finance.gov.au

Contact and help

Home >> Publications >> ICT Procurement >> Guide to ICT Sourcing >> Phase II: Decide Sourcing Strategy

Guide to ICT Sourcing - Phase II: Decide Sourcing Strategy

Phase II: Decide Sourcing Strategy

Contents of this Chapter:

Agencies begin Phase II knowing that they need to consider a change to their current sourcing strategy, be it self-managed, single or multi-sourced. The aim of this phase is to decide precisely the type of sourcing solution agencies should aim to establish. To do this, agencies need to do three things:

Assess Sourcing Options

In this module, agencies will disaggregate their ICT and identify components that would be suitable for self-managed or external sourcing. For components suitable for external sourcing, they will look for opportunities to bundle, factoring in the comparative risks and benefits associated with doing so. They will also decide which type of vendor relationship they need, and will consider opportunities to form sourcing alliances with other agencies.

Agencies will conclude this module by performing strategic and economic assessments of their various sourcing options, and selecting the best one.

Disaggregate ICT and build broad options

In order to map out all possible sourcing options, ICT should be disaggregated along two dimensions – business categories, as described earlier under Business Alignment in Phase I (vital, duty-bound, and discretionary and support), and ICT functions. These functions are often broken down along the following lines:

The resulting matrix should help agencies narrow down their broad sourcing options (Figure 13). Figure 13 is only indicative. Each agency should have its own understanding of what a ‘vital’ business activity is, and whether it could tolerate an external vendor providing a service associated with it.

Figure 13: Disaggregate ICT and build broad options

Disaggregate ICT and build broad options

Figure 13 provides a framework for thinking about the link between business categories and ICT needs, and how that will affect development of agencies’ sourcing strategies. It is a starting point for determining which activities could be outsourced; it is not the final answer.

Agencies are more likely to consider external solutions when the business risk for a particular ICT activity is less than vital, and when:

Identify opportunities to bundle ICT components

Agencies that have determined that some of their ICT functions should be managed externally need to assess whether there are opportunities to bundle some functions. This will determine whether the agency should pursue single or multi-sourcing – if all the elements suitable for external sourcing can be bundled into one group, single sourcing is the appropriate strategy; multiple bundles lead to a multi-sourcing strategy.

In general, single sourcing is better suited to agencies in which ICT is not highly strategic or customised, or to small agencies, because it is easier to manage. These arrangements only require a single vendor negotiation. The vendor assumes risks, even for ICT functions where it is not a specialist, and it may subcontract some functions to other vendors (for which the agency potentially pays a management margin). This is likely to be more cost effective for small agencies than managing multiple vendors.

In general, multi-sourcing is better suited to larger agencies or agencies where some ICT functions are highly specific or strategic. It provides greater control and delivers higher performance than single sourcing. However, it also requires multiple vendor negotiations and, although risks can be shared across multiple vendors, the agency bears the coordination risk. To mitigate integration and management costs, an agency may choose to designate one vendor as the prime contractor. The prime contractor would assume responsibility for coordinating and managing other vendors.

The major benefit of multi-sourcing over single sourcing is clear: it allows agencies to access best-of-breed services across their ICT components. But this model also poses challenges. In particular, it results in significantly increased complexity – as agencies must be able to manage several vendors at once – and demands greater expertise in governing stakeholders with different motivations. The cost of coordination/governance should be a major criterion for deciding whether to separate functions or to bundle them (this factor, along with other criteria, will be measured later in this module, when agencies assess the economic and strategic benefits of potential sourcing strategies).

Determine the type of vendor relationship needed

Figure 14: Determine the type of vendor relationship needed

Determine the type of vendor relationship needed

On one end of the spectrum are commodity relationships, which are generally used when the priority is to control or reduce costs, rather than develop innovative ways for technology to improve performance. On the other end are partner relationships that are based on in-depth collaboration. This suits ICT components that are strategic, particularly where the technology needs to be customised and can play a key role in improving business performance. For these components, receiving the highest quality ICT service takes precedence over cost savings. Between these model relationships are varying degrees of engagement, all of which involve different trade-offs between the elements that determine the real value of the arrangement.

Partnerships with other agencies

Consider undertaking alliances with other agencies

Small and medium sized agencies wishing to adopt a single or multi-sourcing model may want to form partnerships with similar agencies for some or all aspects of the lifecycle (such as negotiation, contract development, etc.). The two main benefits of such alliances are shared costs and heightened negotiating power during development of the sourcing strategy, implementation of the vendor selection process, or even during management of the contract. This does not necessarily mean agencies share the same contract; they can have their own.

Alliances between agencies have evolved into Panel and Multi-Use List arrangements. These are described in Finance’s Guidance on Mandatory Procurement Procedures (MPPs) document in Appendices A and B. Please note that the Endorsed Supplier Arrangement (ESA) referred to in the MPPs is no longer active; see Mandatory Procurement Procedures.

