Talking Business

Talking Business

Since the federal government decided that whole-of-government outsourcing policies were the way to go, public sector CIOs have been thrown in at the deep end, left to negotiate multimillion dollar deals while struggling to keep costs down and efficiency up.

“When we have someone new join us we sit them down and we get them to watch a Yes, Minister video. You think I’m joking? Well, I’m not. That’s really what it’s like dealing with government CIOs.” So says a director of one of the leading technology supply companies who, not too surprisingly, wishes to remain anonymous. (“I don’t want to bite the hand that feeds me,” says our masked man.)

Indeed he wouldn’t, because that hand is a benevolent one, at least in terms of the amount of money that travels out of government coffers into the hands of technology vendors. To put it in perspective, during the next two years no less than $3 billion in government technology outsourcing is going to be up for grabs nationwide.

But just how easy is it for vendors to deal with government CIOs and are the CIOs themselves doing a good job- For some vendors, at least, it appears the game simply is not worth the candle - at least for now.

“We don’t tend to deal with government contracts,” says Sprint Australia CEO David Eagle, “simply because they are too slow moving. It’s fine for companies who want to work in that space, and who understand it, but it’s not for us.”

It is certainly an area that, while promising much in terms of size of orders and potential continuing and repeat business, can also be a frustrating arena to operate in. Our anonymous informant gives just two examples of his experiences in dealing with government CIOs.

“We won a contract that another vendor did not want to renew and it was set at a one-year $32,000 fee. I said: ‘Why don’t we give you a two-year deal for $48,000’ - that way we’d have some continuity and they would get a better deal. I explained to the customer that even if they were to default after just over a year it would still be cheaper to go for the two-year deal than just the one-year, but they wouldn’t have it. It had to be a year’s deal. Now, this just doesn’t make any sense.

“With another government department there was an issue over how much they were spending on Internet service provision. I said: ‘Look, at the moment you’re paying for one terabyte but you’re downloading three so why don’t you upgrade to pay for two terabytes and then your overall spend will be reduced.’ No, they just wouldn’t do it and in the meantime they spent an extra $100,000 because of the amount they were downloading. This is simply bureaucracy gone mad.”

However, according to Gartner’s research director for sourcing of IT services in Asia-Pacific, Jim Longwood, these examples are the exceptions rather than the rule, although he does add that the track record of CIOs and their teams in government is certainly variable. “I’d say that the government score card is about four out of five when they are negotiating the big contracts, though significantly less when it comes to smaller value contracts; I’d give them maybe two out of five for those.”

Longwood says that when it comes to cross-panel deals - those that reach across large areas of government - then there is a good track record and in those circumstances some very good contracts have been negotiated. “At the top end of government where you’re looking at those big contracts there is a core of people who are very proficient in getting good deals. But when it’s a stand-alone deal with low value it’s not always so successful because by and large those CIOs don’t have the expertise in negotiation skills.”

A good example of a very good deal was the NSW Agreement for Microsoft Software (NAMS), which straddles all areas of NSW government. Signed on June 20 this year, the agreement runs over five years with each contract period lasting three years, with two optional one-year extensions.

The beauty of NAMS is its flexibility - a flexibility that was gained by some hard negotiation. NSW government negotiators were so proud of their achievement, and rightly so it would appear, that they released a fact sheet on the plus points of the deal. Chiefly these include savings ranging between 47 and 53 per cent compared with a standard Enterprise Agreement. NAMS allows NSW government agencies to establish a Standard Operating Environment or a Managed Operating Environment, which is said to increase the value of ownership while cutting IT administration and training costs.

NAMS also gives access to the latest technology and product versions from Microsoft as they are rolled out by the company, which should ensure that NSW government departments always have access to the latest technology.

The agreement has the potential to be used across all government departments and agencies, as well as authorities, boards and commissions, local NSW councils and county councils, charitable and other not-for-profit organisations, nursing homes and community-based not-for-profit childcare facilities, plus other welfare and community service providers in NSW.

Longwood says that what NAMS proves is that government CIOs and their staffs not only need good negotiation skills but they must also know how to use them most effectively. “The role of the CIO in government should not be so much direct negotiating with suppliers but rather making sure they have a good and competent team around them to negotiate with those suppliers. When CIOs themselves - typically those in smaller government departments - have come to negotiate contracts it has not always been impressive.”

Interestingly, Longwood points out that in terms of outsourcing IT in particular, since 1997 - 98 mistakes have been made but not always on the part of government CIOs.

“On the contrary, some vendors saw massive opportunities and the mistake some of them made was to cut their margins too fine, their theory being that there would be repeat business. But the tight margins often meant staff had to be laid off because the business wasn’t profitable and then the services were not as good and consequently they didn’t get the work when it came up again.

“When you negotiate a contract, both sides have to be sure that it’s for a fair price. There really is nothing to be gained by cutting the margin to the bone.”

Longwood adds that in the early days of government IT outsourcing contracts, many government CIOs had failed to set their negotiation stance. “They usually opted either for a hot approach or a warm approach. Hot meant you got the shortlist whittled down to two companies and then you played them off against each other and drove the price down. Warm means you had a preferred service provider. Both of these approaches are still used now and both have their pluses and minuses. What government CIOs have to remember - but sometimes don’t - is that if you go for the ‘warm’ approach you do lose some leverage, so that’s when the relationship is very important.”

