10.22 Outsourcing of the Government payments system

Background 

The Department of Human Services (DHS) delivers more than 200 different services for more than 20 Commonwealth and State government bodies and is responsible for the Government Payment System for those services. The Income Security Integrated System (ISIS) transfers these payments, but is at the end of its life. A replacement system could be expected to cost around $1.2 billion to $1.5 billion.

Each working day DHS approves more than $400 million in payments though transfers to the individual bank accounts of eligible recipients via the ISIS system. DHS has advised that ISIS is a complex transfer system, into which the payments system is embedded. ISIS provides not only the payments system, but also customer management capability – that is, the records and history of recipients of Commonwealth Government social services and payments.

ISIS was developed to calculate and administer social welfare payments nearly 30 years ago and has been adapted as government policies and programmes have changed. It is written in now defunct computer language, is inflexible and expensive.

DHS spends more than $830 million on information and communication technology (ICT) in a year, which represents 19 per cent of its total departmental appropriation. DHS’s ten-year, $98.5 million licensing deal with vendor Computer Corporation of America expires in June 2014.

DHS shares data on its customers with a range of other Commonwealth Government agencies to prevent fraud and improve outcomes for individuals. It provides a whole‑of‑government view of recipients of Commonwealth benefits.

What is a payment system?

A payment system arrangement allows funds usually held in one account at a financial institution to be transferred to another account. It includes payment instruments (cash, cheques and electronic funds transfers) and the arrangements that ensure that funds move from accounts at one financial institution to another. The Government payment system requires a capacity to:

  • assess eligibility for entitlements or grants, in respect of relevant laws, rules and standards;
  • review eligibility when the circumstances of the recipient change;
  • maintain records of recipients and make them available to appropriate agencies as required;
  • approve payments from the government account to individual clients; and
  • report outcomes to the Commonwealth.

The DHS payments system is governed by laws, rules, procedures and standards that inform assessments of eligibility for welfare, study, aged pension and other payments. Once eligibility for the entitlement is established, the Government Payment System enables the funding to be transferred electronically, by cash or by cheque to the recipient.

Current DHS services 

High-level indicators about the workloads and activities of DHS, in 2009, include:

  • DHS delivers more than 200 different services for more than 20 Commonwealth and State agencies, through a network of over 1,000 outlets Australia-wide.
  • There are also 25 Centrelink call centres, six Medicare Australia call centres and 45 Child Support Agency sites that take calls.
  • Each year, DHS receives at least 65 million items of inbound mail and processes nearly 280 million health services transactions through Medicare Australia and 6.6 billion transactions against customer records through Centrelink.
  • Each year working day the portfolio approves about $400 million in payments through transfers to the individual bank accounts of eligible recipients.
  • Each working day 400,000 letters are sent out, 361,000 face-to-face services are provided, 222,000 phone calls are answered and at least 70,000 online transactions by customers are supported.

While the payment cycle now is relatively smooth, with little fluctuation on traditional ‘paydays’, the DHS information and communications technology system that electronically processes those payments is complex.

Drivers 

The complexity of the current system arises from a multitude of policy decisions about the structure and goals of the welfare system and the various changes to payments over decades. Many of these payments are enshrined in legislation. According to DHS, the largest driver of complexity in technology and cost is the system’s magnitude, which has 34 payments and 38 add-on payment types.

The complexity of the payments architecture and interactions between payments creates customer confusion, errors and rework, and requires a highly knowledgeable workforce to provide support.

For example, 60 per cent of all Centrelink claims submitted to the Department need follow up activities to correct information. Some 20 per cent of all claims submitted never reach completion or are rejected due to the ineligibility of the potential claimant.

Because of its age and complexity ISIS adds significant costs to processing payments, maintaining the ICT system, producing letters and responding to appeals and reviews, and it increases the need for debt recovery. A replacement strategy is needed. The timeframe for initiation of the development of a new system could be expected to be 18 to 24 months.

DHS was given authority in the 2013-14 Budget to determine a replacement strategy for its ISIS. It is expected that a replacement system will cost around $1.2 billion to $1.5 billion. The Commission sees little option but to make this kind of investment for such an important and complex ICT infrastructure project.

