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Central Government, Government Data Management, Local Government, Policy, Technology

Should data centres be outsourced?

By Jianggan Li | 19 January 2010

Government data centre outsourcing contracts can help local IT players grow. This creates jobs and boosts the local economy. But the real dynamics of data centre outsourcing have been slow to take off in Asia. Why?

Privately owned by two New Zealand organisations, Datacom is the country’s largest IT provider. The company employs more than 3000 staff (more than 1500 are New Zealand-based) and annual revenues of US$460 million.

The firm recently entered Australia and Malaysia. A recent estimate by New Zealand Trade and Enterprise, the country’s outward investment promotion agency, ranks Datacom, which employs 550 technical staff, as the largest New Zealand-owned employer in Malaysia, even surpassing Fonterra, the famous dairy co-operative. The company’s Australia and Asia head Michael Browne says the company’s Malaysia headcount will increase to 700 by March, with a new office opening soon in the Philippine capital, Manila. Around 90 people will be hired there. The company also opened a new NZ$30 million (US$ million) data centre in Auckland in July.

All very positive. But let’s rewind the clock a bit. Laurence Millar, the former Government CIO of New Zealand, reveals that as a major outsourcer for the New Zealand government, the company gained much momentum through its contracts hosting and managing government’s IT infrastructure in the early days of rapid expansion.

A survey by the State Services Commission, the organisation Millar worked for until earlier this year, released a survey recently suggesting that Datacom had overtaken EDS to become the second largest ICT supplier to government agencies, after Telecom New Zealand.

“The government has traditionally been bad at running their own data centres,” he says. “Why don’t we let the professionals manage them? This will not only allow us to focus on our core business, but helps the local IT industry to grow.”

Measuring the positive impact
It is difficult to get hard numbers on how the real contribution such outsourcing deals make to the economy. While Datacom is a notable example of a company that grew into a significant industry player with the help of government contracts, but the direct impact on the economy is hard to measure. But economists are trying.

Professor Russel Cooper is a research fellow at Australia’s Macquarie University. He is currently leading a study on the impact of public sector service outsourcing on GDP. The research, entitled “Public sector utilisation of specialised IT services – an econometric study of macroeconomic effects”, finds a positive correlation between government outsourcing and the economic output of the society, claims Prof Cooper.

The paper examines macroeconomic data from 33 countries, with government IT contracts annualised during their tenure. Prof Cooper’s model, though difficult for a non-economist to interpret, uses the United Kingdom as the base example, showing that in 2003, public sector IT contracted out US$32.23 per capita, or 0.115 per cent of the GDP, which helped achieve a US$212.62 increase in GDP per capita.

The total value of outsourcing contracts of the UK increased seven-fold between 2000 and 2008, while many countries in Asia, with the notable exception of Singapore, have not seen much increase in government outsourcing contracting value.

Prof Cooper reckons that to match what the UK has achieved during that period, India would have to spend US$3.58 per capita on government IT contracts, which would have derived a GDP per capita gain of US$41.80. Similarly, a US$ 6.79 contract value per capita not made in the Philippines would not lead to a US$12.30 GDP per capita gain.

“Actively contracting out to cutting-edge IT innovators helps facilitate government efficiency, as well as create a platform for future growth for society,” says Prof Cooper.

He is currently working on incorporating the e-readiness factor of the countries studied into the way the research is modelled to refine the outcome. The results are expected to be released early next year.

East west divide?
It is not only government, but data centre outsourcing and IT outsourcing in general that has been slow to take off in the region. A recent study from a major research firm has labeled many Asian countries as outsourcing ‘laggards’.

Geng Zhao is the Deputy Director of Dalian Government’s Web Site Management Centre. He reckons that the main reason for the slow uptake of outsourcing the management of data centres is cultural, adding that many Asian governments continue to prefer to run their own data centres.

Dalian’s government data centre was one of the first consolidated government data centres in China. It was officially set up in December 2009, and currently runs 585 applications for 25,000 users across 70 different departments.

“This mentality is hard to change,” says Geng, who draws a parallel with house-buyers in China. Despite the fact that the price of an apartment has increased more than five-fold in many cities, people still buy apartments rather than rent them. The latter makes more economic sense, at least in the short term. The former means people have to fork out a substantial amount of their income.

Security and departmental needs are important. So too is the service quality of local outsourcers which, in many countries, is not yet satisfactory. “Often staff turnover is very high, which impedes service continuity,” Geng says. He adds that often domestic service providers overcharge for the quality of their services.

However, while not letting go of the whole management of IT facilities to a third party, Dalian government tries to outsource particular services as much as possible. “Service outsourcing is leveraged throughout the operations of our data centre,” Geng says. Currently five companies are providing services to the government data centre.

The services range from the server room running environment, internet connection, IT system maintenance, mid-range computer servicing as well as security services.

Geng explains that in addition to helping these local companies grow and create job opportunities, these service outsourcing deals also set an example for private companies to follow. This fits into the government’s roadmap to transform the city into an IT hub for East Asia and beyond.

The uptake of outsourcing is generally not high across the board in China, except for a few sophisticated banks and trading companies. A contact at a major Shanghai-based international service provider, who required to remain anonymous, told FutureGov that in many parts of China the value of a contract and proper service-level agreements are still giving away to other, non-contractual, factors. Contractual terms are vague and difficult to interpret when disputes arise. If there is a conclusion from this, it is that the government needs to be a role model in this field.

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