity issues would all be thrown into the business case.

Senator LUNDY—So in that process you have described, there actually would bea direct application of the Attorney-General’s guidelines to the contractors.

Mr GREENSLADE —Yes.

Senator LUNDY—You mentioned DSD guidelines, are there actually guidelinesfrom Defence Signals Directorate as well as from AG’s? How does DSD play their part inthe security?

Dr MACDONALD —I am not personally familiar with the process, Senator. Iwould be happy to take that question on notice and provide a more fulsome response tothe committee.

Senator LUNDY—I think that would be useful in identifying just what the variouscriteria are. Given that the compliance of the set of guidelines we have is monitored byANAO, is that compliance only monitored in the case of a specific audit with the terms ofreference of security? If so, is there any other mechanism for monitoring complianceoutside of a specific audit?

Mr GREENSLADE —Obviously, if we are undertaking a specific audit of ITsecurity in a specific department we will address that. I should emphasise more generallywe are not the only mechanism for addressing compliance with guidelines. Departmentshave their own internal audit functions. One of those would be IT auditing. IT security istypically an area which is addressed by internal audit functions. So, although we are theindependent external auditor, departments have their own responsibilities for dealing with

FINANCE AND PUBLIC ADMINISTRATION

Page 110: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 597

these issues.

Senator LUNDY—Can the departments comment on whether that is actually aregular feature of your in-house processes?

CHAIR —So we do not get everybody talking at once and so Hansard do not gettotally confused, we might just go round the table from my right and ask departments tocomment individually.

Mr POTTER —We do have regular internal security audits. We have an ITsecurity officer. A point that might be worth making, which did not seem to come out, isthat IT security is not one thing—there are such things as physical security, logicalsecurity. We do take a risk assessment approach which relates the amount of effort andexpenditure we put into security to the importance of the information we are trying tosecure—very much like perimeter security around a building. But it is something whichoccupies a lot of our time. It is certainly well audited internally as well as what ANAOdoes. We also report to DSD any breaches of security that we come across.

Senator LUNDY—So DSD provide a reporting point?

Mr POTTER —Yes, they are capable of taking that role.

Senator LUNDY—Is that the case for all departments? No? Perhaps you couldaddress that as we go round the circle.

CHAIR —Mr Wilson do you have any further comments?

Mr WILSON —The situation in the Department of Transport and RegionalDevelopment is fairly similar to the CSIRO. We have an IT security role that is not doneby one individual officer but by a number of officers who report to me and who areresponsible for different aspects—whether they are physical security, logical security ornetwork security.

The department has an ongoing internal audit program. Security of various aspectsof the IT operations come up each year. It is sort of a continual process. In addition tothat, we have the ANAO come in for particular audits of our finance system, et cetera. Inthat context, they look at different aspects of our IT operations. So it is a continualprocess. Yes, we take advice from Defence Signals Directorate and from the protectivesecurity manual, and AG’s, et cetera, and we comply with that as far as is relevant to ourparticular operations. That is probably about it.

Mr WITHERIDGE —At the Department of Communications and the Arts it isquite similar to that and we also have IT security on our fraud and audit committeeagenda.

FINANCE AND PUBLIC ADMINISTRATION

Page 111: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 598 SENATE—References Friday, 4 July 1997

Mr AITKEN —We have an IT security officer and we have a security committeewhich comprises senior management and the IT security officer and it reports to thestatistician. In 1991, we survived, for want of a better word, an ANAO audit on ITsecurity. The findings were that we were a fairly good custodian of our client’s data andthere were some deficiencies in-house, which have addressed since.

Also following that audit there have been several follow-up internal audits. Feedingin from all of those things, we have developed security guidelines based on the protectivesecurity manual out of the AG’s and have taken into account the Census and StatisticsAct. Privacy of ABS data is covered by that act and the Australian Statistician isresponsible for interpretation of that act. Following on from that, the Statistician arguedsuccessfully that, therefore, his mainframe was in fact out of scope as far as outsourcing isconcerned. I think that was about all I wanted to cover.

Ms SCOTT—I cannot speak about our IT arrangements in house. All I can say isthat most of the Archives information is in the public domain anyway.

