Outsourcing Vs.

In-House Contract
Management in the Public Sector: The Case of
Kuwait
Jassim Alfahhad
Assistant Vice Rector for Academic affairs
Arab Open University - Kuwait

Abstract
Contract management is commonly defined as the management of contract lifecycle process, including
planning, formation, execution and administration. The main purpose of contract management is to
ensure that all involved parties are fully adhere to their respective obligations efficiently and
effectively. A successful contract management requires good preparation, flexibility, knowledge,
relationship management and proactivity. Recently, outsourcing services of contract management
process is an area that is growing rapidly. The prime purpose of outsourcing contract is to increase
efficiency and decrease costs. Due to the encountered difficulties in managing their contracts many
organisations in the public sector have outsourced their services. But how far outsourcing is a
successful process? This paper is an attempt to answer this question by investigating the practices and
experiences of the Kuwait Ministry of Defence (KMOD) in managing its contracts, in particular the
performance type contract. It illustrates the process by which KMOD shifted its policy from defence
contracting (outsourcing) to in-house contracting for the purpose of cost saving. The end results of such
shifting were not successful due to poor-planning, lack of proper contract management skill and other
unforeseen issues.

Keywords: contract management, public sector, outsourcing, defence contracting, ministry of defence,
Kuwait.

Introduction
Legally binding contracts underpin every business transaction, touching virtually every area of the
organization, defining relationships with various stakeholders; customers, partners and suppliers.
Contracts contain clauses, terms, conditions and commitments that need to be managed and controlled
throughout the entire contract lifecycle to maximize business benefits and minimize associated costs or
risks.
Contract management can be defined as the process of systemically and efficiently managing contract
creation, execution and analysis for maximising operational and financial performance and minimising
risk (Elsy, 2007). The term covers the entire procurement cycle, including planning, formation,
execution, administration and contract termination or closes out. The key purpose of contract
management is to ensure the full meeting of all involved parties of their respective obligations,
accountability and commitments efficiently and effectively. Also, it involves delivering the required
operational outputs and providing value for many. Furthermore, it controls the establishment of a
professional working relationship between the service provider and the customer. It is worth stating
that the terms contract management and contract administration are often used synonymously.
Organisations in public and private sectors are facing an escalating pressure to reduce cost, minimise
risks and improve financial and operational performance. Changes in global regulations and increase in
contract volumes and complexity have resulted in an increasing recognition of the importance of
contract management (Dobriansky, 2006).In sum; the importance of contract management is illustrated
as follows:

1
 • It protects the right of the parties
• It ensures the required performance is achieved throughout the contract life cycle
• It balances costs against risks
• It actively manages the customer-supplier relationship

According to UK Office of Government Commerce (OGC) contract management can be broadly

grouped into four types (OGC, 2013):

• Buy side: managing contracts and relationships with suppliers and vendors
• Sell side: managing contracts and relationships with customers, partners and distributors
• HR: managing human resource related contracts and agreements
• Project-based: managing contract performance and obligations

Figure 1 illustrates the main phases of contract management:

Figure1. Phases of contract management

(adopted from Elsy, 2007)
It is argued that good preparation, single business focus, flexibility, proactivity, knowledge,
relationship management, change management and continuous improvement are essential success
factors in managing contract (Young, 2007).

2
The growing demand of contractual process automation and enhancement due to the eminent and
complexity nature of contracts has led the adoption of software solutions and applications that enable
organizations to be proactive in managing and gaining a deeper and more contextualized understanding
of the risks, obligations, and benefits associated with each contract.

Contract outsourcing
Outsourcing is the act of contracting with another specialized party to provide services that might
otherwise be performed by in-house employees. Often the tasks that are outsourced could be performed
by the firm itself, but in many cases there are technical and financial advantages that result from
outsourcing.
Just like other key business processes, outsourcing services of contract management process is an area
that is growing rapidly. The prime purpose of outsourcing contract is to increase efficiency and
decrease costs. The key elements for the outsourcing contract are classified as performance elements,
financial elements, human resource elements, and legal elements. These key elements are all indicators
of a successful customer-service provider relationship (Platz and Temponi, 2007).

