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Scott Winnard

Lessons for effective government IT outsourcing: education and immigration in New Zealand Article (Published version) (Refereed)

Original citation: Winnard, Scott (2017) Lessons for effective government IT outsourcing: education and immigration in New Zealand. International Journal of Electronic Government Research, 13 (3). pp. 80-91. ISSN 1548-3886 DOI: 10.4018/IJEGR.2017070105 © 2017 IGI Global This version available at: http://eprints.lse.ac.uk/86818/ Available in LSE Research Online: February 2018 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website.

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Editorial Prefacev Vishanth Weerakkody, University of Bradford, Bradford, UK

Research Articles

1 InvestmentsinE-Government:ABenefitManagementCaseStudy;

Teresa Matos Fernandes, Portuguese Public Administration, Lisbon, Portugal

Jorge Gomes, Lisbon School of Economics & Management (ISEG), University of Lisbon, Lisbon, Portugal

Mário Romão, Lisbon School of Economics & Management (ISEG), University of Lisbon, Lisbon, Portugal

18 AnAnalyticalMethodtoAuditIndiane-GovernanceSystem;

Darpan Anand, Dr. A.P.J. Abdul Kalam Technical University, Lucknow, India

Vineeta Khemchandani, School of Management, J.S.S. Academy of Technical Education, Noida, India

38 ElectronicGovernmentServicesAdoption:TheModeratingImpactofPerceivedServiceQuality;

Isaac Kofi Mensah, School of Management, Harbin Institute of Technology, Harbin, China

Jianing Mi, School of Management, Harbin Institute of Technology, Harbin, China

55 UseofSocialMediainCitizen-CentricElectronicGovernmentServices:ALiteratureAnalysis;

Mohammad Abdallah Ali Alryalat, Al-Balqa’ Applied University, Salt, Jordan

Nripendra P. Rana, School of Management, Swansea University Bay Campus, Swansea, UK

Ganesh P. Sahu, Department of Management and Systems, Motilal Nehru National Institute of Technology, Allahabad, India

Yogesh K. Dwivedi, School of Management, Swansea University Bay Campus, Swansea, UK

Mina Tajvidi, School of Management, Swansea University Bay Campus, Swansea, UK

80 LessonsforEffectiveGovernmentITOutsourcing:EducationandImmigrationinNewZealand;

Scott Winnard, The London School of Economics and Political Science, United Kingdom

CoPyRightThe International Journal of Electronic Government Research (IJEGR) (ISSN 1548-3886; eISSN 1548-3894), Copyright © 2017 IGI Global. All rights, including translation into other languages reserved by the publisher. No part of this journal may be reproduced or used in any form or by any means without written permission from the publisher, except for noncommercial, educational use including classroom teaching purposes. Product or company names used in this journal are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI Global of the trademark or registered trademark. The views expressed in this journal are those of the authors but not necessarily of IGI Global.

Volume 13 • Issue 3 • July-September-2017 • ISSN: 1548-3886 • eISSN: 1548-3894An official publication of the Information Resources Management Association

InternationalJournalofElectronicGovernmentResearch

TableofContents

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DOI: 10.4018/IJEGR.2017070105

International Journal of Electronic Government ResearchVolume 13 • Issue 3 • July-September 2017

Copyright©2017,IGIGlobal.CopyingordistributinginprintorelectronicformswithoutwrittenpermissionofIGIGlobalisprohibited.

Lessons for Effective Government IT Outsourcing:Education and Immigration in New ZealandScott Winnard, The London School of Economics and Political Science, United Kingdom

ABSTRACT

Information technology (IT) tends to be viewed as ancillary to core government functions.Consequently, IT isoftenoutsourced to theprivate sector.Unfortunately, there is a long lineoffailedoutsourcedprojects.ThisarticleusestwoNewZealandcasestudies,theparticularlypublicfailureoftherecentschoolspayrollsystemandthesuccessfulintroductionofelectronicimmigrationprocessing,toexaminehowthedesignandgovernanceofoutsourcedgovernmentITprojectscouldbeimproved.Itconcludesthatanawarenessofhistorictrendsisimportantforprojectsuccess,thatgovernmentsneedtobemoreactiveincombatingmarketbasedtransactioncostsandthatcontractmanagementbecomesacoregovernmentcompetencywhenprojectsareoutsourced.Italsoarguesthatbetterchangemanagementandcognisanceofdesign-realitygapswouldpositivelyimpacttheoutcomesoffutureprojects.

KEywORdSContract Management, Design and Implementation, Government, Information Technology, New Zealand, Outsourcing, Path Dependency, Transaction Costs

1. INTROdUCTION

They’ve been overpaid, underpaid and not paid at all – now one teacher has been paid for being in two places at one time. (O’Callaghan, 2012)

ThatwasthesituationinNovember2012.ThreemonthsearliertheNewZealand(NZ)MinistryofEducation’s(theMinistry)new,outsourcedschoolspayrollsystems–Novopay–wentlive.Novopaywas,unfortunately,animmediatedisaster.Paymenterrorsoccurredandthecustomerservicefunctionwasunderpreparedandoverwhelmed(Jack&Wevers,2013).ThePostPrimaryTeachersAssociationeventooktheMinistrytocourtforbreachingitsstatutoryobligations(Barback,2013).Performancewas sobad that eventuallyMinisterial responsibilitywas assigned to resolve thematter and theMinistryandTalent2(theprivateprovider)partedways(Joyce,2014;Key,2013).