Mr WATERS —Perhaps I could offer the committee the benefit of a computersecurity survey that we carried out as part of our audit function a few years ago. It isslightly dated now, but we did a survey of all Commonwealth agencies’ computer securitypolicies and procedures rather than specifically look at the way they had beenimplemented. We could provide you with the findings of that.

CHAIR —We would appreciate that.

Mr GROWDER —The tax office for a number of years has had a national securitycommittee chaired by a second commissioner and represented with our business lines andITs. So it covers a broad range of areas. It is quite consistent with the way that committeeworks that IT security issues come up from time to time. Generally we have used theDefence Signals Directorate more as an advisory body for developing our infrastructureand our platform as we are looking at particular issues such as encryption, satisfactoryarrangements for things like portables in the community and things like that. We will goto DSD for advice as to how we should proceed in that area and what sorts of product setsare suitable to give us a range of protection. Most recently in that we have used DSD toendorse our approach to a firewall product for our use of the Internet. We have not got tothe point of actually making use of the Internet and connecting it to our internal networks,but DSD are part of the process.

Mr BOX —We, like most other agencies, have a national security committee or apolicy committee which develops and monitors the policy relating to security throughoutthe Customs Service, including IT security. It takes into account the protective securitymanual and advice from the Defence Signals Directorate. As Mr Growder said, theDefence Signals Directorate advice is mainly on the infrastructure side of IT—encryptionand the like. The security issues relating to Customs are not to be outsourced. They are to

FINANCE AND PUBLIC ADMINISTRATION

Page 112: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 599

be excluded in terms of security policy and access control.

Senator LUNDY—Can you say that again. What has been excluded?

Mr BOX —IT security policy and access control. So issues of security breacheswill remain an in-house activity to consider. Our security issues are of course subject tointernal audit and audits by the audit office in their regular auditing process.

Mr PALMER —The agency has a high-level security and privacy committeechaired at the deputy secretary level. Within the working organisation there is an ITsecurity section, which issues things like security guidelines and liases with the DefenceSignals Directorate and so on—very similar to the other organisations.

We also have a security section in one of the business divisions. In fact, thedivision that is responsible for compliance has a security section within it. As well as that,we have the same internal audit arrangements that other organisations have.

Senator LUNDY—I want to ask a general question. Perhaps some can respondstraightaway and other agencies can take it on notice. Are there any specific exclusions ofIT functions that have been identified by the agencies at this point in time? We had onefrom Customs and also one from ABS with respect to the mainframe. It would be veryinteresting to get an idea whether there are any specific exclusions from outsourcing withrespect to IT and the justification or rationale behind such exclusions.

CHAIR —The departments might like to take that on notice—Senator LUNDY—Yes, I am happy for it to go on notice.

CHAIR —rather than us having to wait around, because I would like to move on tothe next area. So the departments will take that question on notice and provide a responsein writing. Do you have another question in that area that you want to put to them?

Mr WOOD —I want to make a comment. It is really to try to keep things in asimple situation. It is just a suggestion. People can go and look at an awful lot ofcomplexity to build into contracts to provide certain protections and accountabilitymechanisms. I know I sound a bit like a cracked record, and you can claim self-interest,although I think our self-interest is on behalf of Australian citizenry. We actually havesome fundamental pieces of legislation in this country which are amongst the finest in theworld in relation to privacy, audit, freedom of information and the ombudsman. Theprovisions are increasingly well-known amongst the citizenry, and the application of thoseprovisions in contracted situations seems to me to be more accessible to the understandingand comprehension of the citizenry than specific and quite complex clauses built intocontracts.

I am not saying, ‘Don’t have the kinds of things which are the service standard

FINANCE AND PUBLIC ADMINISTRATION

Page 113: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 600 SENATE—References Friday, 4 July 1997

type, access type, issues built into contracts.’ But to substitute what I think has been veryeffective administrative law with provisions in contracts is really quite a silly way to go.That is my final comment.

