A Pattern of Development

A Pattern of Development

Thanks to the decentralisation of outsourcing and the freedoms granted by new procurement guidelines SMEs are queuing up for government contracts - and presenting CIOs with a slew of new issues to face.

Champagne was flowing freely recently at the headquarters of Australian company Logica, when the company announced it had secured a five-year, $25 million contract to build an online marketplace for the NSW Department of Public Works and Services (DPWS).

What was significant about the deal was not only its scope - an expected 11 million annual transactions will make it Australia's largest e-procurement endeavour - but the fact that Logica, a British company with operations in 14 other countries, had wrestled the contract away from competitors not by grabbing the whole thing for itself, but by building a consortium of 12 Australian small and medium enterprises (SMEs). Logica will serve as prime contractor, with the SMEs already ramping up their own capabilities so they can do most of the actual heavy lifting.

"We were quite passionate about involving SMEs in this," says Logica consortium chief Stephen Proctor. "It's hugely a no-go zone for smaller local organisations to bid on larger government business because of the liabilities and size of the contracts. We could put our hands up and do all of it, but that doesn't do anything for local industry or give the marketplace a boost in skills. It's also coming from quite a pragmatic approach, since the government wants to enable nine agencies in the first nine months of the contract."

Be it out of altruism or the need for a quick ramp-up, Logica's decision to involve SMEs in the majority of the work will certainly win it many points with the NSW state government, which has an obvious interest in promoting indigenous ICT companies. Logica is assuming the risk for its subcontractors, which were chosen after extensive due diligence and have each been allocated a specific area of responsibility. It will also train them in the overall project management and quality assurance discipline needed to ensure the group can produce a consistent deliverable.

Prime Meat

Finding effective ways to promote local industry development while leaving enough meat to lure the best prime contractors has long been a challenge for government, particularly when contracts are as large as those on offer during the Commonwealth's short-lived whole-of-government outsourcing initiative.

During formulation of those contracts, industry development obligations were negotiated on a deal by deal basis based on comparing industry development commitments offered by tenderers. The Department of Communications, Information Technology and the Arts (DCITA), which has now assumed responsibility for coordinating industry development within IT procurement contracts, reported in its 1999-2000 progress report that the five winning outsourcing vendors had collectively committed to involve Australian SMEs in at least $330 million of in-scope business, with additional investments of $92 million and exports of $277 million.

That's an average of $66 million per year during the five years up until that time. But during 1999-2000 alone, SMEs reportedly received $91 million of business, with additional investment of $33 million and exports of $23 million. That's a windfall for SMEs in terms of direct business and industry development, although exports were less than half the level that would be expected - and in an excellent year for the IT industry, no less.

While the outcomes may seem healthy, industry observers were concerned that the numbers obscured a situation where SMEs were still subject to onerous burdens before even being allowed to compete for government business. Redundant certification processes, individual departments' lack of involvement in industry development, a lack of clear benchmarking procedures, and the government's tendency to hide key performance figures behind outsourcers' commercial-in-confidence claims were all addressed during the 2001 Humphry Review, whose findings have shaped outsourcing reform over the past year.

The best indication of the effect of these problems came with the Australian National Audit Office's (ANAO's) recent audit of IBM Global Services Australia's (GSA) performance within its Department of Veterans' Affairs (DVA) IT outsourcing contract. Despite requests for more information, IBM GSA had failed to report just what SMEs had participated in the DVA contract. The only guidance received about the success of the industry development schemes was IBM's own estimate that Australian SMEs received $3.5 million as part of nine separate contracts awarded throughout the life of the outsourcing deal.

Murray Harrison, information manager at DVA, says IBM had satisfied DCITA's industry development reporting requirements, adding that the department recognises there is real value in working with small companies: "It's not a clear-cut decision for us that either big or small companies have an edge, but in some cases [SMEs are] more cost effective and keener."

If the $3.5 million figure is correct, Australian SMEs were given just around 2.5 per cent of the estimated $140 million DVA will have paid to IBM GSA by November this year. That percentage would have fallen far short of the government's newly issued industry development guidelines, which specify that SMEs must receive 10 per cent of the hardware value, and 20 per cent of the services spend, of any contract over $20 million (contracts under that limit are now exempt from set requirements).

IBM had not responded to requests for comment at the time of writing.

Commercial in confidence claims by outsourcers have obscured better visibility of the SME spend in other contracts, but such hazy circumstances and unsubstantiated results have shrouded early industry development plans in secrecy that left a bad taste in Humphry's mouth.

Although the government didn't impose specific industry development obligations in the first round of outsourcing, the new requirements give a better picture of the type of industry development levels the government considers to be adequate - and early performance seems to have been far below what is now expected in large contracts.

The CIO's Dilemma

Individual government agencies have welcomed the decentralisation of outsourcing and the freedoms granted them by the new procurement guidelines. However, with this gift comes a new burden for CIOs who just want to get the job done, quickly and well.

