Telstra is set to lose its $90 million outsourcing contract with the federal government’s Group 5 agencies in the wake of a serious security breach involving the loss of backup tapes from the Department of the Prime Minister and Cabinet (PMC).

Agencies within the cluster have confirmed they are currently assessing alternatives with feasibility studies under way before the contract expiring in June 2004.

A number of agencies in Group 5 which includes the Department of Transport and Regional Services (DOTAR), the PMC, the Department of Information Technology, Telecommunications and the Arts and the Australian Competition and Consumer Commission (ACCC) will tender separately for a new provider, thereby breaking up a five-year contract signed in April 1999.

As reported previously in CW (October 27, p3), data tapes held by Telstra Enterprise Services (TES) were stored in a wheelie bin and accidentally thrown out by cleaners who mistook the tapes for garbage.

When the incident occurred earlier this year, DOTAR first assistant secretary Robert Fisher said the agency immediately looked at sanctions including termination of the contract, but pointed out it was not this single security incident that led the agency to begin market testing its IT.

"We did look at the question of termination when the incident occurred . . . but it is the result of a lot of experiences that helped us decide to test the market for alternative providers," Fisher revealed in hearings before the Joint Parliamentary Committee on Public Accounts and Audit.

"Not everybody else in the group has elected to do that. We have taken steps to find alternatives to getting our IT needs met.

"The reality for us is that there were options to extend the contract. We have opted to market test instead of automatically rolling over the contract. . . . We will find a new provider."

Fisher admitted Telstra is likely to be "disappointed", but the "reality is the contract has less than nine months to run."

"The business decision for us is: do we put resources into scoping out a new contract that better meets our needs, given the current arrangements in the department, or do we attempt to renegotiate the four and a half year old contract that we have already figured does not meet our needs? We have decided to put our emphasis on scoping a new contract arrangement that meets DOTAR's current business needs," he said.

Fisher said DOTAR also sought immediate reassurance from TES that no further security breaches would occur before the contract comes to an end.

DOTAR deputy secretary Peter Yuile told the hearing the department's IT security will be removed from current arrangements and bought back in-house.

"The department is clearly changing the arrangements under which its IT will be provided including what is brought back in-house and what is left with external providers," he said.

No decisions will be made until market testing is completed, he said.

A Telstra spokesman confirmed agencies within group five are market-testing and said tendering has already commenced.

He said an investigation was undertaken as soon as the backup tapes went missing and procedures have since been strengthened.

"Telstra deeply regrets that it had mislaid a set of back-up computer tapes, made as part of the federal government Group 5 contract, and takes full responsibility for the outcome," he said.

"There was no loss of information, as new back-up tapes were made and are now securely stored, and there is minimal security risk relating to information on the tapes.

"We have introduced additional safeguards, increased the level of staff training and are conducting a program of regular audits to test our staff and processes.

"After investigating the incident, reviewing and strengthening relevant security procedures and conducting regular audits since, we are confident this was a one-off."