The following is a list of Contract Management-related tasks and processes that are commonly covered
by outsourcing service providers:

• Contract discovery and audit services

• Contract drafting and revision

• Contract abstraction – provision of summaries of key items to be aware of from a contract, like
milestones, obligations and such like

• Maintenance of legal clause libraries and play-books

• Scanning and profiling of paper contract documents

• Online contract repositories

• Alerting and notification services

• Governance, Risk and Compliance management services

• Management reporting services

• Claims and dispute management

The major drawbacks of outsourcing is that it often minimises direct communication between a firm
and its clients which prevent the establishing of solid relationships with them, and often leads to
dissatisfaction on one or both sides. Also, outsourcing may lead to delayed communications and project
implementation which could endanger of not being able to control some aspects of the firm. In
addition, any sensitive information is more subjective to vulnerability. Finally, outsourcing may
prolong provider-dependency which could harm the firm on the long run (Dobriansky, 2006).

Contracting in the public sector

Contracting constitute an integral part of business undertaking in the public sector. The delivery of
most government projects involve a large variety of contracting with private sector enterprises (Young,
2007). These contracts can range significantly in value, in duration, and in complexity. Consequently,
the nature and extent of contract management practices will vary depending on the size, nature,

3
complexity and risk profile of each contract. Public sector entities therefore need to apply rational
judgment about the contract development and management practices that are appropriate to their
particular situation.

The review of the literature revealed that a considerable number of public sector organizations are
facing serious challenges in managing their contracts which in most cases have been proven to be
ineffective (Hongyan, etal. 2005). Research suggests that ill-management of contracts can be attributed
to the factors:

• Slow pace of decisions

• The failure of understanding the obligations and responsibilities
• Missing the opportunities to improve value for money and performance
• The assignment of inadequate resources
• Failure to monitor and manage retained risks
• Lack of skilled and experienced contract managers
• The context, complexities and dependencies of the contract are not well apprehended
• Lack of performance measurement or benchmarking by the customer
• Contracting process remains manual despite its complexity and diversity

Research methodology
This paper uses the theoretical literature and empirical evidence as a framework to discuss outsourcing
vs. in-house contracting of a public sector firm. It explores the reasons, the process and the effects of
the transfer of contract management from the service provider to Kuwait Ministry of Defense
(KMOD). The focus here is on performance type contract were the vendor is totally responsible for
operating and maintaining systems and equipment accordingly. The information in this paper was
obtained from a variety of sources, mainly interviews. Interviews were conducted with senior officials,
directors, staff and contracted personnel. It should be noted that despite the fact they were not involved
in the decision making, the interviews of employees at the operational levels was deemed necessary to
comprehend the extent of outsourcing process effect on them.

The annual reports of the KMOD procurements and contract management which are publicly available
were also used.

Since the research is qualitative in nature, the resulted information is voluminous, hence, content
analysis, was applied to identify, code and categorize its primary patterns (Yin,1990).

Public sector in Kuwait

Kuwait has a geographically small but wealthy, relatively open economy dominated by the oil industry.
The crude oil reserves of about 102 billion barrels - about 7% of world reserves. Oil accounts for nearly
half of GDP, 95% of export revenues, and 95% of government income.(CIA World Fact Book, 2013).
The public sector in Kuwait runs and controls the government’s affairs and comprises over 30
ministries, public authorities and institutes. It plays a pivotal role in planning and implementing the
industrial and development strategies of these states. The government of Kuwait has been the main
supplier of most of the public utilities and services. A major principle of the underlying economic and
governing philosophy of Kuwait government has been to provide a strong focus on the income
distributional role of the public sector (RAM, 2011). Oil revenues have accrued to the state as the
“custodian” of the country’s oil wealth, and government has sought mechanisms through which these
proceeds can be distributed to the population as a whole Approximately 90% of the Kuwaiti citizen
labour force works in the public sector and 90% of private sector workers are expatriates (CIA World
Fact Book, 2013).

4
Kuwait, as is the case with most developing countries, does not have the necessary production facilities
and skilled labour force for making a significant impact on its many social, industrial and agricultural
requirements. Therefore, for their innovative activities and the technology to improve productivity and
quality of life, its indigenous firms are crucially dependent on transfer of technology from abroad (Al-
Fahhad, 2004). The dominant form of technology transfer to Kuwait is the turnkey operation,
particularly when highly sophisticated technologies are involved. In most cases foreign contractors are
entirely responsible for the execution of the projects, from the early phases to completion. Local firms
are almost entirely excluded from participation, except for administrative and legislative tasks. Very
often a turnkey operation is accompanied by a management contract to carry out the operational and
technical services for a limited duration, during which time the capabilities of local labour are
developed.