Senator LUNDY—I want to put one more on notice. Are there any areas of ITthat the Privacy Commissioner, the ombudsman’s office or any of the departments have aspecific view should be excluded? I am looking, I suppose, for more expressions ofviews—not from the departments themselves—about what should be excluded in thedefinition thereof. Perhaps the AIIA could take that on notice. I do not know, but it maybe a question of liabilities. The companies that you represent may have a particular viewabout not wanting to take on board a certain aspect. It may be security. I would beinterested in the views of the people you represent on that issue.

CHAIR —Would the departments like to take that on notice and, where possible,provide some information to the committee in writing?

Senator ALLISON—I want to come back to Professor Mulgan’s submission. Asegment of the submission says:Hence, public servants place more emphasis on avoiding mistakes than on improving productivity.Contractors, however, who are free from the demands of public service accountability and the ever-present threat of departmental and ministerial intervention, can perform much more efficiently.We have not actually delved into that whole question of why it is that these kinds ofsavings are said to be able to be made. Perhaps Dr Macdonald can comment on that.

Dr MACDONALD —I have not read the submission. I will take the question onnotice.

CHAIR —We might move onto something else.

Senator ALLISON—Could I just have one other go at this because I think it isimportant. In another part of your submission, Professor, you say as was raised beforewith the Department of Defence that, in your view, the way in which contracting out hasbeen suggested as a way of improving accountability as well as achieving savings has gota bit mixed up and that what is really possible is the same degree of efficiency andeffectiveness but with new public management techniques, such as strategic management,program budgeting and the like. Would you like to expand on that view? I think what youwere saying is that we have the option of not losing the accountability, which we so value,but there are other ways of managing for results, I think is the phrase that you use.

Prof. MULGAN —Just very quickly, people can read my submission further, but Iargued in a later part of the paper that there was an inevitable loss of accountabilitythrough loss of ministerial control. If one thinks about that, if one loses control, one islosing accountability.

FINANCE AND PUBLIC ADMINISTRATION

Page 114: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 601

On this particular point, the argument is made by defenders of contracting out thatcontracting out has the capacity and potential to increase accountability, which it has, byforcing departments to specify what they want—in other words, to increase their controlover the service by actually specifying things in advance. This is an argument that iscommonly made because you have to write things into a contract. You have to sit downand think, ‘What is it we are trying to achieve? How could we monitor it? What are ourperformance indicators and so on?’ The argument is that you have to do that when youcontract, so that actually makes you think out what you want more than you wouldotherwise do.

My argument in response to balance that argument—though I think there isstrength in that argument—is that it is possible for departments to do that withoutcontracting out. A lot of the supposed benefits of contracting out turned out to be thebenefits that accrue to departmental delivery as a result of the threat of contracting out orgoing through the process as if we were to contract out rather than actually contracting outin the end. One could argue that one could get the best of both worlds from anaccountability aspect by keeping it in-house but going all the way down to the line withthe department, pretending they were going to go out and then in the end saying, ‘Okay, itis yours anyway, but stick with all these things you were going to do.’

CHAIR —If we can move on now to the issue of industry implications and, inparticular, I would like to address the question of regional development and smallbusiness. The government indicated in its public statements with regard to the contractingout of services and IT outsourcing that there will be a significant benefit to small businessin particular. I would like to hear some extended comment from AIIA with regard to theconcerns that you have outlined. Then maybe we could get some views from OGIT abouthow we might actually deliver some benefit to small business when we head down thatpath.

Mr DURIE —AIIA considers outsourcing to be a major industry developmentopportunity for the information industry in Australia. With the committee’s indulgence, Iwould like to put this in a broader context.

The information industry is the most rapidly growing industry in the world. InAustralia, industry revenues are about $50 billion and growing at over 10 per cent a year.Employment is well over 200,000, growing at over six per cent a year. Exports are over$4 billion a year. The challenge is to build on this.

Other countries in our region and elsewhere have had even more success. Theyhave done this by making the development of the information industry and the applicationof information technology in their economies a national priority. We are urging thegovernment directly and through its information industries task force to adopt a similarapproach. The key issue for the industry is for the government to adopt an aggressiveinvestment attraction policy which would include a competitive tax regime, support for

FINANCE AND PUBLIC ADMINISTRATION

Page 115: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 602 SENATE—References Friday, 4 July 1997

local industry—particularly in terms of venture capital—and the attraction of global scaleinformation industry investments.

