Your speakers:

1. ICT Projects in government Challenges for procurement and contract management 26 April 2012 Your speakers: Sue Nolen Assistant Victorian Government Solicitor VGSO Erin Barlow Manager, Investigations, Victorian Ombudsman's Office Isabel Parsons Special Counsel VGSO

2. Key ChallengesSue Nolen

3. Key Challenges and reflections on the Ombudsman’s report • Procurement risks: reliance on vendor’s capacity to deliver, and viable subcontracts • Legislative requirements, public accountability • Managing stakeholders’ requirements and project governance

4. The Victorian Ombudsman’s investigation into ICT-enabled projects Erin Barlow, A/Principal Investigator

5. Session overview • ICT report • Background • Scope • Objectives and methodology • Conclusion • Recommendations • Questions

6. What is ICT? What is ICT-enabled? History of ICT failures: state, national and international level Ombudsman and Auditor-General reports on ICT Little signs of lessons learnt Ombudsman and Auditor-General agreed to investigate April 2011: Ombudsman commenced own motion investigation Conducted in consultation with the Victorian Auditor-General’s Office. Background

7. Examined 10 ICT-enabled projects: Link (Victoria Police) HealthSMART (Department of Health) myki (Transport Ticketing Authority) Registration and Licensing – RandL (VicRoads) Client Relationship Information System – CRIS (Department of Human Services) Ultranet (Department of Education and Early Childhood Development) Integrated Courts Management System – ICMS (Department of Justice) Property and Laboratory Management – PALM (Victoria Police) HRAssist (Victoria Police) Housing Integrated Information Program – HIIP (Office of Housing). Scope

8. Objectives: determine whether the projects were over-budget and/or delayed and the reasons for this determine whether the ICT systems met the needs for which they were designed determine who should take responsibility for project failures determine what lessons can be learned. Methodology: investigators reviewed public documentation on ICT project failings/learnings investigators met with or interviewed over 100 people investigators conducted site visits to child protection, housing and education offices; hospitals; and the Supreme Court investigators reviewed extensive documentation relating to planning, procurement, project delivery and training. Investigation

9. Every one of the projects failed to meet expectations; most failed to meet delivery timelines; and all ran over budget. The latest estimated cost is significantly more than budgeted. Current estimate: $2.74 billion. The budget for DHS’s CRIS project increased by 272 per cent. If Link were to be completed it would cost over three times the original budget. There has also been significant wastage: VicRoads spent $50 million on RandL over three years – at the time of the report, the project had not made it past the design phase and was yet to receive funding for project delivery. Victoria Police spent $59 million on Link over five years – the project has now been cancelled and this money is lost. The additional money spent on these projects represents many foregone hospital beds, trains, police and child protection workers. Conclusions

10. Leadership, accountability and governance Roles and responsibilities for ICT‑enabled projects were often not clearly defined, acknowledged and accepted. Senior officers appeared reluctant to make critical decisions about projects. Many of the project steering committees did not have the requisite expertise. Many of the projects would have benefited from the Department of Treasury and Finance (DTF) taking a more pro-active role. The effectiveness of DTF’s Gateway Review process was limited by its reliance on agencies engaging in and being supportive of the process, which often was not the case. There was limited publicly available information about the ‘high-value and high-risk’ process and some witnesses from DTF and departments remained unclear about it. Five common themes

11. Planning In some cases, optimism bias led to costs and timelines being based upon hope, rather than evidence or comparisons with similar projects and in spite of advice from experts and vendors. Agencies often gave the government no choice other than to invest in the agency’s preferred option and failed to provide government with adequate advice to make an informed decision. Business cases for many of the projects were not updated throughout the life of the projects. In some cases, they were not read by key people. Insufficient attention was given to managing or mitigating risks. Five common themes

12. Funding Agencies felt the need to create ‘big vision’ projects to capture the government’s attention, which increased complexity and risk. In some cases the Budget and Expenditure Review Committee (BERC) only partially funded projects, but agencies failed to revise the scope of the project to fit within the allocated budget. Public announcement of major project funding decisions prior to business case development resulted in business cases being rushed and projects being ‘shoe-horned’ into the published funding ceiling. The costs and timelines of comparative projects were sometimes ignored. Projects funded internally have not been subject to the same level of scrutiny as BERC-funded projects. Agencies were unable to identify the cost of significant projects with any accuracy. Five common themes

13. Probity and procurement Agencies appeared to pay limited regard and expended minimal funds on probity advice and audit. Agency and probity practitioner responses to conflict of interest sometimes failed to recognise the importance of the perception of a conflict of interest. Agencies tended to purchase off-the-shelf systems and customise them to such a degree that the benefits were lost to government. The evidence suggests government should explore new procurement methods for ICT-enabled projects. Large vendors are well-versed and experienced in contract negotiations, putting relatively inexperienced government staff at a disadvantage. Five common themes

