Seminar on Latest Trends in Outsourcing and Innovation

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Seminar on Latest Trends in Outsourcing and
Innovation

• Outsourcing Review in
• Major Procuring Departments
• Ms Kitty Choi
• Head, Efficiency Unit
• 9 August 2006

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Outline of Presentation

• Background
• Labour exploitation issue
• Outsourcing effectiveness
• Good outsourcing practices
• Way forward

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

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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

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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

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Service-wide Measures

• FC No. 3/2004
• Mandatory requirements on tender assessment
• Demerit Point System
• Conviction records

FC No. 3/2001 Marking scheme to take account of
proposed wages and working hours
Standard Employment Contract

• FC No. 5/2004
• Mandatory wage level

• FC No. 4/2006
• Tightened mandatory requirements on tender
  assessment

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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

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Extent of Problem

• Departments under study

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Extent of Problem

• Convicted summons by Labour Department

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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

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EUs Observations Extent of Problem

• Problem seems under control
• Current measures seem to work
• The media, staff union and public may think
  differently

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EUs 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
• Dont over-do it

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EUs 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

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EUs Observations Impact of Measures

• On departments
• Generally raised contract price

17 for one dept.
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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

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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

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Suggested Additional Practices

• Responsive complaint system
• Proactive investigation of complaint cases
• Build up confidence in departments 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

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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
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Outsourcing Achievements HD
Estate management and maintenance services

• Marked improvement in service quality

• Increasing trend of tenant satisfaction level
• Drove up service standard of in-house services

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Outsourcing Achievements HD
Estate management and maintenance services

• Cost saving
• Substantial cost saving achieved

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Outsourcing Achievements GPA
Property management services

• Reformed outsourcing model in 2001-2002
• Steady increase in customer satisfaction level
• Achieved cost savings

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Outsourcing Achievements LCSD
Cleansing, security and horticultural maintenance
services
Sports centre management services

• Long history of outsourcing
• Significant cost saving achieved
• Outsourced progressively since 2000
• Service quality largely maintained
• Substantial cost saving achieved

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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
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EUs 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

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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

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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

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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

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Service Specifications

• Appropriate service levels
• Avoid gold-plated service level specifications
• Nonetheless, seek continuous improvement
• Avoid under specifications

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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

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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 gt 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

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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

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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

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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
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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

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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

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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

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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

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Whats 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

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• The EU stands to help

Contact us Help desk 2165 7255 E-mail euwm_at_eu
.gov.hk Website http//www.eu.gov.hk