I now turn to industry development in the context of outsourcing. This morning MrUpton mentioned several issues where the industry would benefit from greater clarity inthe government’s intentions and desires; industry development arrangements should beadded to this list. We need much greater clarity about what it is the government wants andhow it intends to achieve it. Issues include how commitments firms have made under thepartnership and other agreements are going to be treated and, perhaps even moreimportantly or most importantly, how the government will meet the aspirations of localindustry to participate fully in this opportunity.

As we understand it—I can tell you we only understand it very generally—biddersfor outsourcing contracts will be invited to outline how they would meet the government’sdesire to maximise the industry development outcomes in terms of the involvement ofSMEs, regional development and exports to the Asia-Pacific region, although these termshave not been given any specificity. The successful bidder would then be contractuallybound to deliver these outcomes. I suppose I could say in general terms that the industryis comfortable with that approach; that is, bidders being invited to make commitments andthen being contractually bound to meet those commitments.

As I said though, our concern is that we need much more clarity from governmentabout what it means by the terms it has used in speeches and policy documents. We havebeen assured on that point by Minister Fahey and by our contacts with other interestedagencies that the association and the industry will have an opportunity for furtherconsultation on these matters with OGIT and with the industry department.

I would like to conclude with the remark that it might have been helpful in thediscussion of these issues if the industry department had been here this afternoon. Fromthe association’s point of view, we are disappointed that they are not here. With thosegeneral remarks, I would like to conclude. I am happy to take questions or makeadditional comments as required.

CHAIR —Perhaps, Dr Macdonald, you might like to make some comment,particularly in terms of consultation with industry and in the provision of services and howyou actually get to involve the small and medium enterprise businesses, about which Ithink it is the intention of the government to try to assist.

Dr MACDONALD —Clearly the government have stated that, first of all, theywant a very good price. In addition, they want the involvement of small and mediumenterprises, not just as intermediate service providers to other outsourcers but in situationswhere they can grow and their businesses can expand. Mr Durie is right in terms ofidentifying regional Australia, regional jobs and exports and being contractually bound.The minister has indicated to the AIIA and to the industry that a process of consultation

FINANCE AND PUBLIC ADMINISTRATION

Page 116: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 603

will be undertaken during the development of these criteria so that we do get thetransparency and certainty that is required prior to an RFP being out on the street. That iswhat we are now in the process of doing. We are working with the Department ofIndustry, Science and Tourism and our own department and in consultation with the AIIAto try to come up with as precise a definition as one can in these areas. We recognise thattransparency and clarity is important, both for industry and for departmental clusters asthey go through this process.

CHAIR —Are you aware of a letter from the Canberra Business Council to theMinister for Finance relating to the Department of Finance and expressions of interestwhich were called for on 19 May for the provision of specified support services? In thatletter the council raise concerns with the minister relating to the lack of consultation andcite things such as the very short time frame in which they had to respond. They raiseissues in the dot points:Accordingly it is of some concern to the Canberra Business Council that:-.the range of requirements is so broad and diverse that few if any potential head contractors couldhave resources and expertise in all of them—thus placing a premium on consortium and sub-contractarrangements . . .Those sorts of issues seem to be not uncommon.

Dr MACDONALD —I have not seen the letter. I will take your request on notice.

CHAIR —I would appreciate it if you could provide some comment. It is a letterthat was sent to the committee. We should resolve to receive it, and one from theAustralian Law Reform Commission, and to authorise their publication. If there are noobjections, it is so ordered.

Would AIIA like to make any comment with regard to the problems that are beingexperienced? Are you getting any feedback from your members?

Mr DURIE —I am not familiar with the correspondence. I understand that that isin relation to broader outsourcing—it is not IT outsourcing.

CHAIR —Yes, I know that. Are you getting any feedback from your membershipwith regard to those sorts of problems where people may not have the capacity? I askedyou earlier about the piggybacking issue where people may be excluded or may not havethe capacity. How may we involve them?

