Executive Summary and Findings

1 Over the period November 2004 to February 2009 Voco Limited (Voco) was contracted by the State Services Commission to provide a range of technical and project management services for the Government Shared Network (GSN) project. As at 20 February 2009 the total cost of these services, provided under a series of contracts, variations and extensions, stood at just under $7.5 million. Voco is currently scheduled to complete its GSN work in May 2009. Ten additional contracts for non GSN-related work, worth just under $160,000, were also entered into over that period between the Commission and Voco.

2 In late 2008 it was reported in the news media that questions had been raised about the Commission's handling of its contractual arrangements with Voco, including the way in which possible conflicts of interest had been managed. Other reported criticisms were that Voco had been overpaid for its work and that variations and extensions of its contracts should have gone out to tender.

3 A number of reviews have been undertaken of the GSN project. The Minister of State Services confirmed in an announcement on 3 February 2009 that the GSN initiative was no longer financially sustainable and is being discontinued.

4 This inquiry deals specifically with the contractual arrangements between the Commission and Voco; how any potential conflicts of interest were managed; whether the procurement and contracting arrangements with Voco were in accordance with the rules, policies and expectations in force at the time; how well managers handled the contract arrangements; and the adequacy of the Commission's support and internal control systems.

5 On the basis of the interviews I have conducted and the documentation I have examined, I am satisfied that there was no deliberate wrongdoing on the part of either Commission staff or Voco employees in relation to these contracts. On the other hand, the inquiry has revealed: one instance of a situation involving a prior professional association that was not well managed; a number of irregularities in the way the contracts were let, extended and varied; issues around the management of the contracts; and some weaknesses in the Commission's support and internal control systems.

6 This inquiry has for obvious reasons focussed on shortcomings in the management of the contractual arrangements with Voco. In the interests of balance and fairness, I would ask readers of this report to bear in mind not just that this inquiry was conducted with the enormous advantage of hindsight but that Commission staff involved in the GSN undertaking faced a huge challenge in getting this complex, "first of a kind" project off the ground. The project was, in effect, aimed at creating a whole new telecommunications network for the public sector - an extremely ambitious undertaking for a small, policy-oriented agency like the Commission. It is hardly surprising that a number of hard lessons were learned from it. Not only did the design of the project impose significant risks and challenges, but a number of difficulties that arose during the project's trajectory (for example, the increased competitiveness of major telecommunications companies and the delays and technical problems caused by key suppliers not living up to their obligations) were outside the control of the project managers.

7 I have seen compelling evidence of the hard work and commitment of Commission staff who worked on the project. For the most part their work was of a high professional standard - and in many cases they went far beyond the call of duty in their efforts to work through the multitude of difficulties that surrounded the project. Nothing in this report should be held to call into question either the good faith or the hard work of the staff concerned.

8 My findings under each of these headings (with a more detailed explanation of the thinking behind them in the relevant sections of the report) are as follows:

Conflicts of Interests

9 There was one situation that was not managed either well or in accordance with the rules and policies in force at the time. The Deputy Commissioner (ICT) failed to declare an earlier association with Voco at the time that the initial (design) contract was being let in November 2004. Although the Commission did not maintain a formal register of interests, this failure to advise the State Services Commissioner of the earlier association and discuss with him how to manage it put him in breach of the Commission's Code of Conduct. Having examined the relevant papers and spoken with the people involved, I am satisfied that no pecuniary interest was involved; that the lapse was inadvertent rather than deliberate; and that the Deputy Commissioner (ICT)'s prior connections with Voco would not have influenced the decisions taken on either the initial contract or subsequent contracts and extensions. It does however constitute a technical breach of the guidelines and policies in force at the time.

Handling of Procurement and Contract Arrangements

10 There were a number of irregularities and oversights in the way Voco contracts were let, extended and varied. To some extent these can be explained by the tensions between the project's commercial and operational imperatives and the Commission's standard operating procedures. Nevertheless - and even acknowledging the pressures on under-resourced managers and that the lapses were generally procedural in nature and unlikely to have had any significant impact on overall project outcomes - the irregularities reflect poorly on the Commission's project management team.¹ Whether or not they received adequate assistance from the Commission's support units, it was ultimately their responsibility to ensure that correct procedures were followed and proper records kept. A desire to move the project along rather than spend scarce time doing things "by the book" - particularly when the book in question was never designed for a large and complex commercial project - while it might explain why the short-cuts were taken on contracts, is no real excuse.