Informationtechnology(IT)promisestoprovidegovernmentswithcostandtimesavingsandwithbetterservicecoordinationandinformationmanagement.Itshouldalsoallowpublicservicestobetailoredtotheneedsofcitizens(Oostveen,2008).GovernmentITisoftencontractedoutto

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theprivatesector.Contractingout,oroutsourcing,isacoreNewPublicManagementprincipleusedtointroducecompetitionintothedeliveryofpublicservices.Competitionshould,intheory,spurqualityimprovementsandcostreductions.Additionally,outsourcingancillaryfunctionsissaidtoallowgovernmenttofocuson“core”publictasks.TheoutsourcingofITsystemshashistoricallybeenjustifiedbytheirbeingancillarytocorepublicfunctions(Dunleavy,1994;Dunleavy,Margetts,Bastow,&Tinkler,2006).Despiteallthispromise,thesize,numberandpersistenceofgovernmentITfailuresarewelldocumented(ControllerandAuditorGeneral,2013;Gauld&Goldfinch,2006;Oostveen,2008;Small,2000).

ThispaperexamineshowthedesignandgovernanceofoutsourcedgovernmentITprojectsmightbeimproved.Threeprincipalmattersaretackled:

1. Pathdependenceinpublicservicesandtheneedtoberealisticaboutwhathistorymeansforservicedeliveryandcontractingout;

2. The importanceofminimising transactioncostswhere themarket isused toprovidepublicservices(oratleastsomepublicfunctions);and

3. Thechangingroleofgovernment–fromproducertomanager–whenservicefunctionsareoutsourced.

ThispaperaddstothebodyofpublicsectorITcasestudiesbyunpickingNovopay’sfailureinlightofthesematters.However,italsogoesastepfurtherandusesacomparativecasestudytoplacesuccessalongsidefailure.SmartGate,theprivatelyprovidedelectronicpassportcontrolsystemusedbytheNewZealandCustomsAgency(NZ Customs),isarecentexampleofaparticularlysuccessfuloutsourcedgovernmentITendeavour(ControllerandAuditor-GeneralofNewZealand,2012).Itprovidesapositivecomparisonthroughoutthispaper.Theintentionisthatbyusingcomparativecasestudiesandhighlightinggoodpractice(aswellasbad)thispaperwillcontributetotheexistingliteratureinaconstructivemanner.ItconcludesbydistillingfivecoreprinciplesthatcouldcontributetotheeffectivenessofoutsourcedgovernmentITprojects.

2. THE CASE STUdIES

2.1. Novopay and the Schools Payroll1

Novopaywasafullyoutsourced(i.e.softwareandstaff)payrollsystemtobeprovidedbytheprivatecompanyTalent2. It replaced the(alsofullyoutsourced)Datapaysystem.2ThebusinesscaseforNovopaywas thatDatapaywas aging technology that posed toogreat a technology risk for theMinistryandthatitwasnolongerfitforpurpose.ItwasclaimedthatNovopaywouldoffergreaterfunctionality,abetteruserinterfaceandmoreusefulinformationabouttheschoolspayroll.Novopaywasalsoafullywebbasedsystem,comparedtothemoremanualDatapaysystem.Afterputtingforwarditsinitialbusinesscaseintheearly2000s,theMinistrycontractedwithTalent2(in2008),intiallyfor theprovisionofsoftwareonly.However,encouragedbypredictedsavingsofNZ$4.6millionperyear,theMinistrymovedtofulloutsourcing.ThebudgetforNovopaywasNZ$182.5millionfor10yearsofservice(Jack&Wevers,2013).

TheschoolspayrollisNZ’slargestpayroll–itdistributesaroundNZ$4.6billionannuallyto120,000staff. It isalsoacomplicatedpayroll.TheMinistry is responsible forprovidingpayrollservices, but individual schools (around 2,500 of them) are the employers for payroll purposes.Schoolsdifferintermsoftheirsize,theirnumberandspecialityofpayrolladministratorsandtheITsystemsthattheyuse.Acombinationofcollectiveandindividualemploymentagreementsgenerate


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upto10,000differentpaypermutationsperpaycycle.Historicpractices,suchasreceivingasinglepayslip(evenwhenworkingacrossdifferentschools–i.e.differentemployers),furthercomplicatematters(EducationPayrollLimited,2016;Jack&Wevers,2013).

NovopaywassupposedtogoliveinSeptember2010,butwasdelayeduntilAugust2012.EventhenNovopaywasnotabletohandletheschoolspayroll–thereweresoftwareerrors,usererrorsandcustomersupporterrors.Thisdistractedschoolsfromtheirprimarypurposeofeducation,asstaffspenttimechasingNovopayqueries(O’Callaghan,2012).ByJune2013anadditionalNZ$23.9millionhadbeenspenttryingtoresolvetheissues.TheMinisterialInquirythatfollowedhighlightedanumberofconcerns.Despitebeinglongandcomplicated,thecontractbetweentheMinistryandTalent2wasincompletewithrespecttothesystemrequirements.Subsequentscopecreep(todealwiththepracticalitiesoftheschoolspayroll)increasedthetensioninanalreadystrainedcontractualrelationship.Customisationalsoledtoabacklogofsoftwareerrors.Thissqueezedtimeframes,tothepoint that theintendedpilotandphasedimplementationwereabandonedinfavourofa“BigBang”rollout.TheMinistryalsodisplayedpoorcontractandprojectmanagementpractices(Jack&Wevers,2013).

