Contracting out of Government Services

CHAPTER 5

INDUSTRY ISSUES

There have been a number of recent reports to government calling for the development of more interventionist industry policies to promote the local information technology industry. Spectator or Serious Player?, as its title suggests, reflects a concern that Australia is failing to realise its potential in the IT industry and is falling behind its competitors.[1] The Goldsworthy Report - The Global Information Economy - The Way Ahead - made recommendations for government action ranging over all sectors of the economy. The need to create a supportive environment to attract investment into the Australian IT industry was described as the 'key issue for the industry' by representatives of the Australian Information Industry Association (AIIA) in its evidence to this committee. The AIIA's priorities included investment attraction policy, a competitive tax regime, encouragement of venture capital and the attraction of 'global scale' investments in IT.

The Government as Client

This committee has a much narrower brief and does not intend to offer any national prescriptions for IT development. However it does note Goldsworthy's comments on leading by example. Goldsworthy sees the Commonwealth government as a pace setter in the application of IT to its business. In that the report is in line with publications such as Clients First and Management of Government Information as a National Strategic Resource[2] and the policy of this government. The Goldsworthy report also recommends using government procurement to promote Australian industry,

The sheer size of the government market makes it significant for businesses in the information industries. It is also significant because government installations serve as excellent example sites, particularly for SMEs seeking to export or set up operations overseas. In addition, and perhaps more importantly in the current environment, governments are significant leading edge customers.[3]

The committee endorses this view of the Goldsworthy report. It echoes evidence taken by the committee from representatives of the Australian IT industry.

Ensuring reasonable access to Commonwealth business is seen as vital by the local IT industry. Alex Gosman of the Australian Electrical and Electronic Manufacturers Association (AEEMA) emphasised the importance to business of the government as a client:

it provides international credibility. The government is often a leading edge user and it is difficult to sell to the private sector if you cannot sell to the government. It also provides cash flow for research and development and exports.[4]

This position was supported by Geoffrey Ross and Robert Jackson, local computer industry executives appearing with AEEMA:

Government procurement gives you a level of credibility which is obviously important ... in every country that we are in, especially in the Asia-Pacific area, we will always refer particularly to our defence contracts and provide references ...[5]

and

it is not only a matter of credibility in the Australian market place ... One of the first questions you are asked overseas is 'Does the government use your products?' [6]

Opportunities for Australian SMEs

Small and Medium Enterprises (SMEs) have been broadly defined as companies incorporated in Australia or New Zealand with an aggregate annual revenue of less than AUD$250 million.

There was some uncertainty about government policy with regard to the promotion of Australian SMEs in the outsourcing proposal. Peter Upton, executive director of AIIA, pointed out at the committee's hearing in early July that 'a range of issues require clarification'. This was amplified by his colleague Mr Durie:

We need much greater clarity about what it is the government wants and how it intends to achieve it. Issues include how commitments firms have made under the partnership and other agreements are going to be treated and, perhaps even more importantly ... how the government will meet the aspirations of local industry to participate fully in this opportunity.[7]

At the September hearings Mr Gosman commented that,

From AEEMA's perspective, there has been concern over the last six months of the apparent low priority that has been accorded industry development within the broader outsourcing process and the lack of clarity in policy directions.[8]

Mr Gosman identified the local industry's greatest anxiety with regard to outsourcing:

that the outsourcers, who are expected to be ... multi-nationals, will stick to their international suppliers and not give indigenous suppliers a reasonable opportunity to sell.[9]

This was seen as a problem for local companies seeking new business and for companies that may already have contracts with the Commonwealth. Local industry is concerned that when relatively small supply contracts with individual agencies are rolled into much more comprehensive requirements across a cluster of agencies they will lose business:

if you bring one of those entities [multinationals] in here and you outsource the IT part of your business to them ... the natural inclination for them, in the absence of any other pressure, is just to bring in their pre-existing partners.

The use of a 'cluster' approach will result in a small number of very large contracts for which only the very biggest of players will be able to tender successfully. Local industry's opportunities will come from sub-contracting services from the major service providers.

It was widely reported that the draft RFT contained a provision that tenderers would be rated on their alliances with Australian industry and their commitment to developing exports, investment in regional Australia and local research and development, and that the commitments to Australian industry would be binding. A spokesman for the Minister of Finance, Mr John Fahey, was quoted as saying:

We want to drive home the fact that the Government is unashamedly committed to using IT-outsourcing as a way to develop the local IT industry.[10]

The response from local industry to the draft RFT was mixed. Some media reporting suggested that the larger multi-national companies, likely to be the prime tenderers, were less than enthusiastic. Initial comment also suggested that the local industry welcomed the proposals. In as much as it removes uncertainty the clarification of the development plans is likely to be welcomed. However the committee notes that a position paper released by the AIIA expressed reservations about some aspects and implications of the policy.