Mr DURIE —There is certainly a level of anxiety in the industry, as I mentionedin my earlier remarks, about the very strong aspirations of the SME or the local industryto be fully involved. In our first interaction with the industry department and OGIT intalking about this, one of the propositions we put to them was that it was not sufficient, ifyou like, to make it the industry’s problem by providing the invitation and thencontractually bound commitment on industry development provisions. The governmentactually needs to work with AIIA and the industry to implement an industry policy. I have

FINANCE AND PUBLIC ADMINISTRATION

Page 117: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 604 SENATE—References Friday, 4 July 1997

also indicated that in my remarks, specifically in relation to the outsourcing opportunity.

There is a very complex challenge in front of, for example, small Australiancompanies in dealing with the complexities of negotiating with very large companies andwith having a multiplicity of arrangements. They are small scale so they are going to findit a great challenge to deal with the large outsourcing companies and to positionthemselves with the potentially winning bid, et cetera. We have made a number ofproposals to DIST and OGIT about moving quickly to take action on some businessimprovement programs, support programs and follow up of industry in terms of access toventure capital, best practice in strategic alliance, business plan development, strategy plandevelopment and so on.

We have also made some suggestions about a capability database which wouldshowcase the capability of local companies and which would be available to outsourcingcompanies and departments to see what the local industry can do. On our associationwebsite we have a capability database which we prepared for DIST 18 months ago. Weare currently negotiating with them on the next generation of that, and that will be usefulin this process of basically advertising the capabilities of local industry. So we believe thatthere are a number of proactive things that the government can do in addition to the broadpolicy and the contractual issues that they are addressing.

CHAIR —This is very much a layman’s question: how many IT providercompanies are there in Australia?

Mr DURIE —The ABS released a preliminary study of the industry for 1995-96about a month ago. Off the top of my head I think the number was about 13,000companies. The vast majority of those are single or very small contracting groups. Interms of companies with a capability to export, to be involved in the outsourcing process,I would probably put the number at something under 1,000. On our capability database, itis something like 780 companies.

CHAIR —How many of those are members of the AIIA?

Mr DURIE —We have 350 members. That database goes right across intoelectrical manufacture, which is somewhat outside our terms of reference.

CHAIR —Are there any other associations that represent information industrycompanies?

Mr DURIE —On the computer side, no. On the information technology side, thereis an organisation which represents electrical and electronic manufacturers. There is alsoan interactive multimedia association.

CHAIR —Can you tell me how you are going? At the bottom of page 8 of your

FINANCE AND PUBLIC ADMINISTRATION

Page 118: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 605

submission you say that you would like to progress industry development issues. In so faras approaches that I think you indicated you have made to the government, what sort ofresponse do you have back about that?

Mr DURIE —In terms of interaction with the government, the government hasbasically referred us to its information industry task force, of which great things areexpected. That is due to report in August. I am reasonably confident that that report willreflect pretty much the views that I have outlined this afternoon. How the government willrespond to that is a completely different question to which I do not have an answer.

CHAIR —In terms of the clustering proposal that is coming through, what impactwill that have? Does that have the potential to impact on the involvement of smallsuppliers? Does it have the potential to have any impact on their ability to get into thegame?

Mr DURIE —I think, if I can just talk more generally about outsourcing, it isobviously going to affect their ability to get into the game. I think they are assuming thegovernment does what it says it wants to do, and I am confident, based on interaction wehave had with OGIT and DIST, that they are moving down that track and that there willbe opportunities for local industry to participate. I think obviously the marketplace isgoing to be changing over the next four or five years.

CHAIR —Would you like to make any comment, Dr Macdonald?

Dr MACDONALD —I would certainly agree that there are opportunities for smalland medium enterprise. Indeed, if you look in Canberra, already we have the OGITconsortium that has been formed. We have the select computer technology associated withone of the major outsourcers. ISSC announced their strategic partners sometime ago in apress release. There were seven or eight. They were distributed in many regions of thecountry, and they were small and medium enterprise. I think the important thing here is tohelp these enterprises to grow to build the business.

