Seminar on Latest Trends in Outsourcing and Innovation

1. Seminar on Latest Trends in Outsourcing and Innovation Outsourcing Review in Major Procuring Departments Ms Kitty Choi Head, Efficiency Unit 9 August 2006

2. Outline of Presentation • Background • Labour exploitation issue • Outsourcing effectiveness • Good outsourcing practices • Way forward

4. Outsourcing Policy Use the private sector to achieve value for money in delivery of public services where possible

5. Concerns on Outsourcing • Wide media coverage of contractor malpractices • Common concerns on contract preparation and management • Staffing issues • Union concerns • Impact on establishment and promotion • Contract management skills and efforts

6. The Outsourcing Review • Main study objective: to improve outsourcing effectiveness • To address issues and concerns faced by departments • To develop solutions/recommendations for participating departments • To draw wider lessons for dissemination • To establish objective data on outsourcing • To help find practical and cost-effective means of enforcing control over exploitation of non-skilled workers

7. The Outsourcing Review • Participating departments took up about 21% of total value of non-works contracts in 2004 • Outsourced services studied • Cleansing services • Security services • Horticultural maintenance services • Property management services • Sports centre management services

9. 2001 2002 2004 2005 2006 Service-wide Measures FC No. 3/2001 Marking scheme to take account of proposed wages and working hours • FC No. 3/2004 Mandatory requirements on tender assessment • Demerit Point System • Conviction records Standard Employment Contract FC No. 5/2004 Mandatory wage level FC No. 4/2006 Tightened mandatory requirements on tender assessment

10. Common Departmental Measures • Procuring departments • Posting notice on employment conditions • Interviewing workers • Checking payroll records • Deducting payment for wage shortfall • Setting up complaint / enquiry hotlines • Central investigation team • Enforcement departments • Stepped up enforcement by LD, ICAC, MPFA, etc

11. Extent of Problem • Departments under study

12. Extent of Problem • Convicted summons by Labour Department

13. Extent of Problem • Service-wide Demerit point statistics (for post-DPS contracts only) • DPS implemented for over 2 years • About 3,600 non-works contracts in 2004 • 17 demerit points awarded so far (including 5 cases under appeal) • 1 company debarred from tendering in the next 5 years

14. EU’s Observations – Extent of Problem • Problem seems under control • Current measures seem to work • The media, staff union and public may think differently

15. EU’s Observations – Effectiveness of Measures • Existing measures are generally effective except payroll check • Time consuming but not very effective • May spot technical errors / irregularities • Wilful contractors unlikely to submit incriminating records • Cannot detect wage rebate • If payroll checks are to be continued • Adopt a risk management approach to conduct sample checks • Don’t over-do it

16. EU’s Observations – Impact of Measures • On workers – better working conditions • Standard Employment Contract + Mandatory wage level • Generally higher wages • Vary among departments • From no significant change to +33% in wages

17. EU’s Observations – Impact of Measures • On departments • Generally raised contract price +17% for one dept.

18. Good Labour Protection Practices Identified • Centralise management information • Better understanding of extent of problem • Help formulate appropriate measures • Timely awareness, speedy response, directorate steer • Well-structured contract and robust tender evaluation • Attract capable tenderers • Help select honest and reputable contractors • Greatly reduce subsequent monitoring and enforcement effort

19. Good Labour Protection Practices Identified • Raising awareness on employment conditions • Posting notices on employment conditions in workplace • Briefing contractors and in-house staff • Partnership with enforcement agencies • Early detection of problematic cases • Timely advice on evidence gathering • Enable conviction of unscrupulous contractors

20. Suggested Additional Practices • Responsive complaint system • Proactive investigation of complaint cases • Build up confidence in department’s complaint handling system • Wage calculation • Online computer program for wage calculation • Prevent unnecessary complaints on wage exploitation • Risk management • Measures/effort commensurate with the extent of problem • Focus on bad apples

22. Outsourcing Achievements – FEHD Street cleansing services • Long outsourcing history • No formal mechanism to gauge public views but • Past survey • Staff opinion • Substantial cost saving achieved Higher cleanliness level achieved

23. Estate management and maintenance services Outsourcing Achievements – HD • Marked improvement in service quality • Increasing trend of tenant satisfaction level • Drove up service standard of in-house services

24. Estate management and maintenance services Outsourcing Achievements – HD • Cost saving • Substantial cost saving achieved

25. Outsourcing Achievements – GPA Property management services • Reformed outsourcing model in 2001-2002 • Steady increase in customer satisfaction level • Achieved cost savings

26. Cleansing, security and horticultural maintenance services Outsourcing Achievements – LCSD Sports centre management services • Long history of outsourcing • Significant cost saving achieved • Outsourced progressively since 2000 • Service quality largely maintained • Substantial cost saving achieved

