Outsourcing: The whole story

Outsourcing: The whole story

To say that the Federal Government's whole-of-government IT outsourcing initiative has been riddled with scandal since it was first announced in the 1997/98 Federal budget would be an understatement. Questions arose from the outset as to whether it was appropriate for the Government to get "outsiders" to handle their IT projects and there was much contention over the way in which the Government was managing the execution of the outsourcing. As a consequence, the local IT industry was understandably up in arms, concerned primarily with the distinct possibility that it would lose business to multinationals. And instead of the issue being slowly forgotten, three years later bad management and budget blowouts have simply resulted in the escalation of problems.

Now, with the threat of a Senate inquiry into the Department of Finance and Administration's handling of the issue and local businesses facing financial difficulty, Federal Government outsourcing is as hot as ever.

Three years ago, some Canberra resellers were predicting that at least half of their colleagues doing Federal Government IT business could expect to be out of business within a year of the outsourcing policy launch. As it turns out, the situation has not proven to be as dire as they envisaged, but recent revelations of staff cutbacks by data storage specialist XSI may indicate that maybe they weren't too far off the mark. The industry just needed a few years for the hard times to really set in.

Steven Dixon, managing director of Australian integrator Full Spectrum, says the Federal Government's outsourcing policies have hit businesses across the board, with the notable exception of the big US companies.

"There has been no return to Australian business - we have just lost business everywhere," says Dixon. "The Australian SME market has been devastated by the policy. In the past we could compete for Government contracts, but now it has become impossible for us to take part."

Max Goldsmith, general manager of XSI, says his company had been working with Government departments for a number of years with apparently an excellent track record, but its contracts weren't renewed. Goldsmith says XSI wasn't picked because it couldn't do the whole project and the Government wants to outsource to just the one company.

"We were successful in Canberra because we could match the large multinationals in performance and capability and we had a strong local presence, but that is gone now because of outsourcing," says Goldsmith.

The crisis currently facing Australian IT providers is not limited only to those who rely on Government business. Other Australian companies such as BCA IT are concerned that companies who used to rely on the Government for business will now be competing in different market segments.

Simon Uzunovski, marketing manager of BCA IT, says his company has worked with the Government before but has never been a large part of its business.

"We are more concerned with the indirect effects because these companies will now have to start looking for other places within the market to do business and they will be competing with us," he says.

As a consequence, Australian businesses which have felt the pinch, both in and out of the outsourcing loop, are largely blaming the Federal Government for its poor attempt at protecting the local IT industry. Where Government contracts stipulated the winning company must support the local IT industry by committing a certain percentage of work, they are saying the Government did not go far enough and the industry is now calling for an industry body to protect its interests.

"Guys like us need a champion somewhere. We need someone looking out for us. They should have appointed someone to make sure that Australian businesses were looked after in the outsourcing process," says Goldsmith.

According to a report in ARN's sister publication Computerworld, the Australian Computer Society (ACS) is "distressed" that most of the Government's outsourcing deals had been awarded to multinational companies. ACS president John Ridge called the local industry development component of the contracts purely tokenistic and believes local IT companies did not get the opportunities they should have received under the $5 billion outsourcing program.

However Richard Wyse, a spokesperson for the Office of Asset Sales and Information Technology Organisation (OASITO) disagrees, insisting the Federal Government has provided many opportunities to Australian SMEs. According to Wyse, the winning contractors are selected in part on their commitment to the Australian IT industry, and each contractor must provide at least 30 per cent of the work to Australian SMEs. He believes that 30 per cent has so far brought $400 million to local players.

Locals versus multinationals

According to Wyse, the five tenders awarded to date, (to CSC, EDS, IBM, IPEX and Advantra) have injected around $280 million to Australian SMEs, and so far 75 per cent of all goods and services have been provided by the local industry, which includes labour and purchase of hardware.

However, the Government is now telling local companies they don't want to deal with them directly and are advising them to contact the winning companies. Yet local companies say they have been mostly ignored or treated badly by the multinationals such as CSC, IBM and EDS.

Full Spectrum's Dixon claims they were used by EDS to win the Australian Tax Office contract and were then unceremoniously dumped after the signing.

"The big companies have to be seen to be working with the locals in order to fulfil their initial tenders, but as soon as the paper work is out of the way they stop sending you business. We were working with EDS and were part of their winning bid, however as soon as they won the tender they wound up their dealings with us."

EDS responded to this allegation by arguing that as part of their tender for the Australian Tax Office, they needed to supply the Government with a list of contractors they may have to use in order to fulfil the contract. Full Spectrum was just one of many companies on that list. Maryanne Taylor, a senior EDS executive, says the company just hasn't needed to use Full Spectrum so far, but she insists that EDS has not wound up its dealings with the company, claiming it may still be called upon by EDS for the ATO contract.

Major foreign outsourcers such as EDS and CSC dispute claims they aren't supporting local IT companies. Taylor claims EDS has contracted more than 29 per cent of the work out to Australian businesses, which is more than the amount initially agreed upon in their five-year contract with the ATO.