The other thing I would say here is that one of the reasons we chose to create a PE68-type panel, an outsourcing panel, for the smaller agencies was to allow the smallerenterprises that perhaps would not choose to get into some of the larger deals to still goout and have interaction with the smaller departments in the panel type of operation,which would obviate the need for an intensive process of bid selections, such as would bethe case in the larger clusters. By the way, that particular concept came as a result of ameeting that occurred just before Christmas with the Canberra Business Council, and theywere expressing concerns to us at that time about the fate of the small IT firms.

Senator LUNDY—Can I just ask a follow-up question on that? Why then has thePE 68-type panel been sidelined in the current IT outsourcing process?

FINANCE AND PUBLIC ADMINISTRATION

Page 119: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 606 SENATE—References Friday, 4 July 1997

Dr MACDONALD —It has not been sidelined, Senator.

Senator LUNDY—You just gave directly contradictory evidence to evidence thatMr Maclean gave previously.

Dr MACDONALD —I believe Mr Maclean said that the current PE 68 panelexcludes IT outsourcing in the sense that we are talking about it. What I said is that weare going to create a PE 68-like panel of IT outsourcers in conjunction with DAS todirectly address the outsourcing of infrastructure.

Senator LUNDY—I did not hear you say ‘like’ after PE 68.

Dr MACDONALD —Sorry, it might have been my mistake.

Senator LUNDY—Thank you for that clarification, because it was a pointspecifically looked at earlier on in the estimates process. Just going back to the AIIA’sviews about the opportunity that smaller businesses have to access these contracts. What isAIIA’s view on the requirement for those smaller members to have an association with alarger company to get them in the door? What sort of feedback have you had from yourmembers about their involvement effectively being contingent upon having an associationwith one of the larger companies?

Mr DURIE —I think there is a level of anxiety right across the membership aboutloss of direct contact with the customer. That is not confined to the local companies orSMEs, it extends right through to product vendors, software product vendors, et cetera.How that works out I am not in a position to say, but there is certainly a level of anxietyright from the smallest IT company up to the company just below the major outsourcerlevel about that question which companies protect jealously, and that is their channel withthe customer.

When you look at, for example, the ATO modernisation project that GeoffSeymour mentioned, again that was a similar thing where there was an SI in charge, therewere many subcontractors and, I think both from industry’s point of view and the agency’spoint of view, that was a process that worked very well. Yes, there is anxiety, but at theend of the day commercial deals are going to be made and companies will come to somearrangement, both with the outsourcers and with their anxieties.

Senator LUNDY—With respect to the larger companies, the big six or the big 21depending on who you are talking to—however many big companies there are, are theyexpressing any concerns about this requirement, undefined as it is, to associate themselveswith small to medium enterprises? Are they concerned about how that affects theireconomies of scale and method of operation?

Mr DURIE —My perception, and we had a meeting 10 days ago I think with the

FINANCE AND PUBLIC ADMINISTRATION

Page 120: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 607

companies you are referring to, is that on this point they are enthusiastic. They are alreadyworking with these companies. Dr Macdonald gave you several examples. There are manyothers. I suppose their anxiety would be that the manner of association and the area ofassociation would be specified by the government. They are happy to respond to thegovernment’s invitation to offer innovative proposals and they are happy to work as agroup. Obviously, they have their commercial interests as well, so there is some balancingthat needs to be done, but I am reasonably positive about how it is all going to comedown.

One of the truisms in the IT industry is that no company has all the services andproducts that customers need—everybody needs partners. The industry is ferociouslycompetitive, but everyone has had to learn to cooperate with others and you see Microsoftlying down with Netscape, IBM lying down with its competitors, and so on. The industryhas had to get used to that method of operation.

Senator LUNDY—I might come back to that point. We have been talking aboutthese relationships between the big ones and the small ones with respect to their size.What about the proportions with respect to Australian ownership versus, effectively,multinational status or foreign ownership? How much of that issue is a concern of yourmembership? How have you applied the same sort of considerations, perhaps not withrespect to size, but in associations with Australian companies—proportions thereof and soforth?

Mr DURIE —For the industry, ownership is not a question. There is a concernabout the SME aspect of the government’s approach though. With some of the key localcompanies, we have not had a clear definition of what the government means by an SME.But if you think of some of the companies that would expect to play an important role insupplying the government’s needs, they are not SMEs.

