LEAD FEATURE: Taming the tender

In the 1997/98 Budget the Federal Government announced its "whole of government information technology infrastructure consolidation and outsourcing initiative". The initiative proposed that all government IT services and infrastructure be outsourced to the private sector. In a massive undertaking, the Government called for 11 tenders, and predicted that the outsourcing process would save approximately one billion dollars over seven years.

Three years down the track and an Auditor General's report into the Federal Government IT outsourcing has revealed some disturbing spending practices.

The Federal Finance Minister John Fahey has come under fire for significantly exaggerating the potential savings of outsourcing. Doubts have also been raised about the government's ability to justify huge payouts to US-based advisers.

Government IT outsourcing has released literally billions of taxpayer's dollars into the private sector, and with the process already over budget and behind schedule the process begs some fairly urgent questions. Who is the money being paid to and are the taxpayers getting their money's worth.

More importantly, how is the Australian channel being included in the outsourcing process, and what are the new business models to which IT outsourcing has given rise.

The Government has come under fire for making the tenders too big, placing them beyond the capabilities of most Australian companies.

The Cluster 3 agreement, for example pertained to the provision of IT services to eight government services and departments including the Department of Immigration and Multicultural Affairs, the Australian Electoral Commission, and IP Australia.

Kieran O'Connor, account manager at enterprise-level network integrator NetStar, told ARN the size of the tenders was preventing many Australian companies from taking part in outsourcing opportunities. "It's horrendously expensive - like a sale that takes 12 months to complete," O'Connor said.

Like many Australian integrators NetStar has been forced to pursue partnerships with larger off shore integrators in order to take part in the tender process. However, according to O'Connor, even this can be an expensive and time-consuming process.

Nick Cuthbertson, managing director of IT outsourcer Protech Australasia, agrees the tendering process excludes most Australian companies from winning a primary service provision role.

"It is true there are very few, if any, Australian companies that can be principal in these outsourcing arrangements," Cuthbertson said.

Jonathan Sheiman, general manager corporate and Government of IT, outsourcing company Ipex, goes to pains to point out that the Government's outsourcing policies are not offering anyone a "free lunch".

"You have to put in a lot of effort, when you are working with these large international players - you have to run to keep up. Small companies have to become aware of how to work with big companies," Sheiman said.

Nonetheless, Sheiman is an advocate of the Federal Government's outsourcing policies, pointing out that working with multinational companies was forcing Australian integrators to make significant improvements to their service standards.

He believes that Federal IT outsourcing will also improve the IT skills base as Australian companies partner with larger international players.

Cuthbertson agrees, adding that Protech Australasia has had very positive experiences with multinational companies.

"We have tailored our organisation so that we can work very effectively with the big players. We make sure that our processes are very flexible so they can match our partners, requirements," Cuthbertson said. "Our partners have been happy to share knowledge and work effectively with us - it is a great way for us to continue to develop our skills."

However, there is some concern the Government's insistence on grouping departmental IT requirements in clusters which are simply too big to be covered by a single Australian company, will ultimately deplete rather than augment the local skills base.

IT companies are often reticent about commenting on the ramifications of the Federal Government's outsourcing policy, as they are committed to a partnership agreement, or hope to win one in the near future.

However, the experience of hardware reseller Micro-Tech Tasmania is fairly typical of the changing market facing smaller channel companies.

A change to the Government's outsourcing policies has seen much of the market which used to be fulfilled through local channel companies taken up by large multinationals like mega-sized systems integrator MITS.

Although Micro-Tech has managed to strike up a supply deal with IT vendor NEC, company representative Matthew Sly sounds a common concern for the small players in the industry.

"We have traditionally been in the SOHO market, but we are now looking for larger companies to partner with. We are trying to strike up supply relationships but they are hard to win and risky," Sly said. "We have the right to supply certain agencies, but we are not guaranteed sales by it. We are not even guaranteed a minimum amount of business."

Protech's Cuthbertson expressed similar concerns about the stability of the partnerships generated by the Government's outsourcing push, although he believes it is an unavoidable aspect of doing business.