TheMinistryultimately tookbackpayroll responsibilityforNovopaywhenTalent2wasnotpreparedtospendmoremoneytofix/improveservices(theMinistrystilllicencesTalent2’sunderlyingsoftware,butitownsallofthesoftwarecustomisation)(Joyce,2014).EducationPayrollLimited,agovernmentownedcompany,nowadministerstheschoolspayrollwithperformancecontinuingtoimprove(EducationPayrollLimited,2016;Joyce,2015).

2.2. SmartGate and Border ControlSmartGateisanelectronicpassportcontrolsystemmanufacturedbyMorpho,aprivatecompany.Itusesbiometricdatastoredonpassportstoidentifytravellersattheborder.Asasubstituteforsomemanualpassengerprocessing,SmartGatepromisedtoincreasethespeedanddecreasetheaveragecostofpassengerprocessingandtofreeupstafftodeal(manually)withhigherrisktravellers(ControllerandAuditor-GeneralofNewZealand,2012).NZCustomsintroducedSmartGatein2009(Nicklin,2015).TheprojecthadamodestinitialbudgetofNZ$15.9million,withannualoperatingcostsofNZ$7.4million(Nicklin,2015).WhilesmallerthanNovopayindollarterms,bordercontrolisanolesssensitivepoliticalissue.

The Australian Customs and Border Protection Service (Australian Customs) was alreadyusingMorpho’sSmartGate.BeforeintroducingSmartGateintoNZairportsNZCustomsborroweda SmartGate device from Australian Customs to test its functionality and its compatibility withNZCustoms’otherITsystems.NZCustomsalsomonitoredSmartGate’sperformanceonceitwasintroducedandworkedhard tomaintaincollaborative relationshipswithbothMorphoandotherinterestedparties(forexample,airlines)(ControllerandAuditor-GeneralofNewZealand,2012).

SmartGate has been very successful. Public uptake has greatly exceeded expectations, thepromisedbenefitshavebeenrealisedandNZCustoms’reputationhasbeenenhancedasaresultofSmartGate’ssuccessfulimplementation(LineofDefence,2016;WilliamsonM.,2010).In2015NZCustomssignedanewcontractwithMorphofortheprovisionofmore,andnextgeneration,SmartGates throughto2020.Reflectiveof thegoodrelationshipbetweenthecounterparties, theagreementalsoincludedtermsforaBiometricResearchPartnership(Safran,2015).

3. PATH dEPENdENCy – HISTORy MATTERS

Thetheoryofpathdependencyarguesthatthepasthasastronginfluenceoverthepresent(David,1985).Thisimpliesthatinstitutions(andtheirpractices)arerelativelystableoncetheyareestablished(Peters,Pierre,&King,2005).However,criticaljunctures(externalevents)providethechancetodisruptthestatusquo.Suchjuncturesprovideawindowofopportunitytoshiftfromthecurrentpath(Robinson&Acemoglu,2012).Inpractice,thereisoftenanimportantdistinctionbetweenpolitical


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windowsofopportunityandpracticalwindowsofopportunity.Pathdependencycanbesignificantlyhardertodislodgeatapracticallevel(Bevan&Robinson,2005).

Novopay’smainproblemshadhistoric,pathdependentroots.Accumulatededucationsectorpracticescausedsystemicinertia.Singlepayslipsandtheexistenceofcomplexpaypermutationshavealreadybeenmentioned.Additionally,‘bankingstaffing’(allowingschoolstocarryoverstaffingentitlements)andahighnumberofpaychangesperpaycyclewerethenorm.Existingpayrollpracticesalsoreinforcedthatinertia.DatapaywasmoremanualandpersonalthanthewebbasedNovopay.Certaininstitutionalnormshaddevelopedduringthe10+yearsthatschoolshadusedDatapay(Jack&Wevers,2013).Therewasaworkingassumptionamongschoolsandpayrolladministratorsthatthesepracticeswouldcontinue.

ThepoliticalmandatetopursueanewpayrollsystemwasacriticaljuncturefortheMinistry.However, that window of opportunity for change was let slip almost entirely. Not only did theMinistryfailtosimplifytherelevanteducationsectorpracticesforitsownpurposes(thecomplexpaypermutationsandcollectiveagreementsareobviousexamplesofthisfailure),butitalsofailedtospecifyforTalent2thesystemrequirementsthatthesecomplexitiesnecessitated(Jack&Wevers,2013;SevenSharp,2013).3Itis,therefore,notsurprisingthatscopecreepoccurred,errorsmountedandprojecttimelinesbecamesqueezed.

