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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. Outline of Presentation. Background Labour exploitation issue Outsourcing effectiveness Good outsourcing practices Way forward.

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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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2001

2002

2004

2005

2006

Service-wide Measures

FC No. 3/2001

Marking scheme to take account of proposed wages and working hours

  • FC No. 3/2004

    Mandatory requirements on tender assessment

    • Demerit Point System

    • Conviction records

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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EU’s 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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EU’s 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

      • Don’t over-do it


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EU’s 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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EU’s 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 department’s 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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Estate management and maintenance services

Outsourcing Achievements – HD

  • Marked improvement in service quality

  • Increasing trend of tenant satisfaction level

  • Drove up service standard of in-house services


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Estate management and maintenance services

Outsourcing Achievements – HD

  • 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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Cleansing, security and horticultural maintenance services

Outsourcing Achievements – LCSD

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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EU’s 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 preparation

  • Contract development

  • Service specifications

  • Contract structuring

  • Commercial arrangements

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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Contract preparation

  • Contract development

  • Service specifications

  • Contract structuring

  • Commercial arrangements

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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Contract preparation

  • Contract development

  • Service specifications

  • Contract structuring

  • Commercial arrangements

Service Specifications

  • Appropriate service levels

    • Avoid “gold-plated” service level specifications

    • Nonetheless, seek continuous improvement

    • Avoid under specifications


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Contract preparation

  • Contract development

  • Service specifications

  • Contract structuring

  • Commercial arrangements

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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Contract preparation

  • Contract development

  • Service specifications

  • Contract structuring

  • Commercial arrangements

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 >= 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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Contract preparation

  • Contract development

  • Service specifications

  • Contract structuring

  • Commercial arrangements

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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Tendering

& selection

  • Tender evaluation

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

  • Relationship management

  • Performance monitoring

  • Review

  • others

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

  • Relationship management

  • Performance monitoring

  • Review

  • others

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

  • Relationship management

  • Performance monitoring

  • Review

  • others

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

  • Relationship management

  • Performance monitoring

  • Review

  • others

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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What’s 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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Contact us

Help desk: 2165 7255

E-mail: [email protected]

Website: http://www.eu.gov.hk


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