Treasury fishing for efficiencies

Estimates of ICT cost savings need to be treated with caution, Treasury official says

The Treasury has moved to allay concerns the government has already made up its mind to outsource entire functions in the public service to individual private providers under a productivity drive dubbed "Better Public Services" revealed last week.

IT industry leaders warned such a move would risk stifling innovation and undermining smaller, locally owned service providers.

In the frame are information technology, human resources, finance, procurement and some executive and corporate services, including corporate communications.

Treasury deputy secretary Peter Mersi says international experience suggests savings of 15-30 percent might be achieved through consolidation and outsourcing. A briefing document said private sector productivity had been improving at the rate of 2 percent a year, while public sector productivity was flat or declining worldwide.

But Mersi says estimates of cost savings need to be treated with caution. The Treasury does not yet know what the public service is spending on these services or whether it may already be getting value for money.

"We may conclude that the best business decision is to continue to provide many of these services in-house with our existing technology."

Mersi says some confusion may have arisen about the Treasury's intentions, as it was considering seeking a single contractor or consortium to help benchmark the performance of a range of agencies — against one another and their peers overseas — and help Treasury draw up a business case setting out options.

That did not mean it was set on contracting single providers to carry out functions for the public service.

Treasury expects to find out next month whether it will receive funding for the benchmarking exercise and business case, he says. "I would have thought [we] could do this certainly for less than a couple of million."

If it gets the go-ahead, Treasury is scheduled to submit options for reform to the Cabinet in March or April, though Mr Mersi says that may be optimistic. The business case would need to compare at least three options: business process outsourcing, government-run shared services and hybrid "centres of expertise" — plus any combinations.

NZICT chief executive Brett O'Riley says the industry would be concerned about the potential impact on smaller service suppliers if work was ultimately outsourced to single providers.

"Because the government is such a significant ICT spender, where they place that spend is going to have quite an impact on industry development."

O'Riley says the industry body prefers the approach taken in Australia, where government agencies can buy from an approved panel of providers, streamlining procurement but also creating a marketplace for suppliers that have new technology to sell.

"We are all keen on making the public service more productive, but we would like to understand what the business requirement is before we jump right to the solution. The risks are that you stifle innovation.

"Concentrating some of this procurement around single providers in an environment where technology is changing so dramatically, we think is quite dangerous."

Bennett Medary, managing director of Auckland IT firm the Simpl Group, says shared services make sense.

"Payroll sounds to me like something that could easily be shared as a common service and if there are differences as to how payroll is done between departments, you would have to ask why."

But he says large corporations that had embraced outsourcing often had regrets. "If you have open conversations with the chief information officers of major corporations who have engaged in significant outsourcing over the past 10 years, they will tell you it is all about execution", but the public service was inexperienced in that regard.

Medary fears the government could repeat the mistakes of the private sector if it treated the initiative as a "procurement exercise". Most outsourcing contracts were inflexible. The result was organisations could become "very efficient at what they wanted to do yesterday" and unresponsive to change.

"Even today major corporations and outsourcing partners are struggling to overcome this issue. Outsourcing is not the great panacea people thought it was. Although it feels good on the first day, it creates huge opportunity costs for the business going forward, that the business then has to buy its way out of."

Medary says IBM, Hewlett-Packard, Telecom's Gen-i and New Zealand-owned Datacom are the only businesses that could realistically compete for work if entire functions were outsourced to single providers. The flipside to any savings would be the impact on the depth and breadth of the indigenous IT industry.

One senior industry executive says the Treasury initiative is likely to be greeted with a degree of scepticism.

"These things haven't got a terribly good history. It is so hard to get more than one government department to do anything and the cost of change is enormous. Just look at the Government Shared Network."

Mersi counters that the fiscal environment is making the public service much more focused on what it is able to deliver.

Finance Minister Bill English, meanwhile, took a swipe at the number of government websites, saying there were more than 600 ".govt.nz" sites by some counts. He also suggested a "single IT window" into tax and income support services.

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