11 It is to my mind questionable whether the closed tender process used to award the initial (design phase) contract in December 2004 was the most appropriate way to go. On the one hand, the sum involved was relatively small (although the initial estimate of $200,000 later increased to over $700,000) and the impending departure overseas of two key players and the upcoming Christmas break argued for quick action. While the process did comply with the rules in force at the time (a closed tender approach was allowed in circumstances where only a small number of firms had the requisite capability) it might in retrospect have been wiser to have followed an open tender process - both because of the prior associations described above and because of the evident importance of getting the overall project design right at the outset.

12 The decision in October 2005 to award the first major implementation contract to Voco without going through an open tender process was both unwise and a technical breach of the Commission's Consultants Policy in force at the time. This was by any standards a large contract as well as a major step change in the project - it marked the move from design to implementation. While the arguments for a non- contestable approach were set out clearly in the Project Owner's submission to the Deputy Commissioner (ICT), in all the circumstances an open tender process would have been both a more prudent and the correct course to follow.

13 It is not clear to me that the cumulative effect of the many extensions and variations to Voco's initial contracts were fully taken into account by the Commission's project the "whole of life" costs of any project.) Delays and cost overruns are a significant and unfortunate feature of the GSN project. While there are many reasons for this - and to a large extent they lay outside the project's control - more careful planning at the outset, coupled with a more measured and better documented approach to contract extensions and variations, might have helped.

14 For the record, I do not attribute any responsibility to Voco for any of the slip-ups identified above. They had every right to expect, as I believe they did, that the Commission would have followed the correct procedures in letting and extending the contracts.

Quality of Management Decisions

15 With the advantage of hindsight it can be seen that a serious weakness of the GSN project which complicated the decision-making that went into Voco's role was the inadequacy of the GSN governance arrangements - and in particular the lack of clarity around the roles and responsibilities of the three oversight bodies. Much effort went into the development of a governance structure - and many people put a lot of work into the supervision of the project - but in the final analysis the structure did not work well. Given the scope, importance and complexity of the GSN project, a single governance body charged with full oversight responsibility and working direct to the State Service Commissioner, would have seemed preferable. By full oversight responsibility I mean setting and reviewing the strategic direction for the project, keeping an eye on changes in the environment that might affect the ongoing viability of the project and monitoring the performance of the project management team.

16 The Commission's internal management structure for the GSN project also posed a problem in terms of decision-making on Voco's contracts. Perhaps the most serious weakness was that the Deputy Commissioner (ICT) and Project Owner were apparently expected to discharge their responsibilities to the GSN project within some 5% and 15- 20% respectively of their time. This was clearly inadequate. To be fair, an attempt was made in early 2007 to employ a full-time programme manager. It was however not until early 2008 that this occurred. Moreover the matrix management arrangement that came into effect on the declaration of Project Exit seemed to require very high maintenance. Again, a single line of accountability from a full-time, Commission-employed GSN project manager to the Deputy Commissioner might have been a better option.

17 There were also shortcomings in the arrangements made within the Commission to provide the project with specialist support in such areas as financial management, legal advice, documents management and office accommodation. These weaknesses put additional pressure on the Commission's project management team and made it more difficult for them to discharge their responsibilities. This is dealt with more fully below.