One of the things we are going to be saying to the government in the lead-up towherever this leads to is that they may need to think about industry involvement ratherthan SME involvement. I would not like to see companies like Datacraft, Aspect,Computer Power, et cetera, excluded from this process because they do not meet somedefinition of what an SME is.

Another element of that concern is that we would hate to see a situation where acompany did not meet its commitment about SME involvement because it had succeededand grown some of these companies beyond whatever the definition of an SME was. I canunderstand why the government talks about SME involvement but, certainly from theindustry’s point of view, it is a matter of industry involvement.

Senator LUNDY—It is not necessarily the right definition. If the government hadconsulted you before they let the horse bolt and shut the stable door, what sort of modelwould you have been advocating to OGIT and to the government with IT outsourcing

FINANCE AND PUBLIC ADMINISTRATION

Page 121: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 608 SENATE—References Friday, 4 July 1997

being extended beyond what it currently is? What sort of position would you haveadvocated if you had been given the opportunity?

Mr DURIE —We were given the opportunity. We made a submission to severalareas, one of which was the Industry Commission inquiry into contracting out. I am happyto give you a copy of that submission.

Senator LUNDY—How close is that to the model that the government hasadopted?

Mr DURIE —We did not go into models about clusters or anything like that. Wetalk more about principles. One of the principles we put forward was about the importanceof open, competitive tendering, the industry involvement, et cetera. I will happily sharewith the committee a copy of that submission, which basically sets out what our view wasbefore the government went to print.

Senator LUNDY—With respect to the model currently on the table—I appreciatethat it is not finalised yet and the clusters are still being negotiated—and based on theknowledge that you have, what alterations would you make beyond what you have alreadystated, which is a specific inclusion about industry development strategies?

Mr DURIE —I suppose as a business association, we are focusing on respondingto what is happening. The customer is in the process of defining its requirements andindividual companies are working with OGIT and agencies, and AIIA is also doing thesame. We are not expressing a view about how the government should change the clustersor whatever. In a sense, we are being fatalistic about where that leads the government. Atthe end of the day, it is their call.

Senator LUNDY—Just going back to your earlier point about inclusion of anindustry development requirement in the contracts, or hopefully within the business plan,what degree of specificity is required? How far do you want that to go in terms of detail?What do you have in mind?

Mr DURIE —There are some basic questions. I have already mentioned the SMEversus industry involvement. If you look at regional development, what is a region? I havenot seen anything on that question.

Senator LUNDY—Do you know if Canberra qualifies?

Mr DURIE —I have not seen anything stating what the government’s view is onthat question.

Senator LUNDY—Me either.

FINANCE AND PUBLIC ADMINISTRATION

Page 122: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 609

Mr DURIE —As a Canberra-born person, I have a strong interest in whetherCanberra is a region. Is it non-capital cities? Does that mean Hobart is not a region?

CHAIR —Tasmania is a region, as I understand it, in terms of the regionaldevelopment process that was put in some time ago. I think regions have been determinedto some degree, but it is a matter of whether that definition is being translated into otherareas. Maybe Mr Wilson might like to add some comment to that. Maybe Dr Macdonaldmight also like to make some comment about that. Also, Dr Macdonald, you might like toassist us with the definition, if you can, of an SME.

Mr DURIE —We have a collection.

Dr MACDONALD —I believe there is a definition of region and DIST has adefinition of small and medium enterprise that we will develop with them. The points thatMr Durie raised are valid about what happens when things grow. I will take it on notice toprovide the committee with the definition that we come up with.

CHAIR —Would you also like to address the question which has been raised aboutthe whole of industry approach?

Dr MACDONALD —I want to point out that one of the things that the ministersaid in his speech last week was that Canberra was a region.

Senator LUNDY—I am so pleased.

CHAIR —We have Canberra as a region. That is a big achievement today. I amvery cognisant of the time.

Senator LUNDY—Can we keep going on these points about inclusion? I wouldparticularly like some comment about this scope to expand exports.

