Public Management Information Systems Financing & Contracting Out Tuesday, June 21, 2016 Hun Myoung Park, Ph.D. Public Management & Policy Analysis Program Graduate School of International Relations

2 Funding Sources General tax (tax revenue) User fee Grant and subsidy Enterprise fund Long-term loans Advertisement on the Web Commercial partnerships Philanthropy (donations) and aid Cooperation with other governments

3 Key Financing Questions Who will pay? Tax or user fee? Who will get (need)? Customized or general services? Concentrated? Who will develop? in-house, off-the-shelf, or outsourcing? Types of tasks or online services Types of technologies & IT staffers Long term vs. short term

4 Financed by General Tax Disproportional Benefits & Costs Paid by all citizens Benefits by a small group of citizens Need to consider –User types (young vs. old, individuals vs. firms) –Use patterns (frequency, intensity, etc.) –Technological requirements (e.g., cutting edge technology)

5 Financed by User Fees Can fix disproportional costs and benefits May discourage use of the services. How to determine the optimal level of user fees. Not too high. Reasonable if a small group of clients (firms) frequently uses the online services Chen & Thurmaier (2008): externality and opportunity cost analysis

6 General Tax vs. User Fee 1 General Tax User Fee Numbers of Beneficiaries Small Customized Types of Service Large General

7 General Tax vs. User Fee 2 User Fee General Tax Willingness to Pay Low Technological Requirement High

8 Electronic Procurement 1 G2B (customized services)  User fees Cost and time saving: disseminating RFP, submitting and receiving bids Business process reengineering rather than simple computerization Politics rather than simple technology

9 Electronic Procurement 2 Accessibility and equal opportunity  openness of government Transparency and accountability Technical standards Security issues

10 System Development Strategies Off-the-shelfOutsourcing (Partnering) In-houseCustomized Functionality Unique Local Coverage of the Systems General Global

11 Acquiring Hardware Buy Lease (rent) On-demand or utility computing Purchase used equipment (auction) Upgrade Need to consider the best combination of H/W and S/W given budget constraint. Price and quality to be considered. Lowest price is not always good.

12 Acquiring Software 1 Combination of system and application software Standardization and compatibility (lock-in effect or overdependence must be considered)

13 Request for Proposal (RFP) Specify functional and technical specification requirements to be met Reasonable schedule (timeline) Legal aspect: license of the software, ownership of data, responsibility Compliance with laws and standards Performance measures and rewards (or penalty)

14 Acquiring Software 2 Proprietary versus open source software Customized versus Off-the-self software Packaged software producers (e.g., Microsoft, Oracle, SAP) In-house versus outsourcing software Software as Service (SaaS) Proper license types (based on usage data)

15 Outsourcing Software IT service firms (e.g., IBM, CSC) Enterprise solutions software Enterprise resource planning (ERP) systems (e.g., SAP, Oracle) Cloud computing (e.g., Google, iuj mail) Software as a service (SaaS)

16 Software Purchase 3 In-houseOutsourcing IT experts neededLess needed Competitive market FlexibleLess flexible Less mattersPrivacy and data security issues Less mattersAccountability issues Monitoring needed

17 Software Purchase 4 CustomizedOff-the-Shelf ExpensiveCheap Takes time to develop New to users Use it immediately More familiar with it Varying Need to check Standardized quality Can be evaluated Meet the needs Can control Meet general purposes Depends on vendors

18 Software Purchase 5 Open Source SoftwareProprietary Software Free in generalExpensive New to many users Education and training More familiar with it Standardized but varying quality Standardized quality Rely on collective intelligence in the globe More flexible Vendor dependent Less flexible

19 A Cost Benefit Analysis

20 Outsourcing “Outsourcing was more the result of affordability issues than strategic choice” Best value rather than lowest cost Selective (not entire functions) outsourcing Total cost of ownership: –Capital costs –Operational and administrative support –End user costs—education/training

21 Choice of Outsourcing Tasks with low risk and low importance No sufficient IT staffer and fund available in organizations Political rationality (e.g., competition) by Ni & Bretscheneider (2007) A typology of type (unique vs. general) and coverage/impact (local vs. global) Externality and opportunity cost analysis by Chen & Thurmaier (2008)

22 Potentials of Outsourcing Less costly in IT experts (human resources) Less expensive Up-to-date hardware and software Flexibility and scalability Predictability in financing Competition among contractors.

23 Challenges of Outsourcing Less likely competitive markets (contractors) Monitoring contractors and their performance. Marvel & Marvel (2007) Dependency on contractors (e.g., monopoly and turnover), litigation issues Data security and privacy (accountability) Loss of jobs and labor savings (?)

24 How to Make a Contract? Efficiency gain Loss of effort, quality, responsiveness, accountability, etc. Monitoring performance (rewards & penalty) Where is the equilibrium of this trade-off?

25 Summary in Outsourcing Outsourcing entire functions not recommended IT staff is needed anyway Data owned by government Data security and privacy (public data and private information) Provide incentives and monitor contractors’ performance. Chen & Perry (2003) Role of the leadership of public managers: all contracts are incomplete to some degree