We have defined two types of alliance that agencies may want to consider:

Table 1: Comparison of alliance options

Comparison of alliance options

Back to top

Assess Options Strategically and Economically

At this stage, agencies should have an understanding of the sourcing options. To choose the most suitable one, they need to conduct a strategic and economic assessment of each. Assessing risk is an important part of this process. Effective risk management can help agencies determine which risks to reduce, transfer or avoid, as well as which risks to accept, potentially opening up significant opportunities.

Tables 2, 3 and 4 provide some areas for agencies to consider when assessing strategic fit and economic benefits. Each table provides a set of options faced by agencies that currently have a self-managed, single, or multiple ICT sourcing strategy.

Table 2: Options for agencies that self-manage ICT

Options for agencies that self-manage ICT

Table 3: Options for agencies that outsource their ICT to a single vendor

Options for agencies that outsource their ICT to a single vendor

Table 4: Options for agencies that outsource their ICT to multiple vendors

Options for agencies that outsource their ICT to multiple vendors

These tables should provide broad guidance to agencies as they assess their options. In addition, the economic assessment will use the real value analysis described earlier (see also Appendix A), and the strategic assessment should score options against preferred strategic and satisfaction criteria, such as expected service levels, tolerance of risk, constraints, etc. The elements of strategic assessment will vary by agency, as will their weightings.

Based on this analysis, the agency should be able to map each sourcing option on a matrix (Figure 15), in order to identify the relative priority of each option. One of the options could include re-engineering ICT operations, as mentioned earlier.

This portfolio view of sourcing options, along with the analysis justifying their position on the matrix, will help management rationally decide the most suitable sourcing strategy. This module should result in selection of the best sourcing strategy for the agency.

Figure 15: Map the priority of each sourcing option

Map the priority of each sourcing option

Back to top

Renegotiate Existing Contract

This section applies only to agencies that have external arrangements in place.

If the current contract was signed several years ago, it may not fulfill your current needs as efficiently as it should; indeed, there may be significant room for improvement. It may, therefore, be appropriate to investigate the alternatives in today’s marketplace. Agencies should first, however, review existing contracts to identify any provisions and requirements for extending these contracts.

If a contract is expiring and outsourcing is considered the best option, the market will need to be approached. If, after an analysis of the market, the current arrangements represent value for money, agencies should negotiate with the incumbent service provider to renew the contract. The new contract can then be drafted and signed. It should be noted that a contract extension is in itself a procurement, which necessitates its own value for money decision. If the negotiation is unsuccessful, a procurement plan must be developed. In either case, the outcome of the renegotiation may alter the strategy that was selected in the previous module.

The timing for renegotiation should consider the extension option deadline, the proximity to the contract end-date, and potential reactions from other vendors and from the incumbent.

Develop Procurement Plan

As they begin to develop a procurement plan, agencies must be aware of the context in which Australian Government agencies conduct duties in relation to procurement, and of the relevant processes and regulations with which they need to comply. These are briefly described below.

See Appendix B for details on relevant legislation, policies and resources

This operational guide promotes achievement of value for money by providing practical information on managing procurement processes that lead to agencies entering into a purchasing agreement with a supplier or suppliers. This information meets the requirements of the Government’s procurement framework while facilitating delivery of good business outcomes. This guide is an adjunct to the CPGs and will best serve the reader if they are familiar with the CPGs.

This statement sets out the Australian Government’s policy on FMA Act departments and agencies managing intellectual property (IP). The Statement requires agencies to take a flexible approach to ownership of IP in procurement activities. Agencies should not rely on a default position for IP ownership, but should consider appropriate IP ownership arrangements on a case-by-case basis.

The SourceIT model contracts provide templates for Australian Government agencies to develop sound commercial agreements efficiently and effectively. It is expected that this will encourage good business practice and minimise the risk of conflict and disagreement between agencies and suppliers.

(GITC): GITC 4 is a legal framework developed as a cooperative effort between Australian industry representatives and the Australian Government. Although able to be used for simple procurement, GITC 4, with its clause-by-clause ‘build a contract’ functionality can also be used for more complex procurement scenarios, including IT services and provision of related products, business consultancy, systems integration and facilities management.

Neither SourceIT nor GITC is intended for strategic procurement, such as IT outsourcing, as this type of procurement is outside the scope of these frameworks

Determine business and ICT service needs

Agencies should begin development of the procurement plan by determining its in-scope needs. There are two types of service level requirements to consider. Each should be derived from the agency’s strategic objectives and should support the business priorities defined earlier. They are:

The type of relationship expected from the vendor – as defined earlier in this phase – will help determine these requirements. A commodity-type contract will mostly use service level requirements around ICT metrics, whereas a partner-type contract should include more business metrics.

