Outsourcing

The term “outsourcing” as used in this advice refers to a government agency contracting a third-party – for example, a private company or a non-profit organisation – to deliver and manage a service. Effectively, the government agency has made a decision to buy the service rather than make the service. Common examples of outsourced services are the provision of housing, disability services, employment services, and facilities maintenance (including cleaning, gardening, plumbing and electrical services).

Outsourcing is a type of procurement, but as some of the corruption risks are distinctive, specific advice is provided here.

Outsourcing a service or other function does not make corruption risks disappear. In some cases, additional risks might be created. For example, “regulatory capture” might occur where regulators come to identify with, and favour, the individuals or organisations delivering outsourced services that they are supposed to regulate. Third-party providers of outsourced services also have a specific financial incentive to cover up mistakes, poor performance or poor handling of complaints.

Corruption risks in outsourcing

Corruption risks in outsourcing
An investigation by the ICAC into assessors contracted by a regulatory agency highlighted the risks for corruption in outsourcing certification and assessment services. The testing of applicants and issuing notices of satisfactory assessment to operators of heavy plant and equipment was outsourced. The ICAC’s investigation found that assessors received bribes from candidate operators in return for issuing the notices. One assessor received an estimated $470,000 in bribes over seven years; another received $1.2 million in bribes over eight years. The ICAC identified a number of factors that should have alerted the agency to the high risks involved in outsourcing certification services, including a strong and highly profitable market for the provision of competency assessments, the fact that certificates of competency were a valuable commodity, and the fact that outsourcing diluted centralised control over assessor activities. Understanding the impact of these environmental factors is essential for the control of corruption risks around outsourcing, but it also requires dedicating resources to this effort and a long-term outlook by managers. `Source: Report on investigation into safety certification and the operation of the WorkCover NSW Licensing Unit, March 2006.`

An investigation by the ICAC into assessors contracted by a regulatory agency highlighted the risks for corruption in outsourcing certification and assessment services. The testing of applicants and issuing notices of satisfactory assessment to operators of heavy plant and equipment was outsourced.

The ICAC’s investigation found that assessors received bribes from candidate operators in return for issuing the notices. One assessor received an estimated $470,000 in bribes over seven years; another received $1.2 million in bribes over eight years. The ICAC identified a number of factors that should have alerted the agency to the high risks involved in outsourcing certification services, including a strong and highly profitable market for the provision of competency assessments, the fact that certificates of competency were a valuable commodity, and the fact that outsourcing diluted centralised control over assessor activities. Understanding the impact of these environmental factors is essential for the control of corruption risks around outsourcing, but it also requires dedicating resources to this effort and a long-term outlook by managers.

Source: Report on investigation into safety certification and the operation of the WorkCover NSW Licensing Unit, March 2006.

The corruption risks created by outsourcing mean that inspecting, monitoring and auditing delivery and quality of goods and services may require more (not less) resources. This is because the cost and effort involved in reviewing outsourced activities delivered by a third-party are often higher than reviewing the actions of public officials.

Common corruption risks in outsourcing include:

a public official outsourcing work to a company in return for a benefit
a company performing outsourced work colluding with in-house agency staff to cover up poor performance, such as by falsifying data and results
a company performing outsourced work colluding with in-house agency staff to submit false claims for work not performed.

Developing a strategy

The following actions may help an agency verify delivery of services and reduce corruption risks related to outsourcing.

Perform independent assessments: random or continuous evaluation of delivery by managers can act as a deterrent to corrupt conduct. In cases of hard-to-quantify services, such as client wellbeing, there may be a need to employ dedicated assessors to verify quality and quantity of delivery.
Specify measures in contracts: performance indicators regarding both quality and quantity of deliverables can provide incentives to deliver, as well as assistance to monitoring.
Monitor the deliverable, not the process: by focusing on outcomes (for example, competent operators of heavy plant and equipment) rather than on process (for example, monitoring and auditing the conduct of assessments by third-party assessors at pre-arranged times), poor performance could be discovered faster.
Evaluate control weaknesses arising from proposed outsourcing arrangements: the development of a comprehensive risk management framework prior to an agency embarking on a large-scale outsourcing arrangement will help identify weaknesses in the control environment.

The ICAC’s publication, Controlling corruption opportunities in the provision of maintenance services (February 2017), contains advice regarding how to minimise corruption opportunities arising from outsourced maintenance services.

The report, Investigation into false certifications of heavy vehicle competency-based assessments by a Roads and Maritime Services-accredited assessor (January 2014), identifies a number of control weaknesses that arose from the outsourcing of heavy vehicle licensing.

Updated December 2018