Longwood believes that more government departments should hand the negotiation part of the contract over to independent negotiators and advisers. “In fairness, many government departments already do this. They get independent advisers to come in and tell them what they should expect to pay for such and such a contract. These advisers can also negotiate a contract and that makes a lot of sense because they are specialists.”

He says that on the whole, government CIOs do not fare too badly when negotiating outsourcing contracts compared with some other sectors of the commercial world.

“A successful negotiating area is retail, which is not too surprising because they work all day buying and selling. Of government departments, Defence is very good because Defence is essentially all about contracts. Government in general has not done too badly at all. Ironically, one of the worst performers when it comes to negotiating their own contracts for outsourced services have been the telcos, who generally have been poor performers. Consequently there have been some dreadful deals signed.”

When it comes to renegotiating contracts, it is a fact that as many as 50 per cent of contracts are negotiated halfway through their originally agreed terms. Renegotiation is always expected by vendors so CIOs need to be prepared to wade into a new round of negotiations and usually they will have to be the ones who instigate them.

“There are several reasons for renegotiating,” Longwood says, “and any one of them could be the trigger. Halfway through a contract the relationship between the vendor and customer may have deteriorated and so the service is no longer perceived to be as good as it was. Or renegotiation could be triggered quite amicably simply because the requirements have changed.”

Longwood says that instead of going for a five- or seven-year contract, any agreement should be split into a three plus two plus one year, for example, so there are logical exit or renegotiation points. This is a policy that an increasing number of government departments are opting for.

There is also a question mark over whether a government department should renegotiate or whether it is better to re-tender. A number of state government departments nationwide have opted for re-tendering. Tendering and re-tendering is certainly something of a government speciality, if you like, but Longwood cautions against it.

“Re-tendering costs a lot of money for both sides. Both sides should be aware that in a deal there should be around 2 to 5 per cent margin to play with, so play with it when the time comes to renegotiate rather than opting for expensive re-tendering.”

Huge Opportunities

With around $3 billion of IT outsourcing due to come up for renewal over the next two years, there is going to be some significant business up for grabs and that alone will be sufficient to tempt vendors to jump into the fray.

“Companies will be attracted to this market, there’s no doubt,” Longwood says, “but they have to remember that for government business they need to have the right cultural approach. For example, the tendering process is typically far longer than for companies in the commercial environment and that puts some companies off, but that’s fair enough because it probably means they do not have the right culture for government work in any case.”

It is worth remembering that a vendor might have to invest some $2 million to get one of these big deals and halfway through the tender process they could have spent around $1 million, so they need to be sure they are in with a good chance before committing. That, Longwood says, is probably just as well, because it means only those who truly want the work will apply.

“There’s no doubt though that the tender process has to be shortened for government contracts,” Longwood says. “Sometimes the process takes 15 to 18 months which is simply too long. Government needs to line up further with the outside world in this respect and if they can manage to do that then everyone involved will benefit.”

Case Study:

South Australia’s $1 Billion Hardball

In December 2002 the state government of South Australia announced that it would not automatically re-sign its $600 million outsourcing arrangement with vendor EDS whose contract was due to expire in 2005. Instead, the SA government put in place a highly competitive procedure to select ICT service providers.

The state’s review means potential vendors will be able to supply the full range of ICT services in several open and competitive tendering processes, which are set to be worth a total of $1 billion over five years.

The government says requirements have changed significantly since the original contract was signed seven years ago and their goal in moving early was to ensure that South Australians received the best possible service at the best possible price. With the contract valued at $1 billion the government has some significant bargaining power on its hands.

A facet of the original EDS contract that the government especially liked was that it contained economic development criteria aimed at growing the IT industry in SA. The government sees this as an important factor in positioning SA as a recognised centre for world-class ICT services and products. The government has said it will continue to seek appropriate economic development arrangements with future service providers. That would seem a small price to pay in exchange for $1 billion.

Making IT Deals Work

The negotiation:

This requires a dedicated team. A common and successful approach is to split the team into two distinct subteams: a front-office and a back-office. The front-office team is small (three or four people), highly skilled and spends most of its time at the negotiating table. The back-office team is often larger (a core of eight to 10 people, with an extended team, for a large cross-panel deal, rising to 30 or 40) and has the specialist skills needed to support the front-office.

The culture:

A large IT or business process outsourcing deal changes the operations and interactions of an organisation’s IT department, business units, headquarters staff and customers or users. Undertaking an outsourcing deal is a business program comprised of multiple independent, yet interrelated, projects. It requires the enterprise to harness and manage capabilities available from the IT services market, but it also requires an alteration in behaviour and capabilities across the department.

How to Renegotiate a Better Deal

  • Decide what your goals are before entering the room.
  • Decide what you need to get out of the renegotiation.
  • Be clear about the business outcomes that you expect.
  • Be armed with hard data on how well the service provider has estimated and then managed the schedule and costs, as well as how well it has managed the resources to achieve cost-effective results.
  • Make sure you have benchmarked throughout the life of a deal to ensure that the deal remains competitive.

Information courtesy of Gartner

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