At the same time, the replacement strategy should identify significant ongoing operational efficiencies from the introduction of a new system which should enable greater self-service and online delivery while reducing the need for manual re-working and regular ICT fixes.

Issues

The development of a new ICT system must consider:

  • the complexity of welfare payment arrangements; and
  • the extent and nature of private sector involvement in the new system.

Complexity of welfare payments

A fundamental question for government is whether the complicated web of government payments can be simplified in parallel with the introduction of a new ICT system – this is a question of both policy and administration.

In addition, the design of the ICT system must allow future welfare policy changes to be incorporated into the payments system more easily and without the risks that come with the existing ISIS.

Some degree of simplification may be possible by simply changing guidelines and legislation that were developed in an era where advanced technology was not available. For example, policy guidelines frequently mandate that compliance or information provision needs to be completed by the citizen in face-to-face channels at specific locations, such as the Personal Contact Interviews required for Newstart customers. Much of this could be done either online or via video conferencing.

Other areas for potential simplification include:

  • standardising definitions for customers, for example, income and asset definitions. Different laws have different definitions for information that customers are required to provide, making it more difficult for customers to understand their obligations and requiring increased customer contact and re-work; and
  • removing discretion in decision making — current social security laws contain decision-making points that are subject to considerable discretion on the part of the decision-maker. There is potential for legislative reform to remove discretion at various points in the decision-making process for assessing payments, which currently require human intervention and cannot be completely automated.

More fundamental changes to the welfare system that could be considered (noting they would require careful policy deliberation) include:

  • simplifying and standardising the income test across payments;
  • reducing the number of primary payments;
  • simplifying grandfathering entitlements, some of which go back 20 years; and
  • consolidating or rationalising add-on payments where appropriate.

Private sector involvement

There is a range of issues to be considered in determining the best blend of private and public sector expertise in the development and management of a very complex ICT system.

Specialist outsourcing providers prefer high volume, low complexity activities that are stand alone because they are generally low risk and can be managed relatively easily. Experience indicates that outsourcing works best where the required service can be easily specified and monitored and where a competitive market of potential suppliers exists independent of government patronage.

Other factors that influence the success or failure of outsourcing arrangements include: the need for appropriate safeguards to protect the rights of citizens; the quality of the scoping of the requirement being outsourced; and the management of the contract and contract variations.

The key consideration in outsourcing the government payment system is the potential for services to be delivered more efficiently and effectively and at a lesser cost.

The immediate driver for considering the option of outsourcing the government payment system is the significant investment required to replace the ISIS. It is important to consider all options for the replacement of the system early in the scoping of the requirement.

Further, an outsourced arrangement has the potential benefit of avoiding major capital outlays for the Commonwealth.

The Commonwealth Government has a long history of outsourcing activities that can be delivered more effectively, efficiently and cheaply by other parties. Examples include the outsourcing of the Commonwealth Employment Service to Job Services Australia, outsourcing of ICT services and the sale of assets that are better positioned in the private sector, such as Commonwealth Serum Laboratories, Qantas, Commonwealth Bank and Telstra.

There are several models for engaging the private sector in the delivery of a new payment system, ranging from fully outsourcing the development of the new system to outsourcing specific functions once a more modern ICT system is in place (including processing and customer management).

Key questions include:

  1. Is there a market appetite to take on the task, noting that Australia Post has already put forward a proposal in the public domain?
  2. Can outsourcing be done without undue risk to a core government activity, such as the assessment of entitlements?

Australia Post proposal

Australia Post has put forward a proposal to take over delivery of a range of government services, particularly those delivered by DHS.

