Co-written by Sym Gardiner
As part of the public sector reforms of the 1980s the central planning and control functions of departments such as the State Services Commission and the Treasury were reduced and the responsibilities of departmental chief executives were increased.
The intention of this change was to put responsibility for decision-making about the purchase of inputs fairly and squarely with the chief executive, who was accountable to the minister and Cabinet for the delivery of outputs being purchased from the department by the government.
From the perspective of the department the ability to make choices about quantity, quality timeliness and cost appropriate for the department this makes perfect sense. If the chief executive is to be held accountable for the delivery of outputs then the chief executive must have control over the inputs. The changes applied not only to IT inputs but resulted in the abolition of the control functions of the Government Stores Board and to greater delegation from the State Services Commission in respect of staffing and industrial matters.
From time to time disquiet has been expressed about the degree of autonomy exercised by departmental and crown entity chief executives. The Logan report of 1992 for instance discusses the importance of comparing and ranking investment decisions across the whole of the government sector, not just within departmental budgets. The report also talks at length about the need for strategic decisions and guidelines to be developed centrally to ensure that departmental outcomes are consistent, rather than conflicting.
Michael Wintringham, the current State Services Commissioner, has raised similar issues in the 1999 State Services Commission Annual Report. The Commissioner raised the issue of striking "...a better balance between central control and devolved decision making.". This was in light of the numerous instances of embarrassing decisions being made about senior public sector employee contract conditions and a realisation that a number of outcomes sought by individual departments were in conflict with the desired outcomes of other departments.
Recent purchase decisions made by a number of departments and Crown entities suggest that a new twist is about to take place in IT purchasing, the outsourcing to the 3rd World of the design and construction of custom built software, and this is the subject of this essay.
The IT industry in New Zealand is relatively small by international standards. It comprises a number of major multi-internationals head-quartered mainly in the US such as Microsoft and Compaq, some major New Zealand companies including Datacom, a plethora of resellers dealing mainly with desktop equipment and packaged software, and a range of consultancies and small scale developers.
Datacom is in fact one of the largest IT companies in New Zealand and the largest New Zealand owned IT company. Its revenues are approximately $200million, it employs 1,250 staff of whom 850 are in New Zealand. The spread of skills of its New Zealand based staff includes 200 software developers, 200 systems and network managers, 200 software engineers and 250 business process outsourcing people (payroll, registry and call centres). We see a lot of what is happening in New Zealand business and the public sector.
The public perception of the IT industry is of imported hardware and packaged software, in fact this is a very significant portion of the total value of the industry and one in which the local IT industry can 'add value' only in distribution and implementation.
In recent years many of the multi-national companies producing the hardware and packaged software sold in New Zealand have moved much of their productive capacity to the 3rd World to get access to cheap labour. While this had added employment opportunities to the 3rd World it has reduced employment in the higher cost countries where the businesses are centred, and the shareholders located.
Management consultancy arms of accountancy firms are now "partnering" with these 3rd World developers to front for development work in countries like New Zealand. This must be of real concern to the New Zealand Government. First because of the 'conflict of interest' that is taking place in respects of independent auditing, and second that the temporary alliances of international partners are unlikely hold up to the stresses and strains of business. This has the potential to leave government stranded mid programme with teams unable to provide on-going development.
Custom built software requires close work between client and developer, especially during design, testing and implementation. Best practice is to fuse the development team and the client into single effective unit for the life of the project, and scale that down but keep it in place beyond the project.
Successful developers and project sponsors in both New Zealand and elsewhere, both public sector and private sector stress the importance of long running 'partnerships' rather than opportunistic 'spot purchasing'.
The conventional wisdom of selecting the best proposal on the basis of balance sheet strength, a proven team, established methodology, knowledge with the particular tools and good reference sites still stands. The embarrassment of having to explain the selection of a 'one man band', with a 'super-duper price' but no track record, employing staff off the street to fill the team usually, but not always, guides the client towards common sense.