Mr DURIE —I was talking about the regions. I suppose the other area where thereis a question mark is how does all this interact with the existing industry developmentmechanisms—partnerships, FTA and all suppliers? I do not know what the answer to thatis. Again, it has been talked about in general terms but not in specific terms. For example,in the telecommunications carrier industry development plans, where every carrier whichseeks a licence has to lodge an industry development plan with the industry minister, Iunderstand that is not something we were consulted on, which is a sore point, but there isa set of guidelines on what constitutes an industry development plan.

Presumably, I would hope that the DIST people who are working with AIIA andOGIT on this question have been able to see those guidelines and maybe have somecomplementarity so that companies, for example, which might be both carriers andparticipants in the outsourcing process, are not being pushed this way and that way

FINANCE AND PUBLIC ADMINISTRATION

Page 123: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

F&PA 610 SENATE—References Friday, 4 July 1997

depending on what marketplace they are in. There is a whole range of questions in there.

Senator LUNDY—What about the view expressed in speeches and comments byDr MacDonald with respect to the capability of expansion or export into the Asia-Pacificarea? How does your organisation view that statement? Acknowledging that it has not yetbeen defined, what sort of issues does that raise for your members?

Mr DURIE —I will talk about the opportunity first. We think there is a tremendousopportunity. I talked earlier about the growth of the Australian industry being somethingover 10 per cent a year. We are in the bottom cortile for Asia, along with New Zealandand, even lower than us, Japan. Every other economy in Asia is growing its IT businessmuch more rapidly. In China, for example, the growth rate is up at 45 to 50 per cent. InSouth-East Asia, the rates of growth are between 15 and 25 per cent. So these are rapidlygrowing markets. Their capability to supply their own needs is limited, particularly outsideof hardware. Australia definitely has a competitive advantage in Asia in softwaredevelopment and services provision primarily because we have a much more sophisticatedmarket here that has developed over the last 30 to 40 years and we have some veryexperienced providers, software developers and so on.

In terms of the industry’s capable to respond to that, exports are now $4 billion ayear. I think about half of that is to Asia. They have grown from about $500 million 10years ago. While we are still running a deficit in IT, exports are increasing much morerapidly than imports. So we hope, at some point in the future, we will catch up. We thinkthere is a capability. The caution I would add is that, unfortunately, over the last 12months the government has made some decisions which have removed some support inthe area of R&D tax concessions, the computer bounty, export market grants and thesupport available from Austrade. I suppose I would come back to my earlier point that itneeds to be much more than a wish and a hope and a putting of the obligation onindustry; the government is going to have to work with the industry to address thatopportunity.

I suppose the final point to make is that a lot of the growth in Asia is in fact ingovernment administration and infrastructure. There are already examples of a successfulpartnership between the Australian industry and government agencies in taking solutionswhich have been developed for Australian government departments into Asia. I can thinkof one example of Customs into Thailand, and there are many others.

One of the benefits we would see in outsourcing is that the private sectorinvolvement will then add a great desire to make the most of that in terms of the profitmotive and the desire to grow the business. So, in working with their public sector clients,the consortia handling the outsourcing contract will be actively looking for opportunities totake solutions, services and what not offshore.

Senator LUNDY—So you see that not as a prerequisite but as something that is a

FINANCE AND PUBLIC ADMINISTRATION

Page 124: SENATE - aph.gov.au · SENATE FINANCE AND PUBLIC ADMINISTRATION REFERENCES COMMITTEE Members: Senator Murphy (Chair) Senator Gibbs Senator Murray Senator Lightfoot Senator Synon

Friday, 4 July 1997 SENATE—References F&PA 611

desirable flow on?

Mr DURIE —Yes.

CHAIR —Mr Durie, you can take that on notice. I am very aware of the time andit is Friday. This has been a fairly long day for most people. We are very appreciative ofthe fact that people did come here today. We are taking very seriously this whole issue,and we do need to get the interaction with you people. We hope, at the end of the day,that our report will have been worth what probably seems on days like this slow andsometimes boring. I again say thank you very much for coming along, including thosepeople who have now left. We are very appreciative of the fact that you have done that. Ihope you all have a jolly good weekend and do not have to think about this during thecourse of it.

Committee adjourned at 5.08 p.m.

FINANCE AND PUBLIC ADMINISTRATION