  • The principle focus of the proposal is the physical integration of service points for DHS within Australia Post’s network of over 4,400 retail outlets and its role as a trusted provider of third party services.
  • All DHS functions, other than strategic policy development, would be integrated into Australia Post.
  • Australia Post would bring improved convenience for clients by developing digital alternatives – initially through acquiring the myGov platform operated by DHS – and capabilities to verify digital identities, improve fraud detection capabilities and the supply of direct communication through the Australia Post Digital Mailbox.
  • The proposal would see the 334 Centrelink service centres, as well as 126 rehabilitation centres and 139 standalone Medicare offices amalgamated into Australia Post’s network. In addition, 334 new ‘Supercentres’ would be established to offer DHS and Australia Post services.
  • The proposal is predicated on a one-off investment cost of $1.5 billion to $2 billion and Australia Post has projected it to deliver net benefits of $1 billion to $1.2 billion annually.
  • The proposal claims to deliver total staffing reductions of about 9,000 people, with 5,000 from DHS and 4,000 from Australia Post, resulting in some $700 million of lower costs.
  • The Australia Post proposal would be rolled out over five years from 2015.

At this time, the Commission has not had an opportunity to undertake a detailed verification of the estimates of costs and benefits of the proposal provided by Australia Post.

Assessment of entitlements

Where the service is complex and requires constant quality control, savings achievable through outsourcing can be eaten-up by monitoring costs. In addition, if the supplier market is narrow, with few competitors, governments can become captive to monopolistic exploitation in outsourced arrangements.

Outsourcing arrangements have typically encountered difficulties when the business model changes through deliberate strategic policy decisions by government, rather than improved processes and approaches initiated by the supplier. For the supplier of outsourced services, such decisions can undermine the revenue base on which the contract for the arrangement was entered into. For government, contract changes can lead to very high costs, particularly when the timing of the change is critical.

In relation to this, it is not uncommon for Governments to announce emergency assistance programmes, for example in times of natural disaster, which require new or revised payments to be made urgently. Such events usually require assessment officers to be on-site to provide information and advice on entitlements, as well as to approve payments or provide cash to those affected. Outsourced arrangements often experience difficulties in accommodating emergent needs.

In view of the above, keeping the entitlement assessment function inside government appears to reflect outsourcing experiences, which suggest that outsourcing is not effective in respect of strategic development, or where subjectivity and judgement is required of the outsource service provider. Outsourcing these functions can lead to outcomes that are inconsistent with government policy intent and even legislative requirements.

Assessment processes and the payment of pensions and other welfare entitlements are different for each nation. However, assessment of entitlements largely remains an in-house function of government. For example:

  • The UK Treasury is responsible for disbursements associated with public spending, including departmental spending, public sector pay and pension, annually managed expenditure and welfare policy. The Pension Service helps with State Pension eligibility, claims and payments.
  • Service Canada provides access to programmes, services and benefits for citizens, including pensions. Almost all individuals who work in Canada contribute to the Canada Pension Plan (CPP). The CPP provides pensions and benefits when contributors retire, become disabled, or die.

Potential areas for reform

The Commission supports the view of DHS that welfare payments should be simplified, recognising the challenge this poses for targeting of assistance.

Outsourcing of the payment system should be considered on the basis of prospects for the services to be delivered more efficiently and effectively and at a lesser cost than is the case now. The ongoing management of the system is also a candidate for outsourcing, to drive efficiency and effectiveness.

However, outsourcing does not exempt government and ministers from responsibility for failures.

Even with a simplified payment structure, redesigning the ICT system is a significant undertaking that will require expertise from across the public and private sectors. In addition, the need to re-design such a complex ICT system in parallel with the simplification of welfare policy may complicate any decision about outsourcing.

The Commission considers that, in the first instance, the Government should appoint a highly credentialed business technology expert to oversee the new system design, working with experts from DHS. This person should report directly to the Minister for Human Services and the Secretary of DHS.

The Commission recognises outsourcing of the payments system arrangements would be a substantial and potentially high risk undertaking. It requires very careful consideration.

This would include a judgement on whether the assessment of entitlements is an appropriate activity for outsourcing; whether outsourcing should be confined to the development and maintenance of the replacement for the ISIS, or whether the payment mechanism only should be outsourced.

The Commission does not support the outsourcing of assessment of entitlements.

However, there may be merit in testing the market for the delivery of other aspects of the payments system. A scoping study should be developed, informed by the advice of a business technology expert.