Outsourcing:

1. Outsourcing: Preferred option or last resort? May 5, 2008

2. Outsourcing A definition: �. . .the practice whereby governments contract with private sector providers for the provision of services to government ministries/agencies, or directly to citizens on behalf of the government. In most cases, these services were previously performed in-house by the respective ministry or agency.� A differentiation: �Public-private partnerships�/PPPs refer to arrangements where the private sector supplies infrastructure assets and services traditionally provided by government. --sources: OECD/IBM and IMF

3. Outsourcing: Experience to date What activities or functions? �blue collar� support services �back-office� functions �core government� functions

4. Outsourcing: Experience to date What activities or functions? �blue collar� support services cargo unpack/repack and associated services records management, mail and distribution services facilities management and maintenance

5. Outsourcing: Experience to date What activities or functions? �back office� support functions IT systems development, maintenance and operation pay and accounts administration cash management and associated banking services management of the Customs uniform, corporate wardrobe and protective clothing and equipment requirements fleet vehicle management (acquisition and maintenance) legal services internal audit security

6. Outsourcing: Experience to date What activities or functions? �core government� functions customs coastwatch aerial surveillance pre-shipment (PSI) or destination (DI) inspection price verifications and duty assessment non-intrusive inspection technology (scanning) technical standards compliance trade statistics compilation laboratory services program reform/modernization senior executive services operational management taxpayer audit

7. Outsourcing Motivation (private sector) Reduce costs (61%) Focus on core business (48%) Improve service (35%) Maintain competitive edge (11%) -source: 2004 survey by Institute of management and administration Motivation (public sector) Reduce costs Deter and detect corruption Focus on core business Improve service Knowledge Contract Operational expertise Staffing issues Capacity management Catalyst for change Public policy

8. Outsourcing Key issues (1) Determining the contract authority for government Materiality of the outsourced functions Choosing the right supplier/provider Legal and regulatory obligations Performance standards (service levels and targets) Confidentiality and security

9. Outsourcing Key issues (2) Business continuity management Monitoring and control Audit and inspection Dispute resolution Termination and transition

10. Outsourcing:Tips and traps (lessons learned) Outsourcing of public sector �core institutional� functions is inherently political, and cannot be viewed in a purely commercial framework In low capacity, post-conflict country context, outsourcing seldom reduces costs Government always maintains accountability for the quality and effectiveness of its services Outsource contracts need skillful negotiation and ongoing monitoring/management

11. Outsourcing: Tips and traps (lessons learned 2) Ex post reconciliations have been neglected or inadequately performed in PSI contracts Two Important Cost-Benefit Analysis Rules 1. Benefits are as important as costs. Even if an option may be quantifiably more expensive, it may still be the most effective choice 2. A project will be difficult to justify or support if the project lacks specific, measurable goals and consistent, reliable information. Management Costs Trap When comparing the costs of using external or internal resources, there must be agency management costs in both cases. Even if a vendor will be the �project manager,� agency resources must still be involved to ensure that the project meets the needs of the agency and that communication is occurring between the parties

12. Outsourcing: Tips and traps (lessons learned 3) Outsourcing Risk Poorly defined goals and requirements and a lack of outsourcing contract management knowledge are two of the top reasons for outsourcing failures. Independent Verification and Validation External sources may be considered to assist the agency in managing the complexity of an outsourcing arrangement. While these services represent additional outsourcing costs, they can enable the agency to reduce outsourcing risks and accomplish agency goals.

13. Outsourcing: Tips and traps (lessons learned 4) Vendor Selection Agency personnel should be sure that any agreement is entered into in accordance with applicable procurement laws. Three Rules for Vendor Relations Vendor business goals are and always will be different from that of the agency. While vendors can be valued partners with agencies, recognize that the agency�s priorities and needs will differ Recognize that external vendors will make money on the outsourcing agreement somewhere, or they would not be willing to sign. The better the requirements and the statement of work are, the better the relationship between agency and vendor

14. Outsourcing Tips and traps (lessons learned 5) Planning and Managing Transitions A transition plan and related costs are critical to a successful outsourcing arrangement. Plan for the transition from agency to vendor management or services. The plan should detail the costs involved in the transition process, and map the process by which the vendor becomes involved in the agency�s activities. Plan for changes in workflow that result from service changes in outsourcing contracts. End users will have expectations regarding how the change in services will affect them. Plan for the transition from one vendor to another or from a vendor back to the agency at the end of the contract. Transition periods can be painful for internal staff, vendor staff, and end users�and expensive for the agency�if a transition plan is not available to guide these efforts.

15. Outsourcing Tips and traps (lessons learned 6) Performance Reviews The performance review process should be kept separate from operational meetings. Performance reviews must focus specifically on success and performance issues, rather than the ongoing operational considerations that will otherwise tend to become the main topic of conversation. Managing the Renegotiation or End of the Contract Contract renegotiation is another element that is often ignored or minimized. Recognize at the beginning that the contract may change, or that the contract will end. The end-of-contract options are to: Re-sign with the vendor Work with another vendor Move to internal resource management Any of these options involves significant agency time, money, and difficulty. Transition costs will again occur in this situation.