Public sector outsourcing costs double the private spend

A recent study has found government agencies are consistently spending more on managing outsourcing contracts than the private sector.

While the private sector spends around 3 percent of the total cost of the contract, the public sector spends around 7.1 percent, according to the research undertaken by consultancy firm ITNewcom.

The research examined IT sourcing trends across Australia and New Zealand covering 31 organizations which account for $9 billion worth of outsourcing deals.

The report attributed the high public sector management costs to compliance, pointing out that government departments require a high level of transparency.

"There is a strong emphasis on the transparency and auditability of financial outcomes, resulting from obligations to the Financial Management Act and Senate Estimates therefore increasing the cost of managing the sourcing arrangements," the report said.

IDC associate director Jens Butler agrees this could be one of the main reasons why the public sector tends to spend more managing outsourcers. "I think generally in government there are a few more hurdles to jump over," Butler said.

"But the cost of managing outsourcers does vary from department to department, it can depend on a lot of factors, including the complexity of the outsourcing contract in question."

Also Butler said, the private sector has fewer stakeholders to report to.

"For the private sector the main accountability is really the bottom line," Butler said.

Governments are more proactive when it comes to reviewing contract terms and are more likely to manage multiple vendors, she said.

However, the findings surprised Gartner research vice president of sourcing, Jim Longwood.

He says organizations should typically spend 5 to 7 percent of the contract managing their outsourcers, regardless of the sector they're in.

"From this report's statistics, it sounds like the public sector is in the realm of what we would expect, and the commercial sector sounds a little low," Longwood said.

"I'd expect the private sector to be a lot closer to the public sector."

Melbourne Water, a public sector utility, was also surprised by the results.

David Salter, Melbourne Water's project manager for information systems agreed with Gartner.

"We are reasonably efficient in managing our outsourcers, so I couldn't say why there would be such a difference," Salter said.

Melbourne Water manages multiple providers and Salter said it is one of the key responsibilities.

"Our main roles are managing service providers and managing user expectations," he said.

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