Ministry of Defence underestimated the importance and enforcement of principles of the good outsourcing practice
Press Release – November 19, 2008
Auditors from the Supreme Audit Office (SAO) performed an audit of management of the state budget funds spent on the outsourcing project of the Ministry of Defence that was implemented from 2004 to 2007. The project objective is to outsource the non-military general provision so that the Army of the Czech Republic can concentrate on their military goals. Owing to systemic shortcomings in the implementation of outsourcing and underestimating the importance and enforcement of the principles of good outsourcing practice, the Ministry failed to attain some of its implementation targets.
The Ministry underestimated the importance and enforcement of the principles of good outsourcing practice, which constitute a prerequisite for any successful outsourcing. Owing to systemic shortcomings in the implementation of outsourcing, the Ministry failed to attain some of its implementation targets. It failed to establish evaluation mechanisms such that would allow for monitoring and evaluating the outlays expended on selected outsourced activities and for demonstrably affirming the economic benefits derived from outsourcing. With most services, the Ministry only applied one single criterion, namely the lowest bid price. In some cases, however, this criterion proved to be ill-suited from the points of view of quality of the service and of the required flexibility on the part of the subcontractors.
“The audit focused on internal control systems of the Project, and the auditors exercised over the military experience from other members of the NATO and made the best account of foreign audit institutions’ skills. An external expert from the University of Defence in Brno provided us with useful information too”, said president of the SAO František Dohnal.
The Ministry failed to establish such evaluation mechanisms that would allow for monitoring and evaluating the outlays expended on selected outsourced activities and for demonstrably affirming the economic benefits derived from outsourcing. With most services, the Ministry only applied one single criterion, namely the lowest bid price. In some cases, however, this criterion proved to be ill-suited from the points of view of quality of the service and of the required flexibility on the part of the subcontractors.
„Outsourcing can bring a significant improvement to the efficient and economical utilization of the state budget funds, but only on the ground that the organization follows the best practice principles. The project control had to deal with insufficient timing and concepts of accepted decisions, which were connected with improper demarcation of competences and powers of the Ministry’s organizational divisions responsible for the implementation. The auditors concluded that the Ministry’s top management failed to endorse the outsourcing“, said president Dohnal.
The Ministry when defining the terms of the contractual relationship failed to adopt an equal approach to all subcontractors, which would be conducive to creating conditions for a long-term and effective cooperation and would ensure that the services will be met to the full extent, in compliance with the needs of the contracting authority. In some contracts, certain data of essential importance for computing the unit price remained unspecified. The contracts usually omitted the data needed for unit pricing. The contractual fines were defined in variant levels and there were different application methods and ways of their calculation.
„Owing to systemic shortcomings in the implementation of outsourcing, the Ministry failed to attain some of its implementation targets, especially to decrease organizational demands connected with providing the services and transferring the responsibility to the contractors. Since the Army of the Czech Republic is being reformed and its stuff is being reduced, the essential cleaning, catering, and security services have been provided for. The rate of outsourcing will rise in connection with the Army’s transformation processes. This audit conclusion should help the Ministry to enforce the best practice principles during the second stage of the project that will focus on outsourcing the armament”, said president Dohnal.
The auditing operation was included into the 2008 Audit Plan of the SAO under No. 08/01. Ladislav Zeman, Member of the SAO Board, controlled the operation and prepared the conclusion as well.
Radka Burketová
Press Speaker
Supreme Audit Office