Government IT contracts worth $600 million a year up for renewal

Stan Beer
Tuesday, 24 July 2007 16:16

IT Industry - Strategy

IT outsourcing providers are set to reap a bonanza of new Federal Government business as longstanding infrastructure contracts expire over the next two years, according to a new report. The new business, generated from soon to expire contracts signed in the late 1990s, is projected to be worth $600 million a year.

According to Government business advisory firm Intermedium, there are 23 Federal Government agencies with major IT infrastructure contracts that have almost run their course. These agencies will need to go to the market by mid 2009 to meet their IT infrastructure requirements.  Seven of them have contracts that expire in 2007, seven in 2008, and nine in 2009.
 
Judy Hurditch, Intermedium’s director, says such a large number of agencies are at end of their outsourcing contracts because the majority entered the outsourcing market at about the same time because of Government policy at the time.

“The then Office of Asset Sales and Information Technology Outsourcing strongly encouraged a number of agencies into outsourcing arrangements despite many protests from agencies.  Then a review by Richard Humphry in 2000 halted this push, literally overnight.  Since then, no new agencies have taken up the single sourcing outsourcing option, but a number have initiated some selective outsourcing, most notably the Department of Defence," says Ms Hurditch.
 
“The threshold question for these agencies now is whether to retain infrastructure outsourcing as a strategy or take a decision to revert to in-house arrangements,” says Ms Hurditch.  “While no agencies have yet completely abandoned outsourcing, it is clear that a number of them are very undecided about  what to do,” she added.

The Australian Tax Office has just commenced a process to replace its long-standing IT Outsourcing Contact with EDS.   ATO's contractual arrangement with EDS is due to finish in June 2008.  ATO has appointed Boston Consulting Group to provide advice on the broad options available to either fully or selectively outsource.  The agency will then consider its options, and either go to the market to meet all or part of its IT requirements in 2008, or as it has done in the past, it may exercise the option to June 2010, which is likely to be worth $170 million per year to EDS.

According to Intermedium, because of the discernible trend in Federal Government away from whole-of-agency, single supplier outsourcing, towards strategic outsourcing, significant opportunities should arise for specialist suppliers, particularly if they can find sub-contracting and other strategic partnering  opportunities with the larger players in this field.

Intermedium’s just released Federal Government IT Infrastructure Outsourcing Report 2006-07 shows infrastructure outsourcing is a very significant part of Federal Government ICT procurement.  Intermedium research shows that 48% of agencies which contract more than $1  million on ICT products and services per annum, are involved in outsourcing.  Ms Hurditch says the major question is “will agencies that have not yet engaged in infrastructure outsourcing in the past now see it as a more appealing prospect, given that there is a decade of outsourcing experience within Federal Government?”
 
Intermedium’s analysis of contract data reported in AusTender shows that Managed Services (the sub-category of IT Services that includes all infrastructure outsourcing contracts) grew by 11% in the 2005-06 financial year.  However, it shows that average growth over the five years to 2005-06 has been 31.7%.
 
Intermedium’s Federal Government IT Infrastructure Outsourcing Report 2006-07 provides an overview of the outsourcing market, an outline of discernible trends, and an agency-by-agency reference on the outsourcing arrangements of 56 Federal Government agencies.
 
The report shows that:
-   16 agencies have “single sourcing” outsourcing arrangements
-   11 agencies have “selective sourcing” arrangements and at least 4 of these agencies moved from single sourcing when their outsourcing contracts were due for renewal
-   29 have “self-managed” arrangements
-    There are currently 8 suppliers with infrastructure outsourcing contacts in Federal Government.  Together, they accounted for more than $500m in Federal contracts in 2005-06
-   Seven agencies provide managed services to other agencies, which Intermedium sees as a growing trend