"We have put a lot of resources back into the Australian community and we really promote Australian SMEs. EDS primarily employs Australians, so we are supporting the industry by using the skills of Australians," says Taylor. Yet despite the rhetoric, Taylor couldn't confirm if EDS was currently in partnership with any local businesses.

CSC, which was awarded the Group One tender which includes the Departments of Immigration and Finance and Administration, also rejects claims from the local industry that multinationals are ruining local businesses. Sheryle Moon, vice president of federal systems at CSC, says it has supported the local IT industry substantially more than its contract with the Government demands. According to Moon, CSC has created 199 new jobs for the Australian IT industry compared with their target of 70.

"We have been audited and over the first two years our expenditure on SMEs was $25 million compared with a target of $15 million. And CSC spent $36 million instead of $12 million on strategic investment," says Moon. "We have done a number of things - we have worked with a local SME which is looking at Internet and smart technology. We've sponsored SMEs to attend CSC research forums overseas and we have created a capability database which allows us to match local business to the projects that we are doing in Australia and overseas. So we are providing opportunities that Australian SMEs normally wouldn't have access to."

Moon is unsympathetic towards local companies that are facing financial difficulty due to loss of government work, saying it is just a normal part of business. "The rate of closure of small business in Australia is very high. In any competitive tender environment there are winners and losers. CSC has bid for pieces of business in the outsource environment and lost, both in the commercial and in the Federal Government environment," says Moon. "We have expended lots of dollars to mount a bid to not have any result."

Wyse of OASITO backs up the multinationals by saying they have sufficiently supported the Australian IT industry and have held up their contractual commitments to the industry. He says the multinationals have invested $90 million in strategic investment for Australian SMEs so far and informs that EDS, under the ATO contract, has entered into partnership with 21 Australian SMEs to tender for international contracts.

Is the Government at fault?

The Department of Finance and Administration is currently under threat of a Senate inquiry into its mishandling of the Government IT outsourcing initiative. As the Auditor-General's report pointed out, the initiative is suffering from poor planning and spiralling costs.

Full Spectrum's Dixon says the Government's approach to outsourcing was wrong from the beginning, believing it was unrealistic for the primary objective of the policy to be cost cutting. The Government's mistake was in combining departments' IT needs as though their requirements were the same, he added.

"Government departments typically did things on a shoe string - they paid bottom dollar, they used the cheapest equipment, their staff were underpaid, there was no way outsourcing to the private sector would ever save money," Dixon opined, "There is no way it can add up."

The Federal Government has recently changed the outsourcing policy, which is in order with both the Auditor-General's report released in September last year and the Humphry report, released in January this year. The policy has now taken the outsourcing decision-making power from OASITO and given it back to department heads. People within the Australian IT industry are hoping this change will now give local IT businesses a more realistic chance of winning Government business.

Joel Schwalb, managing director of IPEX, an Australian company which won the Group Eight cluster in the first round of offerings, believes reducing the size of the clusters on offer is good news for medium-sized companies. "The advantage of the proposed changes to the policy from Australian companies' point of view is that some of the IT requirements of the smaller agencies can be met by one medium-sized Australian company, so there will be opportunities at that level of the market."

But Schwalb also points out that very small Government agencies will have problems in sending out tenders, and unless they hook up with larger agencies they will never enjoy the financial advantage as they won't be large enough to haggle over prices.

The news is not good for those businesses already involved in the tender process, however. Protech, a large Australian integrator, has already spent $500,000 as a participant in the CSC bid for the Group 11 tender, which is now on hold due to the outcome of the Humphry Report. Protech managing director Nick Cuthbertson says if it doesn't go ahead they will be very disappointed but he remains positive that Australian companies will eventually get a slice of the action.

Adding a touch of realism, Cuthbertson says Australian companies would struggle if they were left to implement the whole of the Government outsourcing project on their own. He thinks this is where Australian companies can benefit from overseas experience.

"I think the large overseas companies have substantial expertise to offer. I was always of the view that the best result was for international companies to mentor Australian companies. We've been a beneficiary of that and I would like that to continue."

Is outsourcing on the out?

When asked about the future of outsourcing, IPEX's Schwalb says the success of outsourcing has never been an issue, instead he believes people are just taking the opportunity to criticise the Government.

"The problem at the moment is that the debate has been portrayed politically rather than truthfully. There was an attack on the Finance Minister rather than on the policy. Australia didn't invent outsourcing and the Federal Government didn't invent it either," says Schwalb, adding that he feels most Government agencies didn't reject the idea of outsourcing, merely the way it was imposed on them. And he remains positive about the future of IPEX's working relationship with the Government.

"I think agencies are saying that outsourcing is advantageous, and they want to continue the process. Our current tender lasts for four years. My gut feeling is that all of the department heads, or most of them, will carry on with us."

But Full Spectrum's Dixon isn't so sure about the future of outsourcing. "One thing you have to remember in this industry is that everything is cyclical. Government outsourcing is all the rage at the moment, but it will gradually get broken up and the core functions will go in-house again. Just give it time."

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