Kuwait Ministry of Defence

Most of the developing countries lack the competencies to support their acquired technology,
particularly in the advanced one (ibid). This is the prime reason for developing countries to outsource
their defence systems through defence contractors. Defence contractor is a business organization or
individual that is responsible in providing products or services to a military department of a
government. Products typically include military aircraft, ships, vehicles, weaponry, and electronic
systems. Services can include logistics, technical support and communications support, and in some
cases team-based engineering in cooperation with the government (Wikipedia, 2013). Also, the
majority of defence contractors are liable to provide the necessary training programmes to the
indigenous military and civilian personal.
Kuwait Ministry of Defence (KMOD) holds the sole responsibility of the procurement and providing of
all of the military systems and supporting equipment demanded by the Kuwait Arm Forces. The
majority of these systems and equipment are highly sophisticated and need highly skilled manpower to
operate and maintain, which is in most cases beyond the capabilities of KMOD. This necessitates the
outsourcing of these services through the international defence contractors. The primary task of
contractors is to ensure the effectiveness of the operation and maintenance of the systems. Also, part of
their task is to offer adequate training programmes to the local manpower and boost their skills to the
level that they can eventually take over the responsibilities from the contractors, which was never the
case with all of the KMOD contracts1. The principal reason for this is the unwillingness of contractors
to transfer the know how to their customers. This policy leads to the prolonged of technological
dependency and, hence, the increase of the costs.

In 2006 KMOD decided to undertake a comprehensive review and evaluation of the outsourcing
process of performance contracts. Prior to 2006, KMOD used to outsource its services to several
defence contractors to support various armed forces systems and equipment2. Normally, the support is
of two types of contracts; personnel or performance3. The annual cost of each individual contract
ranges approximately from $500k to $100 million. In addition to the incurred high cost of outsourcing,
KMOD experienced other major disadvantages. First, KMOD discovered that a considerable number of
technicians were not qualified at all for the assigned posts4. Second, some of these technicians were
severely abusing the logistic procurements and systems and equipment repair and overhaul in exchange
for commissions from OEM sources. Finally, there was no satisfaction progress of the output of the
training programmes offered to the local staffs by vendors which KMOD attributed it to the
unwillingness and the lack of integrity and seriousness by vendors.

1
Part of this information is based on my past personal experience as the head of foreign contracts and
project management dept. in KMOD.
2
Most of these contracts exclude the cost of spare parts.
3
The personal contract determines the type and number of manpower. Performance contract specifies
the carried out tasks regardless of type and number of personnel.
4
For example, some of the aviation crew were holding motorcycles and guitar repairing certificates.

5
In an attempt to overcome the disadvantages of outsourcing, KMOD decided to eventually terminate
these contracts and replace them with in-house contracting. It means that KMOD acts as head hunter
for the required skilled manpower. It was projected that direct contracting could save more than 82% of
the outsourcing budget.
To pursue this goal, KMOD established the Central Recruiting Committee (CRM). All members of the
CRM were selected with extensive technical, admin and legal background. The objective of CRM is of
two folds. First, the continuous assessment of the armed forces (land, air and navy) needs of the
required manpower. Second, the recruiting of the appropriate candidates. The CRM team held
extensive meetings with the concern departments and units of the armed forces to determine the
criteria, qualifications, standard and number of needed manpower which the recruiting process will be
based on.
Then, the major challenge for CRM team was to locate the pool of sources by which candidates can be
located and approached. Different techniques were applied, including web search, contracts archives
search and peer consultation. Based on the availability of similar military systems and equipment,
searching process concluded that several international sources were considered an ideal for the required
skilled manpower. Through the military attaché in these countries, advertisements were posted in some
of the prominent daily newspapers and in various professional carrier web sites. After the receiving of
the documents from the applicants the CRM screened them and sent a short list to the concerned
attaché for the interviews.
CRM dispatched five teams to each country to proceed with the interviews. To maintain the
standardisation across all the interviews and to minimise any biasing or misjudging a three days'
workshop conducted for all of the five teams to improve their interviewing skills. Also, all teams were
provided a standard interview form to fill it during and after the interviews. The recruiting process was
concluded with contracting over 77% of the required manpower. By the end of 2007 and having
finalised all of the related administrative work5, the contracted personal started to arrive to their work
stations. CRM prepared an induction programmes to all of them to facilitate their settling with the new
environment. Realising it accomplished its mission, KMOD dissolved CRM.

