Resellers prepare for outsourcing bloodbath

Resellers prepare for outsourcing bloodbath

At least half of the resellers that do federal Government IT business can be expected to be out of business within a year, according to Canberra-based resellers.

With the federal Government tipped to give a go-ahead to whole of government IT outsourcing on Budget night (13 May), resellers that want to stay in business need to diversify or suck up to the outsourcing companies.

This was the view of a medium-sized reseller that declined to be identified. "We're into sucking up, right now," the manager said.

The Federal Office of Government Information Technology (OGIT) has proposed consolidating all 66 budget dependent agencies into five clusters and outsourcing their IT activities.

OGIT predicts that outsourcing will bring savings on mainframes at between 12 to 31 per cent and 5 to 22 per cent on desktop and network infrastructure.

Given that the annual cost of IT is about $800 million a year, outsourcing companies such as EDS, ISSC and CSC will be the only ones capable of managing these contracts.

OGIT plans to require successful outsourcing companies to deal with small and medium-sized companies, but resellers are not confident the terms will be attractive.

Another reseller, more happy to be identified, agreed things were grim, and his company was looking to non-government sales for its future growth. "It might be easier dealing with five or six big boys as opposed to up to 66 separate agencies," Software Shop's general manager, Andrew Boundy, said. "But our margins will be squeezed at the same time."

He estimated that resellers, still in the game, might have to manage with margins halved. "They (the outsourcers) could also go direct to the software distributors rather than doing it through resellers, depending on the level of their purchase. What the Government has not worked out yet is that they already get the cheapest possible price," the medium-sized reseller said.

"By introducing a management layer by EDS or one of the others, it is not going to get a better price." With margins of 5 per cent to supply 1000 PCs, there is no scope for discounting for 10,000 PCs, he explained. He said the outsourcers will probably tack on an additional 2 per cent to 3 per cent anyway, and that prices will actually rise.

In the meantime he believes that more than half of the resellers will go out of business. "A lot of people will lose their homes. Outsourcing will fail, but not before it kills everybody."

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