The industry development requirements in the outsourcing initiative are at odds with [general information industry development proposals]. They represent a return to a contract-by-contract offsets approach, which was abolished in the mid 1980s. They are in conflict with the already existing firm agreements between the government and most suppliers.[11]

The AIIA also describes the arrangements as 'complex and costly' and 'hard to justify' when considered in the broad context of IT development in the Asia-Pacific region. More specifically the AIIA suggests that,

15 or more 'clusters' each with its own unique business requirements, industry development obligations and timetable. This situation will infer [sic] high tender costs for both government and industry, and high accumulated losses for industry through lost bids.[12]

This situation will, according to the AIIA, be particularly difficult for SMEs which will be required to make 'numerous presentations to prime contractors with no guarantee that the prime contractor will even proceed with a bid'.

It is understood that already existing arrangements to support industry development in the information technology area, notably the Partnerships for Development program and the Fixed Term Arrangements, will continue.

The Government's Industry Development Position

Prior to its receipt of the final request for tender (RFT) for Cluster 3, firm details of the government's approach to IT industry development were scanty. In the committee's 5 September hearing, Alan Evans of the Department of Industry, Science and Tourism clarified a few industry development issues for the committee. He pointed out that Australia had a two per cent share of the world's IT market and stressed that 'one of the key elements of an industry development approach that the government could adopt is to use its capacity to leverage its requirements to help Australian SMEs become global'[13] though not through the use of quotas. He opposed local preference clauses, on the grounds that they would act as both a floor and a ceiling and would also invite retaliatory action. But, given the financial significance of IT outsourcing, he saw it as an opportunity to get the Australian industry growing 'providing we get the balance between cost and development right'.[14] Legitimate ways to assist SMEs might include direct equity by multinationals and strategic alliances with multinationals, including support for research and development in Australia.

This committee did not receive a copy of the draft RFT and the final document was received by it only on 6 November 1997. Unfortunately this prevented the committee from discussing these issues with representatives of the relevant government agencies or gaining any response from industry. The committee also notes that companies considering tendering were precluded from discussing the draft RFT in public. Thus the committee can do no more than summarise the RFT's requirements and some media and industry comment at this stage.

The Cluster 3 RFT presented the following broad industry development objectives sought through the government's IT initiative:

a) supporting growth in the Australian IT&T industries;

b) promoting the international competitiveness of the Australian IT&T industries; and

c) supporting employment growth and development in regional Australia.

The outsourcing of government IT services is intended to contribute to the achievement of these objectives by helping establish a sustainable, diverse platform for the cost-effective delivery of IT&T services, the preservation and development of technical skills and increasing technical innovation in the private sector and by acting as a catalyst to attract international operations to Australia, to develop enduring relationships that will encourage SMEs to develop an international focus, and to build internationally competitive capabilities within Australian companies.[15]

The committee's principle concern with regard to the impact of IT outsourcing on Australian industry is to ensure that local industry has a genuine opportunity to participate in the supply of outsourced services. The committee will revisit this topic in its second report on contracting out when it has had the opportunity to consider the Cluster 3 RFT in some detail and to consult interested parties.

Footnotes:

[1] A report commissioned by the Australian Chamber of Commerce and Industry (ACCI) as a submission to Information Industries Task Force.

[2] Information Management Steering Committee, Management of Government Information as a National Strategic Resource, 1996.

[3] Information Industries Task Force, The Global Information Economy, the Way Ahead, 1997, p. 24.

[4] Committee Hansard, 5 September 1997, p.F&PA 613.

[5] ibid., p. F&PA 632.

[6] ibid., p. F&PA 632.

[7] ibid., p. F&PA 601.

[8] Committee Hansard, 5 September 1997, p. F&PA 614.

[9] ibid, p. F&PA 613.

[10] Stan Beer, 'PC tender favours locals', Australian Financial Review, 6 October 1997, p. 27.

[11] Australian Information Industry Association, Outsourcing of Information Technology, 23 October 1997.

[12] ibid., p. 1.

[13] Committee Hansard, 5 September 1997, p. F&PA 659.

[14] ibid., p. F&PA 663.

[15] OGIT, Request for Tender Cluster 3, 1997, pp. 33-34.