TheMinistryalsofailedtoprepareschoolsforthechangesthatitintendedNovopaytobringabout.Instead,ofproactivelypreparingschoolsforthefunctionalandsupportdifferencesbetweenDatapayandNovopay,theMinistrypaintedasimple,“rosy”pictureofNovopay.Atthesametime,through customisation the Ministry essentially tried to recreate ‘legacy processes and systems’withinNovopay(Jack&Wevers,2013,p.37).4Thisisaclassicexampleofdeferencetosystemscaleeconomies(David,1985).Thereweremanythousandsofschoolpayrolladministrators,butonlyonepayrollsystem.So,theMinistryoptedtotrytochangeNovopaytoconformtohistoricpractices,ratherthanretrainpayrollstaff.Theeffectofthiswasthatcomplexpracticesweredigitised,ratherthantheunderlyingbusinessprocessesbeingstreamlinedandsimplified.Insum,theMinistryhadanopportunitytosimplifyhistoriccomplexitiesandchangeexistingpractice.Insteadofbeingrealisticaboutwhatthosechangesrequired,theMinistrylargelyputitsheadinthesandandpursuedanewsystemwithinanunchanged,andmismatched,environment.

SmartGate,bycomparison,demonstrateshowapublicsectororganisationcantakeboldstepswhilestillbeingawareof(andutilising)existingpathdependentaspects.Trans-TasmancollaborationbetweenAustraliaandNZdatesbacktocolonialtimes.Morerecently,andformally,theAustraliaNewZealandCloserEconomicRelationsTradeAgreementof1983 is a foundationaldocumentforjointbordercontrolefforts(Nicklin,2015).StronghistoricprecedentforcollaborationmeansthatitisnotsurprisingthatNZCustomschosetolearnfromAustralia’sleadinelectronicpassportcontrol.ItalsoprovidessomeperspectiveonthedecisionofNZCustomstousethesamesystem(i.e.SmartGate)asAustralianCustoms–compatibilitywouldaid integration.SmartGatehasanintentionalpathdependentflavouraboutit.

However,SmartGate’ssuccessisalsotheresultofacriticaljuncture.Threeelementscreatedthatjuncture.First,theNationalpartywaselectedtoofficein2008andthethenPrimeMinister,JohnKey,tookupthetourismportfolio(Nicklin,2015).Secondly,in2009KeyandthethenAustralianPrimeMinister(KevinRudd)‘pledgedrenewedambition’forTrans-Tasmaneconomicintegration(Key,2009).Thirdly,NewZealandandAustraliawerejointlyawardedtherighttohostthe2011RugbyWorldCup.Thiswasexpectedtogenerateapeakinalreadygrowingpassengernumbers(ControllerandAuditor-GeneralofNewZealand,2012;Treasury,2011).ThisjuncturegaveNZCustomsawindowofopportunity.Notwithstanding,SmartGatedidgeneratesomepoliticalandoperationaloppositionwhenitwasintroduced.However,politicalsupportfromthethenPrimeMinisterprovidedtheleverageNZCustomsneededtointroduceelectronicbordercontrol(Nicklin,2015;Stuff,2009;Stuff,2010).

To review, history matters in project outcomes. Yet far too often history receives too littleattentionandgovernmentsarenotrealisticaboutwhatitmeansforservicedeliveryandoutsourcing.


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TheMinistrywantedtochangetheschoolspayroll.However,itfailedtoeffectivelyuseitswindowofopportunity (i.e. thepoliticalmandate) toachievepracticalchange.Asa result,Novopaywasmismatchedwithrealityandfailed.Conversely,SmartGateshowsawarenessofhistorictrends.Eventhoughitsintroductionwasaboldandsomewhatcontroversialstep,itwasbroadlyinlinewithexistingcollaborativepractice,andNZCustomstookadvantageofawindowofopportunityofpoliticalsupport.

4. TRANSACTION COST ECONOMICS – MINIMISING dOwNSIdE EXPOSURE

Outsourcingisadecisiontobuy,ratherthanmake,agood/service.Beforechoosingtooutsourcegovernmentsshouldconsiderthestrengthsandweaknessesofinvolvingthemarketinpublicserviceprovision(Williamson,2000).Asastartingpoint,usingthemarketimposescostsintermsoffindingacounterparty,negotiatingacontractandmonitoringthatcontractovertime.Thesetransactioncostsneedtobeconsideredandshouldbeeconomised(Coase,1937).Williamson(1975;1985;2000)identifiesanumberoffactorsthatimpactthesizeofpotentialmarkettransactioncosts.Thesefactorsareasapplicabletogovernmententitiesastheyaretoprivateactors(Shleifer,1998).ThefollowingofWilliamson’sfactorsareparticularlyrelevanttotheNovopayandSmartGateprojects:

• Bounded Rationality:Neurologicaland language limitsmean that it isoften impossible towriteacompletecontract.Incompletecontractsexposecounterpartiestothepossibilityofcostlyfuturecontingencies;

• Information Impactedness:Informationasymmetries,thataretoocostlytoovercome,canunderminecontractsbecausecounterpartieshaveaknowledgediscrepancyvis-à-visthesubjectmatter;

• Complexity / Uncertainty:Complexoruncertaincircumstancesaggravateboundedrationalityandinformationimpactednessbyincreasingthechancethat:◦ Aprojectcannoteasilybereducedtowriting;◦ Itisnotpossibletoidentifyallofaproject’scontingencies;◦ One counterparty has superior (and advantageous) knowledge and experience with the

subjectmatterofthecontract;• Asset Specificity:Assetsaresaidtobespecificwheretheyhaveonlyalimitednumberofuseful

purposes.Thiscancreate“lockin”effects,wherecounterpartiesdependonthesupplyofandthedemandforparticularassets;