27. Conclusion Clear evidence of improved quality of service and cost savings Competition from contractors has driven up the service standard of remaining in-house services

28. EU’s Observation - Outsourcing Effectiveness • General lack of documented data on outsourcing effectiveness • Business case documentation • Cost figures before and after outsourcing • Service delivery cost • Contract management cost • Service levels before and after outsourcing • User satisfaction levels and views

30. Good Outsourcing Practices Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Contract management • Relationship management • Performance monitoring • Review • others Tendering & selection • Tender evaluation

31. Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Contract Development • Centralised contract development • A central unit to develop standard contract terms and conditions • Benefits • Facilitate development of outsourcing expertise • More effective and efficient in preparing, processing and refining tenders • Maintain a consistent approach

32. Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Service Specifications • Outcome-based specifications • More outcome focus to encourage innovation and flexibility • Some input specifications inevitable • Department A adopts a performance-based approach and achieves the following benefits: • More customer focused • Both parties focus on ensuring delivery of quality services • Flexible deployment of resources by contractors • Reduced contract management effort

33. Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Service Specifications • Appropriate service levels • Avoid “gold-plated” service level specifications • Nonetheless, seek continuous improvement • Avoid under specifications

34. Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Contract Structuring • Bundle small contracts and related services • Benefits • Enjoy synergies and economies of scale  cost savings, improved service • Reduced tendering and contract management effort Dept. A • Large number of • Cleansing contracts • Security contracts • Property mgt. contracts 4 property mgt. contracts with more comprehensive services Estate mgt. and maintenance contracts covering cleansing, security, frontline tenancy mgt. and maintenance services Dept. B • Cleansing contracts • Security contracts

35. Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Commercial Arrangements • Encourage good performance • Link payment with performance level (Department A) • Min. 95% payment • 96% payment for 82% performance level • 97% payment for 84% performance level ... • 100% payment for >= 90% performance level • Extend contracts of good performers (Department B) • Invite contract renewal for performance exceeding pre-set level • Other departments may consider awarding a longer term contract with break clause(s) in between on achievement of performance targets for continuation of services

36. Contract preparation • Contract development • Service specifications • Contract structuring • Commercial arrangements Commercial Arrangements • Optimal risk allocation • Allocate risk to the party best able to manage it • Private sector best at managing operational and life-cycle risks • Mitigating price risk in longer term contracts • 2 departments have contracts with 3-year term + extension option • Adjust contract price annually according to CCPI movement • Adjust committed wage level annually by CCPI/NWI movement • Benefits • Reduce price risk to both departments and contractors •  more realistic bid price

37. Tendering & selection • Tender evaluation Tender Evaluation • Take due consideration of performance track records • Balance technical capability and price evaluation • Provide sufficient information to tenderers • Enhance transparency in tender evaluation

38. Contract management • Relationship management • Performance monitoring • Review • others Contract Management • Contractor relationship management (Department A) • Appreciate concerns and expectation of each others • Major issues be brought to the direct attention of top management • Collect views on outsourcing arrangements • Identify improvement opportunities • Timely rectification of contractual irregularities Annual tea gathering Tripartite meeting Operation meeting

39. Contract management • Relationship management • Performance monitoring • Review • others Contract Management • Self-reporting of performance • Department A requires contractors to submit performance reports • Involving service recipients • Department A: Take account of consumer satisfaction levels in considering contract extension • Department B: tenant satisfaction survey results form part of contractors’ performance scores

40. Contract management • Relationship management • Performance monitoring • Review • others Contract Management • Ongoing review (Department A) • Outsourcing arrangement constantly reviewed by • Working Group on Contract Management • Supplies Section, Contracts Unit, Outsourcing Section • Major improvements made • Standardisation of core terms and conditions and marking schemes • Alignment of service specifications • Bundling of contracts to achieve economies of scale • Establishment of a document library in Intranet • Coordinated approach in quest for further outsourcing

41. Contract management • Relationship management • Performance monitoring • Review • others Contract Management • Allow sufficient time for contract transition • Adopt partnership approach and provide sufficient support to contractors • Focus on monitoring performance • Adopt risk management approach • Maintain consistency and transparency in performance assessment

43. Challenges Ahead • Rising contract price • Outcome vs output • Contract management a new skill to acquire • How does outsourcing fit into the overall departmental strategic plan • Outsourcing vs staff commitment • Tendering criteria • Handling of surplus staff • Public perception on outsourcing

44. What’s Next • Disseminate good outsourcing practices • User guide to contract preparation and management • Outsourcing Survey 2006 • Training on contract preparation and management • New edition of Outsourcing Guide

45. The EU stands to help Contact us Help desk: 2165 7255 E-mail: euwm@eu.gov.hk Website: http://www.eu.gov.hk