On the Road Again

VicRoads is leading the charge towards a new era of government outsourcing.

According to research firm Gartner, outsourcing is a practice in transition. While the majority of outsourcing contracts are what Gartner describes as "utility" operations, covering bread and butter IT activities with little if any value-add, there is a move to greater and stronger relationship building and a requirement for greater and more creative input from the outsourcer.

Simultaneously, there is a move to "selective" outsourcing - meaning a range of contracts and, presumably, of contractors - as opposed to the "big bang" approach of comprehensive outsourcing to a single supplier.

Speaking at a Gartner conference on outsourcing in July this year, Linda Cohen, managing vice president for Gartner's Global IT Management Sector, said that "many existing relationships [between client and outsourcer] are deteriorating", and she blames this, at least in part, on the fact that "contracts in existence can't respond to current uncertainty and change".

This means that second generation clients are looking to re-evaluate their outsourcing arrangements, often from the ground up, assessing what and how much to outsource (or whether to outsource at all), what to bring back into the organisation, the number and type of outsourcers used, changes to pricing structures and the measures used to assess performance, and the very nature of the relationships created.

These changes typify the moves that the Roads Corporation of Victoria (more commonly called VicRoads) is currently going through. And while this is still a work in progress, if it achieves what it sets out in its initial manifesto, VicRoads will represent the epitome of where outsourcing is apparently going and, just as importantly, where it has come from and why that past state is no longer enough.

The Story So Far

VicRoads is responsible for developing and implementing road safety strategies and promoting road accident prevention practices in the community; managing the arterial road network, including maintaining, upgrading and extending the declared road network; and providing vehicle registration and driver licensing services, including new registration and licensing, renewals and transfers. Think RTA in NSW, Queensland Transport, Main Roads in WA and so on.

In 1994, as part of a joint activity with Public Transport Corporation of Victoria, VicRoads entered into a contract with IBM Global Services, then called ISSC. That contract has run for nine years. In addition, "we went to market for best-of-breed applications development", says John McNally, VicRoads' CIO. "As a consequence we ended up with a number of third parties, with principally IBM Global delivering our IT services."

The outsourcing contracts with IBM covered:

  • hosting of VicRoads' main transaction systems for registration and licensing
  • hosting of its electronic service delivery capability
  • hosting of its financials and HR using Mincom's Ellipse suite
  • WAN and LAN services
  • applications support for the registration and licensing and electronic service delivery systems
  • some help desk activity
  • a range of back-office applications, such as its traffic volume and road crash information system
  • Other significant outsourcing contracts include:

  • a licensing system with ongoing support provided by DMR
  • voice communications components with Telstra and Optus
  • a VPN for the traffic signals and Intelligent Transport System with Telstra
  • Desktops, however, are managed internally. "It's probably the one area of IT that's understood by everybody," McNally says. "They can see it, they can feel it and it's certainly the one part that's very close to people in the organisation. We refresh the hardware every four years - 25 per cent per year - and the SOE and the apps servers that sit behind that SOE, which means our Lotus Notes environment. There's a mixture of stories about whether you can do better in-house or outsourced, but we made a determination to hang onto it."

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    Annually, VicRoads spends about $23 million on outsourcing, out of a total IT spend of $50 to $60 million. IBM was the first of the outsourcers, and the largest - about $18 million per annum. McNally also thinks VicRoads was one of IBM's first outsourcing clients in Australia.

    Changes Afoot

    VicRoads started looking at alternatives in about March last year.

    "The first thing we looked at was the need to develop an IT strategy," McNally says. "We do that about every three years. We really needed to be able to reaffirm to government that we had a competitive arrangement on the ground. A subset of that strategy was a sourcing plan, and a desire to test the marketplace and introduce some competition to that $18 million worth of business."

    So what were the key objectives?

    "We wanted competition. We felt that dividing it and not having all of our eggs in one basket would open up some alternative solutions. And our early investigations suggested that by doing that we might well attract some considerable benefits to the organisation in price reductions and in niche providers giving a higher quality service. "Price is the most important element - definitely price," Mc Nally says.

    While not specifically going through budget pressures, the organisation needs to achieve ? and to be seen to achieve ? productivity improvements. "It's about using public money in the most effective way," McNally continues.

    "We're replacing pretty well all of the outsourcing contracts. We looked at all the big [functions] and we said, how do they logically group?" Which means VicRoads will be looking at contracts covering the outsourcing of the following discrete functions:

  • a registration and licensing and electronic service delivery bundle
  • an ERP service bundle
  • a managed network services bundle
  • a desktop services bundle
  • "The desktop and all of the hardware to do with printers and LAN servers and our Lotus Notes servers will be delivered internally by a semi-commercialised entity that sits within our commercial services division - not within ITT."

    The other three bundles went out to the marketplace in March this year, calling for separate expressions of interest, with separate tenders and contract documents expected at the end of this year. The final decisions will be announced in the first half of 2004. There is nothing to preclude one company getting more than one bundle, and McNally says he would be "happy to receive additional discounts" if that were to happen.

    Why the Change?

    McNally is not entirely disenchanted with the current arrangements. But he wants more than he has received in the past. "In terms of the underlying performance requirements that were written in 1993-94, IBM have met most of those and exceeded some.

    "However, the world has moved on. We are looking for a relationship that brings change to the table, that stimulates us to think about other things.