• Atmosphere:Transactionsoccurwithinawidercontext–theatmosphere.Theatmospherecanproduceadditionaltransactioncostsoverandabovewhatcounterpartiesanticipateorexpect.5

Novopaysuffered fromextremelyhigh transactioncosts.Thecontractbetween theMinistryandTalent2wassignificantlybounded.Thecomplexityoftheschoolspayrollwaslikelytocauseboundedrationalityevenifitwasknownbybothcounterparties.However,itwasonlyknowntotheMinistry.Talent2didnot(andcouldnotwithoutincurringsubstantialcosts)knowofthepayroll’struecomplexity.Consequently,Talent2wasataninformationdisadvantage,onewhichtheMinistrydidnotacttoremedy.TheMinisterialInquirysuggeststhatthismistakebytheMinistryresultedfromalackofsufficientlyexpertstaff(Jack&Wevers,2013).

The impact of asset specificity is also clearly evident in the Novopay project. As Talent2customisedNovopay(attheMinistry’srequest),theMinistryalteredtheproject’stimelinetoallowTalent2tofixerrors(forexample,theMinistryabandonedtestingandphasedimplementation).TheMinistrycouldhaveinvokedcontractualbreachprovisionswhenTalent2misseditsmilestones.Instead,andthereisnoindicationofopportunismbyTalent2,theMinistrycontinuedtonegotiateforimprovedperformance (Jack&Wevers,2013;SevenSharp,2013).This isclassic lock inbehaviour– theMinistrywas(orfelt)toocommittedtowalkaway,evenasNovopayfailedtoperform.Onceagain,theMinistrywasalsoitsownworstenemy.Itletitscontractualcontingency(tocontinueusingDatapay)lapse,sothatitbecamea‘Hobson’schoice’togolivewithNovopay(Jack&Wevers,2013,p.51).


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Finally,Novopay’satmospherewascomplicated.Payrolladministratorsandschoolstaff,whatWilliams(1975)describesasthehumanfactor,wereexpectingsimilarfunctionality,paypracticesandsupportservicestowhatDatapayprovided.TheMinistrydidnothingtodispelthatexpectationanddidnotpreparethemforthechangesthatwereactuallyrequired.ThetransactioncoststhattheMinistrysufferedwereasmuchreputationalasmonetary–‘Novopay[‘sfailures]haveaffectedpublictrustandconfidenceintheMinistryofEducation,andalsothewider[NZ]publicsector’(Jack&Wevers,2013,p.9).TheMinistrywasapassivecounterpartywhooverexposeditself tomarkettransactioncosts.Itpaidahighpriceforitsmistakes.

NZCustomstookamuchmoreconstructiveapproachtoSmartGate’spossibletransactioncosts.SmartGate,too,wasacomplexanduncertainproposition.Thebiometricsoftwareinvolvedinthegates/kioskswascuttingedgeandcomplicated.ItwasalsouncertainwhetherSmartGatecouldbesuccessfullyintegratedwithotherrelevantITsystems–forexample,thesystemsofImmigrationNZ(ControllerandAuditor-GeneralofNewZealand,2012).Thismeantthatabounded,incompletecontractwasalmostguaranteed.Italsocontributedtoinformationimpactedness.Morphopossessedspecialisttechnicalknowledgewithrespecttothebiometricsoftwareandhardware,whileNZCustomshadamuchbetterunderstandingoftheotherrelevantITsystems(ControllerandAuditor-GeneralofNewZealand,2012;LineofDefence,2016).Theseinformationaldifferencesfurtherincreasedthemagnitudeofthepossibletransactioncosts.

TheatmospherewithinwhichSmartGatewaspursuedwasadelicateonetoo.SmartGatewasbeingchampionedbythethenPrimeMinisteranddealtwithbordersecurity.Thepoliticalstakeswerethereforehigh.BordercontrolisalsooftenthefirstinteractionthattravellershavewithNZ(Nicklin,2015).UseofautomatedpassengerprocessingriskedreputationalramificationsforNZmoregenerally.

NZCustomseffectivelyandconstructivelyaddressedthemarketbasedtransactioncoststhatitfaced.Itdidsointwonotableways.First,ittestedSmartGateinacontrolledenviromentbeforeintroducing it. Testing, and learning from Australian Customs’ experience, reduced the level ofcomplexityanduncertaintysurroundingSmartGate(ControllerandAuditor-GeneralofNewZealand,2012).Inturn,thisreducedthedegreeofinformationimpactedness,reducedtheboundednessofthecontractandnegatedsomeofthepossiblenegativeatmosphericeffects.Secondly,NZCustomsintentionallypursuedarelationalcontractwithMorphoandcollaborativerelationshipswithotherinterestedparties(forexample,ImmigrationNZ,AirNZandAustralianCustoms).BothCoase(1937)andWilliamson(1985)note thevalueof trustandreputations insupporting longterm,complexanduncertainprojects.NZCustomsconsultedwith interestedpartiesandengagedwithMorphothroughout.Asaresult,MorphobecameinvestedinthesuccessofSmartGateinNZ(ControllerandAuditor-GeneralofNewZealand,2012).Thisstrongrelationshiphelpedtooffsetremaininginformationimpactednessandcontractualincompleteness.ThesuccessofthisrelationshipisevidentinthenewcontractbetweenNZCustomsandMorpho,whichexpresslyincludesaresearchpartnership(Safran,2015).NZCustomsastutelyusedtesting/monitoringandrelationshipbuildingtomitigatepotentiallylargetransactioncostswhenitintroducedSmartGatetoNZ’sairports.