Major obstacles and failures

Despite all of the efforts devoted by CRM to accomplish its mission in an effective manner, there were
some mismanaged, unforeseen and overlooked issues which had led to undesired consequences, and in
some cases to a total failure. The commencing of the contract witnessed several disruptions and
interruption, and the overall performance of tasks and duties were declining due to various factors. The
first and the utmost issue is the excessive political pressure exerted by the foreign governments to
retain the outsourced contracts of their national firms. KMOD find itself hopeless once the decision has
been made by higher authority for the favour of these contractors. To comply with this situation,
KMOD was obliged to re-outsource some of the contracts, which left KMOD in a dilemma of
monitoring two different types of contracts simultaneously. The other issue pertains to the retaining
of the contracted manpower. It was discovered that some of the key and talented personal have been
approached by private firms in Kuwait and in the surrounding region and were offered a competitive
and attractive financial packages. This caused a serious drain in the key positions in various units of the
armed forces and raises the turnover ratio. In an attempt to resolve this situation some units proposed a
new benefit scheme that matches the competitors offers to retain the contracted manpower. However,
this effort stumbled by the hideous bureaucratic process within KMOD and related government
agencies.
Also, the variance of the salary package and benefits, either introduced directly by KMOD or through
outsourcing process, for same posts has created status of complain and dissatisfaction among the
contracted personnel. This variance was based on the monetary buying power of the home country of
the personnel. A margin adjustment was introduced to the lower packages to leverage the payment

5
E.g. issuing visa, tickets, accommodation,…,.etc.

6
scheme, however, it was unsatisfactory step for the majority of the affected workforce whom ultimately
resigned. The final issue relates to the confidentiality and restrictions of some of the warfare systems
and equipment. The manufacturers of these systems and equipment strictly permit certain nationalities
to work on them and get access to the accompanied materials and data. This condition had severely
limited the capability of the armed forces to self-operating and maintaining these systems and
equipment. By the end of year 2012 the contracted manpower capacity was reduced to less than 50%.
Consequently, to recover the sharp shortage of the manpower to support the mounting demand of the
armed forces, KMOD decided to re-outsource all of the performance contracts.

Conclusion
A major lesson to be learned here is that in-house contract management is a complex and challenging
process that requires good preparation, concentration, flexibility, proactivity, knowledge, change
management, continuous improvement and indigenous capabilities, particularly the government-type
contracts. Due to the lack of experience, mismanaged and unforeseen issues, it is evident that the in-
house contract management project of KMOD was impractical and inefficient and caused disruption to
the provided services, at least for the short term. It is also believed that the dissolving of the CRM has
proved to be unwise decision and partially contributed to this failure.

References

[1] Al-Fahhad, J. (2004). Assessing the Capability to Acquire and Absorb Technology within the
Public Sector in Developing Countries: The Case of Kuwait. Ph.D. thesis. Aston University.
[2] CIA World Fact Book, 2013.
[3] Dobriansky, J. (2006). Contract Management: what happens after the contract award. Contract
Management, Vol. 46, pp 24- 32.
[4] Elsey, R. (2007). Contract Management Guide. The Chartered Institute of
Purchasing and Supply.
[5] Hongyan H, Suresh S. & Houmin Y. (2005). Purchase contract management with demand
forecast updates. IIE Transactions Vol. 37, Issue 8, pp 775-785.
[6] Platz, L. A., & Temponi, C. (2007). Defining the most desirable outsourcing contract between
customer and vendor. Management Decision, Vol. 45(10), pp 1656-1666.
[7] RAM, 2011. Country Assessment Report. Available from:
http://www.ram.com.lk/other_pdf/0611_car_kuwait.final.pdf. [Accessed 19 June 2013].
[8] UK Office of Government Commerce (OGC). 2013.
[9] Wikipedia, 2013. Defence Contractors. Available from: http://en.wikipedia.org/wiki/Defence
contractor. [Accessed 22 July 2013].
[10] Yin, R. (1994). Case Study Research: Design and Methods. London: Sage Publications.
[11] Young, S. (2007), "Outsourcing: uncovering the complexity of the decision". International
Public Management Journal, Vol. 10 No. 3, pp. 307-25.

AUTHOR PROFILE
Jassim Alfahhad, is an assistant professor and work as an assistant to the Vice Rector for Academic
Affairs, Arab Open University (AOU), Kuwait. jalfahhad@aou.edu.kw. He gained his Ph.D. from
Aston University (UK) in 2004, in the field of Technology and Operation Management.