14. Project management Several agencies failed to act with enough urgency to address potential problems and in doing so allowed the issue to escalate. There is a shortage of skilled senior project managers with relevant ICT experience in government. To compensate, agencies often appoint expensive contractors or inexperienced public sector staff. Managing vendor and user relationships can be a complex exercise and agencies have adopted differing approaches to this problem with different degrees of success. Approaches to training staff were varied and not always effective. Five common themes

15. The framework within which agencies seek funds, manage and review projects needs to be improved. The scale of the problem suggests that significant ICT‑enabled projects should be treated as a special case at least until the bureaucracy is sufficiently experienced to handle these projects well. The Ombudsman developed a framework that builds on current guidance and advice from the Auditor‑General and DTF and provides a practical solution to many of the problems commonly encountered. The framework contains 42 recommendations based around the five common themes. The Ombudsman also made recommendations that suggest a way forward for each of the 10 projects. Recommendations

16. For all ICT-enabled projects over $20 million: Increasing the oversight and accountability of Ministers and secretaries. Enhancing the role and accountability of DTF. Capitalising on the value of Gateway, including making it mandatory. Requiring that agencies seek funding and undertake projects in stages. Waiting until the completion of the planning/procurement before announcing funding/timelines. Examining the ‘competitive dialogue’ process used in the United Kingdom for ICT procurement. Examining strategies to attract skilled ICT staff. Ensuring VGSO is briefed early and that it endorses all contracts. Recommendations

17. These problems are not limited to the Victorian public sector. There is no panacea. Arrangements would benefit from a review in two years time to ensure their effectiveness, ongoing relevance and practicability. Future review

18. Questions?

19. Legal issues for contract management in ICT ProjectsIsabel Parsons

20. Contract management themes in the Ombudsman's Report • Insufficient attention given to managing/mitigating risks • Challenges with heavy customisation or leading edge/untried systems • Failure to act with urgency to address problems/escalation • Complexities of managing vendor and user relationships • Reluctance of senior officers to make critical decisions

21. Principles of contract law • Common law of contract - principles of formation and construction • Implied obligations - cooperation, good faith • Constraints on exercising rights - election to continue, estoppel

22. A case study: GEC Marconi Systems v BHP Information Technology [2003] FCA 50 • Commonwealth procurement: Sub-contract between BHP-IT and GEC Marconi • Failure of DFAT to provide security device (STUBS), operation of change request CR3049 and subsequent activities • No amendment to the sub-contract • GEC Marconi faced significant losses on the project and sought to terminate • Many cross claims, including against DFAT for misleading and departure conduct

23. Key questions in GEC Marconi case • Had the sub-contract been varied to reflect CR3049? (No written agreement) • Had GEC Marconi elected to treat the contract as being on foot, rather than to terminate? • Did GEC Marconi’s conduct amount to repudiation of its obligations under the sub-contract, and was BHP-IT entitled to damages for breach?

24. Outcomes in GEC Marconi case • There had been a variation to the sub-contract – terms were identified from conduct and correspondence • GEC Marconi had elected to perform the sub-contract, including the STUBS variation, and was precluded from terminating for that breach • Court considered obligations of the parties to act in good faith

25. Alston v Yokogama Australia(No. 7) [2012] SASC 49 • Construction contract case • Considered implied duties of parties to co-operate with each other and obligation of good faith in the context of interdependencies in work to be performed

26. Good faith and dispute resolution • ‘Meet and discuss in good faith with a view to resolving dispute’ (VGPB) • ‘Use reasonable commercial efforts to resolve by negotiation’ (GITC) • Express obligation: United Group Rail Services Ltd v Rail Corporation NSW [2008] NSWSC 1364 and [2009] NSWCA 177

27. Good faith and termination for convenience • Kellogg Brown & Root Pty Ltd v Australian Aerospace Ltd [2007] VSC 200 – may terminate by notice in writing • Solution 1 Pty Ltd v Optus Networks Pty Limited & Ors [2010] NSWSC 1060 – for any reason and at any time in Optus’ absolute discretion • Risks in using these clauses to change supplier, or to terminate for non-performance

28. From contract to contract management • Don’t ‘put the contract in the bottom drawer’ • Comply with VGPB Contract Management Policy • Follow appropriate methodology • Adapt resources – VGPB Category Management Materials, Gateway Review Gate 5 Readiness for Service • VAGO 2008 ‘Investing Smarter in Public Sector ICT: Turning Principles into Practice’

29. Change management and variations • Have you created a new contract without really trying? • Correspondence, change orders and conduct may vary your contract • Deprives State of benefit of key provisions and ongoing rights • Document this carefully, with clear reservations of rights • Use deeds of variation

30. Killing projects – termination ‘early and often’ • Prior to acceptance - is this realistic? • Is termination an option for the State – Critical systems or services • Termination for convenience or breach? • State is vulnerable to lengthy, complex and costly litigation

31. Reaction time – keeping your options open • For how long – stakeholder management and senior decision maker involvement is critical • Effective contract management informs good decision making • What happens during the delay determines whether rights are lost • Evasive statements to contractors or lack of co-operation may lead to claims against the State

32. Questions?