OutsourcingITexposesgovernmenttopotentiallysignificantmarketbasedtransactioncosts.AcomparisonofNovopaywithSmartGatedemonstratestheimportanceofproactivemitigationoftransactioncosts.ThepragmaticandengagedapproachofNZCustomscouldbeheldupasa“goldstandard”forpublicsectorcontracting–itdemonstrateswhatisrequirediftheprivatesectoristobeeffectivelyutilisedinpublicserviceprovision.

5. COMMERCIAL ANd CONTRACTUAL NOUS – CONTRACTS NEEd MANAGING

Outsourcingis,broadlyspeaking,aformofprivatisation–the“asset”thatisprivatisedistheservicecontract(Goodman&Loveman,1991;Vickers&Yarrow,1991).Privatisationchangestheroleofgovernmentfrombeingtheproduceritselftooneofoversightandmanagement.Thisnewroledemands


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newskillsfromgovernment.Governmentdepartmentsthatcontractoutneedhighqualitycommercialandcontractmanagementskillstomatchtheirprivatesectorcounterpartsandtoeffectivelymanagecontractstodeliverdesiredoutcomes(ControllerandAuditorGeneral,2009;ControllerandAuditorGeneral,2011).Unfortunately,thepublicsectoroftenhasskilldeficitshere.Inaddition,publicsectorprojectsoftensufferfromhighstaffturnover,causingalossofinstitutionalandprojectknowledge.Thiscanleadtoanoverrelianceonexpensive(andusuallytemporary)externaladvisers.Aninabilitytoeffectivelymanagecommercialcontractsoftenunderminesgovernment’sabilitytodeliverdesiredoutcomes(ControllerandAuditorGeneral,2009;ControllerandAuditorGeneral,2011).

Novopayis,quitesimply,amodelofhownottonegotiateandmanageanITcontract.Itisalitanyofpoorpractice.Mostsignificantly,theMinistry:

• Erroneouslybelievedthatithadsufficientinternalexpertiseontheschoolspayrolltomanageanoutsourcedschoolspayrollcontract;

• Lackedthenecessarycommercialandcontractualnoustonegotiateacompletecontract(thisiscloselylinkedtothepointabove,inthattheMinistrydidnotknowwhatitwantedorneededfromNovopay);

• Sufferedfromhighturnoverofseniorstaffmembers;• Didnotrecognisedeterioratingcommercialconditionsastheyarose.Thedecisiontonegotiate

withTalent2whenitfailedtomeetperformancemilestonesisagoodexampleofthis;and• UndermineditsownpositionbyallowingitscontractualoptiontocontinueusingDatapay(i.e.

itscontingency)tolapse(Jack&Wevers,2013).

TheMinistrydid,at times, recognise itsskilldeficitsandcontractexternalsupport (Jack&Wevers,2013).However,overall,MinistrystafflackedthecommercialandcontractualnousneededtomanageacomplexITproject. It isalsoworthmaking the linkbetweenpoorcommercialandcontractualpracticesandtransactioncosts.PoorpracticeswereamajorreasonwhytheMinistryfounditselfoverexposedtothemarketbasedtransactioncostsidentifiedinsectionfour.

NZ Customs, on the other hand, demonstrated sensible commercial practices when itintroducedSmartGate.6Itstartedwithaclearunderstandingofitsenvironmentandits“businessneeds” – international passenger numbers were increasing, airport space was limited andprocessing timesneeded tobemanaged.This resulted ina solidbusinesscase forwhatwasrequired from an automated processing system. NZ Customs also used its relationship withAustralianCustomsasavaluablecommercialpartnership,learningfromwhattheAustraliansalreadyknewaboutautomatedprocessing.NZCustomsthenselectedan“offtheshelf”technology–SmartGatewasanestablishedproduct thatmet itsneeds–whichlimitedthepossibilityofunforeseencomplications.Finally,itrigorouslytestedandmonitoredSmartGateandestablishedcollaborativerelationshipswithinterestedparties,includingMorpho.Asaresult,NZCustomstransformeditselffrom“justanothergovernmentagency”intoanastutecommercialcounterpartywhowaswellplacedtomanageandoverseeacontractforanautomatedbordercontrolsystem.TherecentpartnershiparrangementconcludedwithMorphohighlightsthecommercialreputethatNZCustomsnowhasinthisarea(ControllerandAuditor-GeneralofNewZealand,2012;Safran,2015). It isobvious thatdevelopinga strongcommercialpresencehelped shieldNZCustomsfrompotentialnegativetransactioncosts.