Contracting with strangers, through third parties, poses significant business and reputation risks that government chief executives may consider to be within their delegated mandate, but will gain them no thanks from their minister or the Prime Minister when the project fails. The belief that a 'cast–iron contract' provides a guarantee of success, or the money back, is a fallacy that departmental solicitors should address.
In this essay we will comment on the issues of the economic and strategic damage that outsourcing to the 3rd World may do to the public sector, we will explore the micro-macro issues of the CEO decision making powers, look at options that other industrially developed economies apply, and explore some of the New Zealand strategic responses that could be made to the threat from the 3rd World partnership with the multi-nationals.
Lessons From The Past
Prior to the commercialisation, corporatisation and privatisation of the Computer Services Division of the State Services Commission, the New Zealand Government took a central position in IT. The parcel of policies were explicit:
- The SSC had a central role in the planning and control of IT.
- The SSC had a leadership role in custom built software and in IT outsourcing with parcels of clients clustered around management teams with the knowledge, skill and experience to deliver the services. For example IRD, DSW and Valuation were clustered at Pipitea Computer Centre; Police, Transport and Justice at the Wanganui Computer Centre, Treasury accounting and the Education and Government payrolls at Cumberland House Computer Centre.
- The SSC has made long-term strategic alignments with particular technologies. For example Burroughs at Pipitea, IBM at Cumberland and Vogel, ICL at Trentham and the Department of Statistics, Unisys at Wanganui.
There were problems with these operations but generally these were problems with the ability of the generation of software technology, rather than a failing of the strategy.
With insufficient thought, in the 1980s the Government not only privatised but deregulated, and thereby :
- Did away with central planning and control of IT
- Broke up the software communities it had established
- Broke up the strategic technology alliances it had established
And permitted a 'free for all' in IT for a decade in which the lack of central policy leadership has left several major IT development needs unmet.
How The New Zealand IT Sector Should Look Today
The New Zealand Government has an interest in the strong IT industry in New Zealand both from a purchaser of software perspective, and from an economic/employment perspective. Every job that is lost from the high knowledge/high value end of the market will cost 1-2 support service jobs in the New Zealand economy.
The New Zealand Government asserts that it is concerned to promote both IT industry development and regional economic development. Central to that assertion is the belief that the work is necessary for New Zealand and that it has the potential to reduce foreign exchange pressure as the result of imported services and to develop into an export industry.
The ability to develop systems and IT support structures and make a critical mass of applications such as call centres, technical help desks and internet applications requires more than lip-service from Government.
The macro benefits of a vibrant and expanding industry, that can sell IT services into the US and Australian market and provide the New Zealand government with a secure, stable and knowledgeable supplier of systems needed to be assessed. Micro decisions on price need to be weighed up in this overall context.
In the late 1980s the conventional economic wisdom in New Zealand was that markets should be 'free' with open access to international markets for New Zealand firms. The New Zealand Government de-regulated ahead of its trading partners and found that it did not have access to their markets and was wide open to importation from the 3rd World manufacturers.
That a dreadful error of political and economic judgment was made has not only not been learned but the mistake may about to be replicated. This exposure of the emergent New Zealand IT industry to attack by multi-national companies, exploiting the 3rd World and the New Zealand market for their own gain does not yet have the priority that it deserves in this governments agenda.
The New Zealand IT industry employs people in New Zealand and pays taxes here in New Zealand. If the New Zealand Government signals that 3rd World prices are needed to win its software development assignments then the only rational response for the New Zealand industry is to re-locate software development capability to Malaysia and Indonesia.
The loss of Kiwi jobs to the 3rd World does not contribute significantly to those countries as 'back door aid' first because of the enormous size of these markets and second because they are effectively 'dual economies' in which the lives of the urban elite and the rural impoverished have no real connection.
How Do Other 'Developed' Countries Address This?
If New Zealand is experiencing these problems you would expect that countries who are 'fatter fish' would be frying. Yet this does not seem to be the case.
Other developed countries have not taken such an ideologically driven approach as New Zealand has in awarding contracts. A more complex or macro mix of factors, with price as one of them, are assessed when awarding a contract.