18 A weakness in the GSN project as a whole as well as in the contractual arrangements with Voco was the seeming absence of any independent mechanism for reassessing the status and prospects of the project at key milestones. Rigorous peer reviews of the kind currently being trialled under the "Gateway Process" might have helped, particularly at the point at which the more competitive approach of major telecommunications companies and repeated delivery problems were causing client agencies to lose interest in the GSN. Certainly there is evidence that the way ahead was constantly under review by the project team. There was in addition an independent quality assurance (IQA) process run by Hexad, regular monitoring of the project by the Treasury and Audit New Zealand and the deliberations of the GSN Steering Group, the All-of-Government Advisory Board and the Commission's Senior Management Team. A comprehensive "Performance Measurement and Reporting Framework" and monthly project status reports were also in place. But despite all these measures, the key risks and problems facing the project never seemed to be highlighted or analysed to the extent they should have been - or to get quite the attention or action they required.

19 There is a question in my mind about the wide-ranging nature of the responsibilities given to Voco under the October 2005 contract and subsequent variations and extensions. It was inevitable once the decision was taken to house the GSN project in the Commission that a firm such as Voco would need to be contracted in to provide the project team with the necessary technical and project management skills. I am told that the Commission's management team rated Voco's performance highly. But I am left with misgivings about the decision to give one firm so much of a say in the design and management of a project to which they were also a major supplier of services. That, together with the decision to use Voco to represent the Commission in its dealings with client agencies, would have added considerably to the already-heavy responsibilities of the Project Owner for contract monitoring and supervision.

20 Another feature of the Voco contracts that must have placed real pressure on the Project Owner was that they were time and materials-based. Voco's invoices were normally certified for payment by the Project Owner. He stated to me that he stayed close to the project at all times, kept a careful eye on Voco's performance and did not authorise payment until he was fully satisfied that they had met their contractual responsibilities. There was however little documentary evidence of just how the firm's performance against each contract had been assessed. While I can understand the Project Owner's desire to get on with the project rather than spend time filling in forms and documenting discussions and decisions, I have to note that the absence of an audit trail makes it difficult to assess either Voco's performance or his own management of the contracts. And while the available documentation indicates that Voco's costs were generally in line with market rates - and benchmarking exercises were conducted from time to time - it is not clear to me that the rates were always - in the words of the Controller and Auditor- General - "actively negotiated" to the extent they might have been.

21 Questions were raised with me about the decision to declare "Project Exit" in September 2007, when not all the key products were ready to be rolled out and the project was still bedevilled by technical problems and supplier delays. On the one hand there were strong arguments for moving the project from an implementation into an operational phase - for example, the need to show agencies something for their money, an interest in reducing run rates and the desire to move a major (non-Voco) supplier on to a new set of contractual arrangements. On the other hand, there were a number of issues with the reliability of the products rolled out as well as a number of products still in the pipeline. This was clearly a trade-off situation, and the records show that it was debated strongly at both management and governance level. Perhaps it was one of those situations in which there is no good answer and you take what seems to be the least bad option.

22 Finally, I note that this section deals with the quality of the Commission's decision making on the GSN initiative and its handling of the Voco contracts. I have not attempted to assess the performance of Voco or any other contractor or supplier involved in the project.

The Commission's Support Systems and Controls

23 As indicated above, it was always going to be a stretch for the Commission's specialist support units (primarily the Finance and Legal sections, Records and Office Services) to accommodate the demands of this large, technology-driven and heavily commercial project. Difficulties and frustrations were experienced on both sides of the interfaces. In retrospect, a stronger effort should have been made to assess the project's support needs at the outset, to adjust resourcing levels in the support units and to establish with greater clarity just how the relationships should work. Alternatively, or additionally, more specialist support should have been built into the project team.

24 The Commission's internal control systems had difficulty coping with the advent of the GSN project. The Commission's arrangements for contract management had traditionally been dispersed over a number of units - an arrangement that might have been adequate for its mainstream work but was not well suited to the needs of the GSN project. Much the same could be said to apply to the areas of financial and risk management. I was encouraged to see that the Commission is now moving strongly on the establishment of an independently-chaired Risk and Assurance Committee, a strengthened risk management register, a centralised and strengthened contract management system and an internal audit capability. Whether or not another project of this kind is ever housed in the Commission - and at this juncture that seems unlikely - these moves stand to be of considerable benefit to the Commission.

¹ The term "Commission's project management team" is normally used to denote the Deputy Commissioner (ICT) as Project Sponsor and the Project Owner.