25 June 2008 by

Outsourcing and technology procurement in the public sector

Outsourcing has dramatically increased in popularity in the last few years, especially in the technology environment. Outsourcing suffered in South Africa in the 1990's as a result of a number of large technology outsourcing transactions going sour.

Outsourcing’s bad reputation was caused partly by a lack of understanding of how successful outsourcing should operate and partly as a result of outsourcing service providers over-committing to customers, with resultant difficulty in performing to standard. However, businesses have learnt from these mistakes and now understand the potential benefits of having well managed outsourced service arrangements, especially in respect of non-core aspects of their businesses.

Public entities have also realised the vast benefits of outsourcing certain or all aspects of their technology requirements to third party service providers.

As a public entity or as a service provider tendering to public entities for technology related outsourcing or procurement contracts, it is essential that any decision to embark on a tender process for the outsourcing of services or to bid for the provision of such services, is taken after careful consideration of the legislative backdrop.

A public entity would be required to consider the various legislative constraints under which it would have to conduct the tender process and bid evaluations. The importance of government procurement in South Africa is underpinned by its specific mention in the Constitution of South Africa which states that all such procurement has to be "fair, equitable, transparent, competitive and cost-effective". To give effect to the constitutional status of government procurement, various statutes have been enacted to regulate these activities, including the Public Finance Management Act, the Municipal Systems Act, the Municipal Finance Management Act, the Broad Based Black Economic Empowerment Act, the Promotion of Administrative Justice Act and the Preferential Procurement Policy Framework Act. In addition, the common law and the general rules applicable to administrative and constitutional law also have application.

When contracting for technology services in the private sector, basic commercial requirements are generally the only overarching factor in the decision to appoint a service provider. Conversely, public entities, being statutory creations, are required to act strictly within the legal bounds conferred upon them by statute. Parties need to be aware that the relevant statutory requirements may result in a lengthier tender and evaluation process than is generally the case in a private sector context, and this may have concomitant cost implications.

An extensive tender process would usually be required to be followed in line with the public entity's internal procurement and tender rules and procedures. Outsourcing services represent many complexities in the evaluation and consideration of bid responses. Therefore, marrying internal procedures with obtaining the best results so as to attain the intended benefits of outsourcing the services in the first place (such as attaining reduced costs, increased efficiency and the enablement of state-of-the-art technology), can be a tricky task.

As most complex technology procurement and outsourcing tenders would involve a multi-phased tender process, both the public entity and the bidder should be aware of the risks inherent in a tender for outsourcing services in the public sector, including the time frames for the conclusion of such a process.

In terms of the Promotion of Administrative Justice Act and to ensure fairness and transparency, the evaluation and adjudication criteria which will be used to evaluate the bid responses have to be disclosed in the tender documentation. This will enable the potential bidders to make an informed decision as to whether they wish to tender or not, and should they choose to tender, these criteria will assist the bidder to prepare a responsive tender submission. However, public entities are warned to consider the criteria which they include in their tender documentation very carefully, as these cannot be subsequently changed or not applied in the tender evaluation.

Most technology outsourcing services relate to complicated technology environments and services. Accordingly, it is not always possible or practical for all of the service requirements to be specified in detail in the tender documentation. It is crucial that a public entity includes detailed and clear specifications in its tender documentation to bidders. If not, it risks receiving inconsistent bid responses and further complexity in having to clarify a large number of its service requirements with bidders.

As any decision to award a tender to a bidder constitutes an administrative act, the provisions of the Promotion of Administrative Justice Act apply to such tender process. Accordingly, a public entity has to treat private contracting parties fairly in relation to each other. Thus, even though sufficient time and information may have been given to enable interested parties to participate, all bidders should be treated fairly in relation to each other. No preference should be afforded to any one bidder over another.

In keeping with the requirements of procedural fairness, a public entity cannot allow some bidders more time for the preparation and submission of their tender response than others. Further, the same information should be made available to all bidders. If the adjudicating party expresses a view prior to or during a hearing regarding how it would decide a matter, this may lead to the conclusion of an apprehension of bias on the part of an unsuccessful bidder.

Records of tender evaluation procedures should be meticulously maintained by the public entity. This is because an unsuccessful bidder is entitled to request reasons for not being awarded the tender in terms of the Promotion of Access to Information Act. An unsuccessful bidder to a government tender would be entitled to challenge a public entity's decision in respect of a tender, whereas in a private sector transaction, very little room exists for such a challenge.

In addition, the relevant employment and competition law implications of an intended outsourcing transaction require consideration.

An assessment of labour law implications should be carried out early in the process so that the appropriate steps are timeously initiated with employees (and the relevant trade unions) who are likely to be transferred to the service provider, or who may be retrenched.

Where the outsourcing arrangement includes the transfer of productive assets (which may be used to render services to third parties as well as the outsourcing customer) to the new service provider, the transaction may require prior approval in terms of the Competition Act, provided that certain financial thresholds for notification are met. Such notification process should be initiated at the earliest possible time in order to avoid or reduce any time delays which may result from the Competition Authorities considering the transaction.

Preeta Bhagattjee

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