"As a company, you are always under scrutiny to maintain service levels, the primary partner is also under pressure to perform and deliver, and they expect the same from their partners," Cuthbertson said.

The principal concern is that small Australian channel companies have little bargaining power with the multinationals.

In a case cited in Federal Parliament, ACT-based IT training company Wizard Computer Training was unceremoniously dumped by a major multinational working on a Government outsourcing project after apparently closing the deal.

Federal Labor senator for the ACT and opposition IT spokesperson Kate Lundy is concerned about the ramifications of the Government's outsourcing policies.

"The main concern is that Australian IT businesses are missing out. The outsourcing tenders have been structured to favour large companies," Lundy said.

Lundy added that smaller Australian IT companies were feeling the margin pinch as their prices were forced down by unequal partnerships.

"There is also the issue of local innovation being squeezed out, as the multinationals make their money through economies of scale and provide mass-produced, shrink-wrapped style solutions," Lundy said.

Lundy is concerned that while the company employs local staff, the profit and therefore development resources end up on foreign shores.

"The measure should not just be in terms of jobs, because these are vulnerable to the success or otherwise of an off-shore company. We need to develop the capacity to innovate and supply our own IT needs," Lundy said.

According to the Auditor General's report, of the $70 million the Government is supposed to have saved from the outsourcing arrangements, $40 million will go to Michael Murphy and his associates at US-based law firm Shaw Pittman Potts and Trowbridge.

The firm is one of a growing number of "outsourcing consultants" which offer advice regarding the nature and extent of outsourcing in the private sector.

Another such group is Business Catalyst International, a Sydney-based research and management consultancy with US affiliations that was selling the benefits of outsourcing at a recent conference in Sydney.

While Business Catalyst International consulting director Ian Ritchie believes the conference was a resounding success, a quick glimpse at the guest speakers reveals a who's who of Australia's outsourcing cheer squad. John Fahey, ACT Chief Minister Kate Carnell and representatives of outsourcing company IBM GSA all spoke at the conference.

Ritchie told ARN the most important element of outsourcing was "developing a corporate culture to create sustainable business practice".

"Our current view on outsourcing is that there may be some cost savings available, but the most important improvements will be made in terms of flexibility, time to market and so fourth," Ritchie said.

Dr Graeme Hodge of the Mount Eliza Business School in Melbourne has been keeping an eye on the outsourcing debate for some time.

"Three or four years ago everyone involved in outsourcing was talking about cost savings, but now they talk about skills and core business functions," Hodge said. "Money is a long way down the list."

According to Hodge's studies, outsourcing offers potential monetary savings in labour-intensive areas such as cleaning, however his verdict on IT outsourcing is that there is little in the way of monetary gains.

"The problem is that the Government has approached the issue from an ideological standpoint. A business will only outsource services which will save money or improve its efficiency. People like John Howard would say that all IT expenditure belongs in the private sector, so it all gets outsourced."

To a large extent, the Australian channel has been caught in the middle of this ideological debate over outsourcing. On the one hand, outsourcing is good for the industry because it places more money in the private sector. On the other hand, the size of the tenders has excluded many Australian players from taking part.

Midrange outsourcer and systems integrator KAZ Computer Services is confronting the "do or die" dilemma of how to approach the Government IT outsourcing tendering process.

David Knox, KAZ Computer director of business development, spoke about how the company intends to attract some of the Government business.

"Our mid-range solutions work very well in government, but we didn't enter into the tendering process because of the cost of participation," Knox said. "The only way for us to participate is to subcontract to some of the larger players."

Knox believes, given the size of the tenders, the key to ensuring outsourcing does not favour foreign companies is to build an element of Australian content into the tenders themselves.

"There will always be room for Australian companies to take part in the process. Businesses today have to co-operate - rarely can one company offer all the core components of a deal. There is a lot of room for local companies, but the tenders need to specify local content."

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More about Australian Electoral CommissionCatalyst InternationalDepartment of Immigration and Multicultural AffairsGSA GroupIBM AustraliaIBM GSAIP AustraliaIP AustraliaIpexKAZ Computer ServicesMITSNECNetStarOffice of the Auditor GeneralProtech AustralasiaProvisionWizard Computer Training

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