Contractsdoneedmanaging.Outsourcingimposesupongovernmentstheneedforcommercialandcontractmanagementskills.Oftengovernmentsdonotpossessthenecessaryskillstobeginwith–neithertheMinistrynorNZCustomsdid.Wherethatisthecasetheyneedtobeactivelydeveloped.NZCustoms’approachtoSmartGatedemonstratesthatconcertedandconsistenteffortscanbuildtherequiredskillbase,ultimatelyforthebenefitofcitizens.


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6. COMPARATIVE dISCUSSION – CONTRACTING FOR IT SUCCESS

ThereisnodoubtthatIThaspotentiallylargebenefitsforgovernment.Notonlyoperationally,butalsopolitically,thismakesITprojectsattractive.However,asNovopaydemonstrates,ITisactuallycritical,eveninseemingly“ancillary”functions,suchaspayroll.Governmentsneedtobeundernoillusionofthisfact.Inthatsense,thefirststeptoimprovingoutsourcedITprojects(bigorsmall)istobemorerespectfuloftheimportanceofITasanenablerofthebusinessofgoverningandserviceprovision.RespectingITmeansthinkingcarefullyaboutwhatisoutsourcedandhowitisoutsourced.NZCustoms’approachtoSmartGateisinlinewiththisapproach.OnthesurfaceSmartGatewassimplyareplacementforamanualstampinapassport.YetwhatNZCustomsrecognisedwasthepotentialformuchlargerramificationsshouldthingsgowrong.Therefore,itcarefullybuiltupitsfamiliaritywith,andknowledgeof,SmartGatebeforeintroducingit.

TheNovopayandSmartGatecasestudiesalsodemonstratethatpolicymakersarewelladvisedtoacknowledgepathdependencyintheirprojects–ignoringthepastisnotagoodoption.Thisdoesnotmeanthatprojectsshouldnotbeinitiatedwheretheygoagainstthegrainofthepast.Thatwouldstiflebothinnovationandopportunitiestoimprovebusinessprocesses.Rather,realityshouldshapeaction.Insomeinstances,ambitionmayneedtobescaledbackorintroductionphased.

ITprojectstendtodisruptthestatusquo.Incircumstanceswheremajorenduserchangesarerequired investment in change management is an important part of the implementation process.Responsibleofficialstendtobewellintentioned.However,theyalsoneedtoberealisticaboutthetotalityofwhatactuallyneedstobedonetoimplementITprojects,andwhowillberesponsiblefordoingit–governmentorprivateprovider.Novopaywasnotabadidea,andwouldlikelyhavebeenmoresuccessful(andlesscostly)iftheMinistryhadbeenfrankabouttheneedtosimplifytheschoolspayrollandtherequireduserchangers.“Historicawareness”shouldbeachievabletoo.Arelativelyhigh-levelcomparisonofthepresentwiththedesiredfutureshouldindicatewhatthemainissuesarelikelytobe,andthereforewheretodirectextraattentioninimplementation.Betteruseofbusinessanalysisandprocessmappingattheoutsetwouldserveasavaluablepartofsuchanapproach.

Contractualandcommercialskillshavebeenshowntobeanotherbigareaforimprovement.Theseskillsarecriticalbecausetheyplacegovernmentonanequalfootingwithprivatecounterparties.However,andcritically,competentcontractualmanagementandsoundcommercialjudgmentisalsolikelytoreducegovernmentexposuretomarkettransactioncosts.7NZCustomsmitigatedmanyofthepossibletransactioncoststhatitfacedbymethodicallydevelopingitscommercialunderstandingofSmartGatebeforeintroducingitandbydevotingtimeandenergytothedevelopmentofcooperativerelationships.Conversely,theMinistry’sapproachwithNovopaywasclosertothe“blindleadingtheblind”,andwasparticularlyunconstructive.Commercialandcontractualskillsarenotusuallyeasytodevelop,nordotheytendtodevelopquickly,withoutintention.Caseinpoint,theUKhasintroduced dedicated civil service training programmes and career tracks focused on improvingcontractandcommercialskills(ControllerandAuditorGeneral,2009).Anothermoreshort-termsuggestionmightbetoimplementretentionpayforseniorpublicstaffthatistiedtomajorprojects.Thiswouldencouragetargetedstafftoseeoutthedurationofaproject,andthereforeallowprojectspecificexpertisetoaccumulate.

ITprojectsalsoparticularlystrugglewith‘design-reality’gaps(Heeks,2006,p.128).Adesign-realitygapexistswherethereisasignificantdifferencebetweentheassumptionsonwhichanITprojectisbasedandthecurrentrealitiesofthesystemintowhichthatITprojectwillbeintroduced.Privateproviderswillonlyeverprovidewhatgovernmentscontractfor.Therefore,itiscriticalthatgovernmentsidentifydesigns-realitygapsandspecifysolutionsinoutsourcingcontracts.