Both types of service requirement should be captured in the form of draft Service Level Agreements (SLAs). An SLA sets out the service provision arrangement between an agency and a vendor, outlining each party’s obligations concerning service provision and identifying how they will work together to achieve the agreed objectives. It is included in tender documentation and refined during clarification/negotiation processes to form a schedule in the Services Contract.

For each service, an SLA should specify at least:

Agencies should include, as part of the SLA, a requirement for each tenderer to submit a transition plan as part of its proposal. The SLA should also consider the ways in which an agency’s mission – and therefore its requirements – may evolve during the contract.

Decide between open tender and select tender

Agencies need to decide whether to pursue an open or select tender. The default choice is for an open tender, which provides the widest range of competition and therefore of potential solutions. The costs and complexity of an open tender should be balanced by the improved value for money that can be achieved through competition.

Agencies can opt for a select tender, which involves inviting potential suppliers to submit a tender. Potential suppliers should be selected in accordance with the procedures outlined in the Commonwealth Procurement Guidelines (CPGs). When using a select tender, agencies are still required to ensure the process is non-discriminatory.

Three methods are permitted for conducting a select tender. In the first two, an initial open approach to the market must be undertaken to identify potential suppliers eligible and interested in participating in the select tender.

Agencies may conduct a select tender from:

Define the list of vendors in case of a select tender

If the agency chooses a select tender, it should develop a prioritised list of vendors, based on two dimensions:

Agencies should then map all potential vendors onto a matrix that includes both of these dimensions (Figure 16). Assuming the assessments remain fact-based, this will allow agencies to rationally determine the restricted list of vendors who will be approached.

Figure 16: Matrix for selecting vendors to continue in the RFT process

Matrix for selecting vendors to continue in the RFT process

Decide level of collaboration with vendors in the tender process

Agencies now need to decide the level of collaboration with which they are comfortable during the tender process. They can begin by considering two extreme scenarios:

The agency will eventually have to adjust each of the main collaboration parameters (Figure 17) in order to both comply with the Australian Government policies and to maximise their value for money solution. Agencies may wish to use the services of a probity adviser, in order to ensure all processes are proper and ethical and tenderers are treated consistently and equitably in accordance with set procedures.

Figure 17: Decide level of collaboration with vendors

Decide level of collaboration with vendors

Define selection criteria

At this point, agencies should develop a list of qualitative and quantitative criteria for assessing and scoring vendors. These criteria, along with any relevant weighting, will be included in the RFT. An example of selection criteria is shown in Figure 18.

Figure 18: Define selection criteria

Define selection criteria

Since many scores will be based on subjective assessments, often by different individuals, an effort should be made to make the scores consistent and equitable. This can be done by discussing and clarifying, as a group, the nature of the criteria, and arriving at an agreed interpretation for each one. Likewise, a common understanding should be reached on rating scales.

Prepare for both-way due diligence

Due diligence is an important process that enables agencies to better understand legal and strategic risks and allows tenderers to better understand an agency’s requirements. A well managed due diligence process leads to improved solutions and fewer qualifications. The more information agencies provide to tenderers, the more likely they are to submit competitively priced tenders (they will not need to build contingencies into their pricing to cover risk) and the more likely they are to fulfill agency needs. Before this process, agencies should refer to their probity plan concerning managing provision of information to potential providers. Agencies should also have in place proper procedures for identifying and treating confidential information during their tendering and contracting activities.

Agencies should begin compiling material and data that is relevant and appropriate for release during due diligence. The information will need to be comprehensive enough to allow tenderers to develop clear pricing bases and technical proposals. It is likely, however, that tenderers will seek further information on an agency’s ICT environment. To the extent this information is held in a recorded format (electronic or otherwise), it should be collected in a central repository or data room that tenderers can visit.

Tenderers may seek interviews with agency staff to understand specific circumstances of an agency’s operations. Agencies need to prepare for those interviews by anticipating likely subjects of discussion and ensuring the necessary resources are available to conduct the interviews (agencies can ask tenderers to provide a list of subjects they want to discuss in advance to assist preparation and ensure interviews are relevant).

Develop a transition/termination strategy

Excessive termination costs are generally due to unexpected issues concerning intellectual property rights, residual value of equipment, transfer of assets or remaining lease payments, assistance from the incumbent vendor to transition to a third party, and any potential damage costs. These costs need to be identified when agencies are drafting the contract and factored into calculation of the real value of the arrangement (this is discussed in more detail in the next phase). However, at this point in the lifecycle, agencies should begin to develop a view of the key elements that will need to be managed in order to keep these costs under control.

Develop a draft contract

Overall business and legal agreement

Technical agreement

Finance benchmarking and pricing

Transition plan (IT assets and people)

HR agreement

At the end of this module, agencies should have developed all the elements they need to secure the authority to proceed with the new sourcing strategy.

Contact for information on this page: ICT Procurement

Back to top

Last Modified: 14 January, 2009