Governments need to change the way they think about outsourcing if they expect to avoid repeating the mistakes of the past.

With major government IT outsourcing arrangements coming up for renewal and re-tendering it is worthwhile reflecting on the issues that will shape the success or failure of the next wave of outsourcing in Australian government circles.

The challenges lie in making sure that any future outsourcing is done properly and without unacceptable risk. We believe there are numerous lessons to be learned from the "first round" (and in some cases the second, third and fourth round) experience of IT outsourcing here and overseas. Albert Einstein once said that the definition of insanity is doing the same thing over and over again while expecting different results. We need better tools and approaches if we are to avoid the bad results of past IT outsourcing experiences.

A key theme of the Humphry Report was that government agencies should be given greater individual responsibility for determining outsourcing models and approaches, and in implementing outsourcing policies. Importantly, agencies and agency heads are now held accountable for achieving policy outcomes.

Our experience in this area reinforces the view that it is the elementary, almost self-evident, issues that often are not properly addressed and that either cause problems with outsourcing or lead to the possible gains being dissipated.

Take the failure to organise properly the planning for the services, their transition, implementation and delivery. It has been recognised since the earliest outsourcing experiences that properly defining the business/governmental need and then working out the best way of implementing this (if necessary through bundling and a distribution of service responsibilities between the customer and various contractors) is critical to success. Time and again, the failure to deal with these issues has been noted as one of the key trilogy of major indicators of likely success or failure in outsourced IT transactions - the other two being a failure to properly pre-qualify vendors and allowing finance, legal or vendor issues to overly dominate the process.

Managing Current Arrangements

One major issue relates to the ability of agencies to manage their current IT outsourcing contracts in order to achieve their contractual objectives. The Humphry Report found the centralised model for letting outsourcing contracts suffered from a lack of focus on the relevant agency's business, and on how those contracts would be managed. The key question is: how does an agency work with and manage its service provider to develop the right business focus?

To have a real chance of long-term success, outsourcing as a minimum requires each party to have a clear understanding of the agency's various activities (and underlying processes), the prioritisation to be given to these activities, a clear specification of what users need and value, the unequivocal commitment and support of senior management, and a project team that has substantial amounts of dedication, proactivity and vision.

The crucial starting point is the business need and how this will be best fulfilled during the relevant time frame. Reviewing the existing relationship, contract and service scope is but one part of the process. Equally critical is the task of assessing whether the contract contains the right business processes and payment (and other incentive) mechanisms to require/encourage the service provider to meet the agency's requirements. This requires a much broader perspective than we have so far seen.

This demands user liaison, contract review, discussion and "brainstorming" with service providers, and potentially, contractual renegotiation. We find it is often necessary or desirable to refocus or renegotiate outsourcing arrangements as relationships and business knowledge evolve, while ensuring you are not altering the risk allocation or the "value for money" equation of the deal. Time and persistence is needed. And as there are many ways to structure and manage outsourcing arrangements, you will probably need to seek advice from a range of experienced professionals, whether they are in-house or external to the agency, or preferably some mix of the two.

You also need the necessary expertise (both internal and external) to manage the contractual arrangement on the agency's behalf. The Humphry Report found some agencies may have insufficient numbers of trained and experienced staff - an issue that should be addressed as a matter of urgency. Most specialists in this area agree that outsourcing arrangements do not "run themselves", and indeed, require more sophisticated skills and management from each party to the transaction.

Future Outsourcing Issues

Then there is the power of agencies to take increased responsibility for their outsourcing arrangements. To this end, the lessons from past outsourcing experiences include:

• •ensuring that the "minimum requirements" outlined above of a successful outsourcing arrangement are met
• developing and running a market-testing process that is based around the specific agency's needs, funding and business priorities, and taking consideration of whether numerous smaller interlinking contracts may be more effective than a single overall one
• factoring into that market-testing process adequate planning and consultation cycles, adequate resourcing capability and realistic time frames
• paying particular attention to implementation and transition arrangements, particularly as agencies will be transferring from one provider to another
• instituting steps to identify (and, where appropriate, to screen) "loss leading" bids
• continually ensuring senior management and other stakeholder "buy-in"
• being more sophisticated and commercial in dealing with intellectual property rights (IPR)
• allowing the customer practical and effective options and rights to respond to performance problems
• designing and conducting due diligence processes that offer a full, accurate and meaningful understanding of the project - including, where possible, access to the "know-how" of the agency's current service providers, inspection of legacy systems, briefings on the agency's technology plans, and widespread access to users
• (last but certainly not least) developing specifications that are: output based (rather than a technical or functional solution); not over-specified or under-specified; developed from the "ground up", and not borrowed from another project; performance-based and can be easily measured in terms of performance and designed to provide the customer with adequate control, and the service provider with adequate certainty, over changes and developments to the underlying business.

There is no doubt in the short to medium term there will be major opportunities for agencies to improve the return from their IT outsourcing arrangements. It will be interesting to see if and how the opportunities outlined above are taken up. Failure to do so would, in our view, fulfil Einstein's test of insanity.

Paul Armarego and Richard Morrison are, respectively, partner and special counsel at legal firm Clayton Utz