Big ticket IT deals banned: Taylor’s $100m contracts cap in tech clean-up

By Julian Bajkowski

Wednesday August 23, 2017

Federal agencies will be hit with a strict $100 million cap on the size of the IT contracts they award to suppliers under strict new measures included in the biggest technology purchasing overhaul in a decade.

To be revealed today by Assistant Minister for Digital Transformation Angus Taylor, the contract price limit reforms will be backed by the target of an increase of $650 million, or 10%, in the value of work awarded to small and medium sized businesses under the government’s $6.5 billion annual tech bill. If achieved this will mean SMEs will share in around a $2.4 billion annual spend, equal to 38 per cent of the total ICT spend.

Size does matter

The shake-up is clearly aimed at stopping the established practice of agencies awarding big, long term deals to so-called ‘mega vendors’ which often blow out in cost and underperform on the capability and delivery front — like Immigration’s ‘Systems for People’ project and Tax’s ‘Change Program’.

The shake-up comes on the back of a sweeping whole-of-government probe into public sector tech spending and investment undertaken by Prime Minister and Cabinet’s ICT Procurement Taskforce, the findings and government response which were released today.

“These are exciting changes that will throw open the door for SMEs and allow government agencies to bring in new and innovative services,” Taylor said.

“A cap is now in place to limit the term and value of government IT contracts. We are reducing the number of IT panels to make it easier for small players to supply services. We are actively encouraging small innovators to sell us their ideas.”

Smaller portion sizes to slim contracts spending

While Taylor’s announcement didn’t name which vendors it wants to put on a fiscal diet, the ICT Procurement Taskforce did when it released its consultation paper last year.

“Between 2009-10 and 2014-15, around 50 per cent of the total value of government ICT contracts went to 20 vendors, with almost half of this going to just five large vendors (HP, IBM, Telstra, Lockheed Martin Australia and Optus Networks),” the paper said.

It is understood the logic behind introducing the contract price caps is to break down government tech spending  into smaller and more manageable chunks that can be delivered quicker, more cheaply and with more immediate effect.

The approach is broadly similar to that undertaken in 2014 in the UK where Cabinet Office minister Francis Maude instigated a £100 million limit to mitigate what he said was a scenario where “big IT and big failure have stalked government for too long”.

While there will be provision for exemptions and special cases — most likely around national security and critical infrastructure — they will have to be argued on an individual and case by case basis.

Pocket rockets to counter risk aversion

Taylor is also backing the ability of smaller, more nimble suppliers to take up the competitive fight to large incumbents by making contracts more accessible and contestable before they are put to the market.

“The Taskforce found a culture of risk aversion in government procurement had undermined the freedom to innovate and experiment. If we are to reward the entrepreneurial spirit, a new procurement culture is necessary,” Taylor said.

If the offer of potentially $650 million worth of work is the blue sky in the reforms, there’s still plenty of firmly grounded cost reduction.

It broadly looks like this:

  • Dynamic pricing
    The established practice of fixing software licence prices for multi-agency deals for the duration of a contract is being junked in favour of a system of ‘dynamic pricing’ that aims to recover the difference between an initial strike price and subsequent later discounts.
    It means that as software or compute prices decline in a deflationary market, the government doesn’t get stuck with the higher walk-in price down the track, a revenue seam vendors have exploited for decades.
  • Fewer, more holistic panels
    Panels and multi-use lists might have their function, but a proliferation of options across government has increasingly made figuring out where to buy or sell software more difficult than it needs to be. Stand by for a major cull.
  • Outcome based procurement
    The days of tenders and approaches to market requiring highly prescriptive and tightly defined technical descriptions and definitions for products and services is being relaxed so agencies can specify an end result rather than a product.
    It’s understood this is aimed at accommodating a wider and more flexible mix of solutions to be offered without bidders being struck out for not meeting choice limiting criteria.
  • Proof of concept reforms
    One of the biggest bugbears for innovative suppliers vying for solution work has been the two phase procurement approach of having to stand-up a proof of concept co-developed with agencies only to then have to resubmit a formal tender bid against competitors who come in late without putting in the legwork.
    It’s understood the new procurement approach will allow agencies who require proof of concepts to follow the supplier that demonstrates it through to the end purchase of the solution.
  • Standardised ICT contract terms across agencies
    Differing ways of cutting ICT contracts are a gravy train for lawyers and consultants but a major barrier to entry for mid size and smaller suppliers who can’t afford to redo and manage the paperwork for every smaller value deal.
    A major clean up and clean out of disparate definitions, bespoke terms and conditions in favour of core set of contracts that will apply across the whole of government is intended to cut the legal red tape and allow greater competition for work from suppliers.
  • Catalogue based e-procurement
    Going shopping for standard and smaller tech shouldn’t require expensive requests for tender or labour intensive approaches to market that slow deployment and limit choice.
    Agencies will be given access to a core electronic catalogue that won’t just show them what’s available and the prices, but allow buyers to literally load up an electronic shopping cart and head for the checkout.

Where the savings will come from

There’s little doubt that Taylor’s big spring clean of tech procurement aims to exert competitive pressure on big incumbents by increasing market access.

While that will have some effect, the biggest savings are likely to flow from project size and cost creep reductions by not allowing agencies to load-up suppliers with big deals that become unwieldy to manage as government circumstances change.

Tech talent deficit still a problem

Much less clear is how the government will address the growing ICT skills shortage within its own ranks.

A long running issue exacerbated by renewal cycles, managing talent costs previously required central intervention from PM&C during the Howard era to cool down the internal bidding up of IT contingent labour prices as agencies battled each other for contractors who were able to name their price because so many agencies had big jobs on and were at risk of missing crucial deadlines.

With agencies now competing with banks and other jurisdictions for scarce tech talent, and an overhaul of the 457 visa system starting to bite, fixing Canberra’s supply of tech talent could soon become as a pressing a priority as reforming its shopping habits.

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