AkeyreasonthatITprojectsstruggletobridgedesign-realitygapsistherelativeintangibilityofIT.Prisonsandroadsarematerialthings.ComparedtoIT,itiseasiertoseehowtheywillworkinpractice.Interestingly,partofSmartGate’ssuccesshasbeenattributedtoitstangibility–physical


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kiosksandgatesthatactuallyletpeopleenterNZ(Nicklin,2015).MostITsystems,bycontrast,aremore“elusive”fromauser’sperspective–usersseeonlyacomputerinterface.Formany,virtualinterfacesarelessintuitivethantangibleobjects.ThismakesITprojectsparticularlyvulnerabletousererror/interactionissues.ThiswascertainlythecasewithNovopay.Moreattention,therefore,needs tobegivenbygovernment tospecifying incontractual terms thesocio-technical interfaceforITprojects(Maguire,2014)andtomakingsurethatinterfacesmeetrealusers’needs.Thisisparticularly sobecausecontractingout introduces anadditional link in the supplychain–usersthemselvesareonestepremovedfromtheprivateproviders.Thisseparationneedstobecounteredifthedesign-realitygapistobebridged.Early(anddetailed)specificationofenduserrequirements,alongwithstrongchangemanagementprocessesandproducttesting,canhelptoeffectivelyconnectprivatedevelopersandusers.

Finally,thescaleandintegrationofITprojectsareimportantconsiderations.LargeITprojectstendtobedrivenfromthetopdownandoftengetpreoccupiedwithtechnicalelementsattheexpenseofsolvingrealpublicserviceproblemsandincreasinguserreadiness(Gauld&Goldfinch,2006).Inotherwords,politicalvisiontendstotrumppracticalrequirements.This,unfortunately,widensthedesign-realitygapsinlargerprojects.ThiswascertainlythecaseinNovopay.Analternative,andpreferredapproach,istoscaleupsolutionsthataredevelopedatagrassrootslevel.Withgrassrootsdevelopmentprojectfocusrevolvessquarelyaroundsolvingexisting(andactual)challenges.Thisshrinksdesign-realitygapsbyallowingiterativelearningtotakeplace(Heeks,2006).SmartGate,withitsemphasisontestingandorganisationallearning,illustratesthefruitsofthisapproach.

7. CONCLUSION

GovernmentsoftenchoosetooutsourceITprojects.ThisisbecauseITsystemsareconsideredtobeancillarytothepublicfunctionstheyhelpdeliver.Caseinpoint,coordinatingteachers’payis(oratleastwas)notconsideredtobecentraltothedeliveryofeducationinNZ.However,alargenumberofoutsourcedgovernmentITprojectsfail.Indeed,Novopaywasaverypublicfailure.UsingtheNovopayandSmartGatecasestudies, thispaperhasdiscussedimportantdesignandgovernanceissueswhenoutsourcinggovernmentITprojects.

Drawing on the preceding analysis and comparative discussion, five positive principles foroutsourcedgovernmentITprojectsareproposed:

1. Governmentshouldrecogniseandconsidercarefullytheinterconnectionsbetweenallpartsofpublicservicesbeforeoutsourcing–publicservicesarenoteasilydividedupforthepurposesofwritingacontract;

2. Governmentshouldacknowledgehistoricimpactsattheoutsetandshouldmatchthelevelofattentionandresourcethatisdevotedtochangemanagementtothedegreeofchangerequiredfromthestatusquo;

3. Governmentshouldexpectmarketbasedtransactioncosts,makingallowancesinbothtimeandresourceforthemandactivelyworkingtominimisethem;

4. Governmentshould,asmanagerrather thanproducer, intentionallydevelopthecontractandcommercialskillsthatwillallowittoeffectivelyserviceitscitizens;

5. Governmentshouldallocatemore timeto thedesign-realitygapsofITprojects,so thatrealpeopleknowhowtosolverealproblemsusingIT’s(oftenintangible)functionality.

SmartGatedemonstratesthatpositiveoutsourcedIToutcomesaremostdefinitelyachievable.FocusingontheprinciplesabovecouldcontributetoimprovingtheoutcomeoffutureoutsourcedgovernmentITprojects.


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ENdNOTES

1 Asapointofgrammar,itisnotedthatthe“schoolspayroll”referstothepayrollsystemofNewZealand’sschools,whichisexternaloftheschoolsthemselves(sothereisnopossessiveapostrophe).

2 TheMinistrymovedtotheDatapaysystemin1996.Priortothatithadprovidedpayrollservicesitselfusingitsownsoftware(Jack&Wevers,2013).

3 Ironically,theverysamepracticeshadalsocausedproblemswhentheMinistrymovedtotheDatapaysystem(Jack&Wevers,2013).

4 Interestingly,andasanexampleofpoorcommercialpracticeinitsownright,Talent2didnotpushbackagainsttheMinistry’sscopecreep(Jack&Wevers,2013).


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Scott Winnard is an MSc (Public Management and Governance) candidate at the Department of Management, London School of Economics and Political Science. He previously obtained an LLM (Cum Laude) from the University of Amsterdam and LLB (Honours) / BCom from the University of Auckland. He was formerly a corporate solicitor in Auckland, New Zealand.

5 Williamsonidentifiessmallnumbers(ofproducers)and/orcounterpartyopportunismasreasonsformarket transaction costs too (Williamson, 1975; Williamson, 1985). However, these factors are lessrelevantfortheanalysisinthispaperandarethereforenotdiscussedfurther.

6 ThereislimitedpubliclyavailableinformationregardingthecontractbetweenNZCustomsandMorpho(thisisprobablybecausenothingsignificanthasgonewrong,sothecontracthasnotbeensubjectedtopublicscrutiny).

7 Market based transaction costs cannot be completely eliminated. In pursuing market solutions, thegovernmentmustacceptatleastde minimisexposure.

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