The United States
The United States has explicit policies that require any projects or organisations using federal funds to explicitly favour local products or services. This approach is undertaken in a wide variety of areas including construction, raw product purchases, transportation and services.
The Buy America Act is an explicit piece of legislation that favours purchases from American companies and defines what an 'American company' is. The Davis – Bacon Act requires contractors on federal funded projects who use non-American labour to pay American minimum wages. The United States Maritime regulations require that materials for federally funded projects are carried by US registered and owned ships. The Intermodal Surface Transportation Efficiency Act requires that trains in the US be produced in the US.
While the US is held up as a bastion of free trade, it is pragmatic in its promotion support and development of its own industry with its federal expenditure.
Australia has a different approach from the United States. Australia operates a two-tiered approach to promoting its local industry. The Competitive Tendering and Contract Branch of the federal government operates a scheme called the Endorsed Supplier Arrangement. This scheme requires all suppliers to government organisations to be 'endorsed'. Rigorous endorsement requirements are specified which encourage organisations to locate in Australia.
In addition a number of states operate explicit policies that favour local suppliers for government expenditure. In NSW, Queensland and Western Australia a tender by a non-local supplier must beat the tender by the local supplier by a set percentage. These percentages range from 5–10%.
Britain operates a similar system of centralised purchasing as Australia. Britain has a number of organisations that purchase centrally on behalf of departments. These include 'The Buying Agency', the CCTA and the Government Purchasing Agency.
While departments are able to purchase independently they are strongly encouraged to use these central agencies through price and risk mitigation factors. These agencies allow government departments to enjoy large price and service benefits by contracting one supplier to supply the whole government service.
Government is more than just a conglomerate of 350 output-producing entities (48 departments, 39 TEI, 24 hospitals, 17 SOEs 80 TLAs and 150 odd miscellaneous entities). The government in both its tax (central) and rate (local) collection role, and its role in health, education, welfare and policing is pervasive in New Zealand.
What it purchases and who it purchases it from effects the quality of life in New Zealand. Purchasing off-shore creates foreign exchange pressure, and takes jobs from New Zealand.
The strategic purchasing of IT by the Computer Services Division of the State Services Commission created significant synergies and contributed towards risk management across the public service. There were problems with the application of these strategies but the commercialisation, corporatisation and privatisation of CSD resulted in the 'baby being thrown out with the bath water'.
Leading industrial economies ensure only fair competition impacts of their industries, the fact that the 'open markets' policies have been over zealously applied in New Zealand needs to be recognised.
Government should carefully define 'value for money' in IT purchasing. They should also recognise the trade off between the short term and the long-term goals.
Value for Money should be defined by approaches like 'Function Point' analysis. Essentially this approach measures the output and productivity of the development. If a New Zealand software developer delivers higher productivity in terms of a function point count then a foreign based competitor should not be allowed to use a 3rd World salary differential to undermine the new Zealand firm.
The trade off between long-term economic development and short-term expenditure saving goals should also be recognised. The leakage of foreign exchange and the loss of support jobs in the New Zealand economy must be taken into account. At its crudest level firms that pay taxes and employ people in New Zealand have a legitimate claim to preferential treatment.
Considering the high level of taxes in New Zealand and the policy commitment by government to keep high quality jobs in New Zealand the combination of these factors could accounts for a 33%-50% loading on the off-shore price in favour of a New Zealand based supplier.
If a New Zealand fronted, but 3rd World based development can beat this, on a function point count by 33%-50% then they deserve to win and the New Zealand Government is better off with them. If not then the combined benefits of economic and industry development, employment and foreign exchange savings must point departmental CEOs to chose to partner with New Zealand based and owned IT companies for their IT needs.
Review of State Sector Reforms, SSC, 29 November 1991
www.hm-treasury.gov.uk web site, Procurement Guidelines
www.dot.gov web site, Buy America Requirements
ww.ctc.gov.au web site, Various papers on Endorsed Supplier Arrangements
Strategic Sourcing of Information Systems : Perspectives and Practices, edited by Leslie Willcocks and Mary Lacity, Wiley 1997
www.atip.or.jp web site, Various paper
State Services Commission Annual Report 1999
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.