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.
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