    "In the past, we have found it difficult to introduce any change into the equation in a way where we felt comfortable we were meeting the value-for-money proposition. It has taken us a lot longer than we might have wanted, which means we have suffered loss of benefit because of deferred implementation of systems." He cites VicRoads' business-to-business electronic delivery as an example of a function that took longer to deliver than expected.

    He says it has also been difficult to introduce third parties into the equation.

    "We've gone to the market and got competitive bids for a new system selection and it might be for several hundred thousand dollars. But then we've had no method of predicting how much it was going to cost to introduce that into the current hosting environment." He says they have been surprised to find the costs involved in introducing a new system have at times been a lot more than the new system itself.

    "Traditional outsourcing agreements have been very much focused around input. What we understand to sit behind that is [the outsourcer's] remuneration agenda based on revenue growth and profit.

    "Nobody came to us and said: 'Hey, we can make your program run sweeter. And by the way, it's going to reduce what are called your service unit counts by half a million dollars a year.'"

    According to most analysts, it is often in the contract where an outsourcing relationship breaks down. McNally admits that the contract they developed 10 years ago did little to encourage the sort of value-add he now wants.

    Internal Suppliers Internal Control

    Gartner's Cohen warns that bringing functions back in-house can be "really, really difficult and expensive". Nevertheless, that is what VicRoads had done in the past, and what it intends to do in the future.

    When VicRoads first outsourced, it pushed the help desk to IBM. However, it became apparent that it needed to have the help desk and service desk close to the customer. "We weren't getting that link that we needed, that understanding. And we were paying a premium. So we in-sourced that about four years ago into a call centre that we already had ? the infrastructure was there for our registration and licensing business. We skilled up a small group within that, leveraging off the infrastructure to provide an internal help desk."

    McNally plans to grow that group into a more mature service desk to assist in managing the three new outsourced bundles, which may turn out to be a challenge should they end up with three different outsourcers.

    Currently VicRoads has three people supporting the contract. It will double that to include a problem coordinator, a change manager and one person for each of the critical bundles. McNally also expects to beef up his service desk capability, which may mean some additional resources or it could mean tools and different skill sets. "I am creating a CIO group, and that is where we will be doing the vendor management."

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    Greg Chambers is McNally's project manager for IT sourcing. "That whole service management area is going to be different," he says. "How well that happens is going to be a big determinant of the health of the relationship.

    "We're very much putting ourselves at the centre of that [managing multiple relationships]. By default we have been there a lot of this time anyway - even the middleman between IBM and their subcontractor on occasions. So we're taking that as our role and skilling ourselves up to manage that."

    And that will hopefully end up being a two-way street. "As well as an outward-facing group of contract managers," Chambers says, "there is also an inward-facing group in John's new department who are there to manage the relationship with the individual business users. They're picking up on where the business is going, translating that into how IT can respond, and working with the outward-facing group in turning that into reality."

    New Relationships New Measures

    So what does McNally expect out of his new outsourcing relationships?

    "Firstly, we are changing the parameters on which we are paying for this service. Our pricing model [will be based on] what we define as a meaningful output to the business. This will impact on the relationship.

    "Under the outputs-based model, vendors can reap the rewards of improvements in their own service efficiency, while VicRoads' costs fall in response to improvements in the way the business uses those services.

    "We want to pay for what we call 'available hours'. We don't care how many MIPS they use, we don't care how many people they have pedalling behind this. What we want is to have the application available during these service windows with these levels of response time, et cetera. I'm hearing that that's a significant move from where the big players in the industry want to be.

    "The second element," McNally continues, "is to do with third-party involvement and applications development. We are clearly saying the prime contractors will have a role with us in third-party development, but they won't bid for third-party contracts. What they will do is tell us up front, when they put their prices on the table, what fee they will charge us to manage who we select as a third party - that will be something like a percentage of cost.

    "We also want the vendor to give us an indication of the price they're going to charge based on the complexity of the application for integrating the end result into their hosting world."

    McNally also wants independent review processes, "so that up front we don't just accept what the provider says is the size of the task, we have an independent panel which will give us, very early in the piece, some knowledge of what it's going to cost us to implement the change.

    "Change, I know, but the vendors have shown that they understand the outputs-based approach and that they are keen to move in that direction and that they see this as an opportunity to shape their future services."

    Continuing on the Outsourcing Path

    McNally is a strong advocate of outsourcing, although that was not always the case.

    "I ran a group called IT Business Solutions with about 80 permanent staff and 20 or 30 contract staff doing systems development and applications maintenance and support. When outsourcing first came along, I thought my whole life was stuffed. Somebody had pulled the rug out from under me.

    "Nine years on, I wouldn't go near trying to run a computer centre. I wouldn't attempt to maintain a group of systems developers and maintainers in an organisation of this size. You don't have the smoothness of workflow, the predictability of it, and you're not big enough to maintain the level of investment in staff to ensure they are what I'd call state-of-the-art.

    "There are a whole lot of things you get through economies of scale that are in the hosting world and the apps support world that you can't deliver internally. You don't save a lot of money. In some cases you probably spend more. But then you get some very clear lines of responsibility and accountability so somewhere down the track you should end up with better benefits."

    Second time around, McNally and his team are developing a broader approach that they plan - rather than hope - will pay off for the organisation.

    Copyright © 2003 IDG Communications, Inc.

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