Although prime contractors typically assume the majority of the risk in terms of planning, executing and managing delivered projects, their ability to manage SMEs is another issue altogether. The more subcontractors involved in a project, the harder the prime contractor must work to keep them all singing from the same hymnal. Skill sets must be brought to parity, expectations must be clarified, and penalties for non-delivery must be set out from the start.

As always, good relationships with prime and subcontractors are key to success. These relationships facilitate smooth resolution of any issues, including the ability to quickly formulate workarounds should companies fail to deliver. They can also help bridge cultural gaps - which can be a particular issue when large companies are forced to work with small.

Building bridges isn't always easy, particularly when large companies are forced to work with smaller companies with different ways of doing things. "Some of the requirements of particular contracts have forced us to take partnership arrangements that we wouldn't have taken," concedes Grant Dreghorn, general manager of CSC Australia's defence group.

"They've been structured in particular arrangements to meet percentage requirements for industry development. Those relationships stretch across many transactions, and you have to learn to work together well. Slammed together as partners for the first time on a particularly sensitive and trying deal such as outsourcing, clearly there were issues."

Those sorts of issues present significant issues for CIOs needing to ensure delivery deadlines don't slip behind schedule due to the primary contractor's failure to keep everybody in line. Service level agreements may seem to help ensure delivery, but they're little solace if problems push back delivery of key services.

Despite the ideological appeal of encouraging SME participation, the sheer need to get the job done sometimes makes larger companies and multinationals more appropriate, says Tony Aitkenhead, manager of IT infrastructure with the Victorian Department of Human Services.

"If you're stacking up service offerings and they're equivalent, the differentiator would be which is a local company," he explains. "But there have been times when [SMEs] say their skills are only in a specific niche. Often, the problem that you've got is often greater than that small niche. There are a number of very good local companies, but bigger organisations often have a better base to come off since they've been there and done that before."

On the other hand, SMEs are often easier to deal with because they have local knowledge, local staff, are more focused on the task at hand, can be more nimble, and are easier to deal with since CIOs often deal directly with the company's principal. And it's not like SMEs are completely unproven: every government jurisdiction requires some form of preapproval before tenders can go to any company.

That means the real challenge for CIOs is figuring out how to leverage the relative strengths of both by helping prime contractors incorporate SMEs into contracts, while working around issues stemming from their smaller size, risk profiles and obligations such as insurance and financial guarantees.

Such investigations impose a significant burden on departments, but even vendors concede they're a necessary evil. "At the end of the day, the government is spending taxpayer money," Logica's Proctor says. "There are commercial processes you have to maintain." Those processes become significantly less burdensome in a situation such as the NSW DPWS deal, where Logica has assumed all the risk for its subcontractors.

Not every prime contractor is so altruistic, however. Noting that a prime contractor's performance is inextricably linked with that of its subcontractors, CSC's Dreghorn says the need to meet SLAs "may mean we have to pass those full obligations onto the subcontractor, since we're entirely in the hands of [their] performance. Try as we might, we can't absolutely eliminate all the risks associated with such subcontractors. So we have to exercise the sort of due diligence one would expect."

Over time, however, encouraging involvement of SMEs will be less about finding ways to extend SMEs' capabilities so they can handle larger contracts, says Aitkenhead. Rather, as departments become increasingly concerned with short-term deliverables and smaller Web-focused developments, the smaller scope of such projects will become even more appropriate for SMEs.

This change, in turn, should encourage CIOs to break down large projects into smaller, more manageable chunks that can be farmed out to the most appropriate contractors - large or small. That approach, which has the added benefit of enabling faster ROI and more nimble IT strategies, was previously an issue of concern in relation to Commonwealth contracts since SMEs had to climb such high barriers to entry to get into any contract. But with Endorsed Supplier Arrangement certification now the only eligibility requirement for SMEs wanting to participate, execution of smaller contracts shouldn't be so onerous.

New Choices

Although the specifics of monitoring SMEs' involvement are still emerging, the provisions arguably provide more flexibility for government agencies in managing their procurement processes.

Nonetheless, the guidelines have not been without criticism - mainly focused around the lack of clear methods for ensuring compliance with whatever industry develpment expectations are put in place under the new regime. Predictably, opposition government claims the new policies are simply the Coalition's way of kowtowing to big business lobbying against being pushed into working with SMEs just to meet industry development quotas.

"All of the work the Coalition has done in this area is premised on the fact that a multinational gets the contract and Australian SMEs get subcontracted from that point," says Kate Lundy, Shadow Minister for IT and Sport. "I think that's an inappropriate premise and not a premise that assists with growth opportunities for those companies.

"Issues such a financial guarantees and insurance are tangible blocks that need to be addressed," she says. "They exclude new companies who don't have a particular track record but have a good product or service they want to compete on. Since [the Coalition is] not providing any sort of practical pathway for industry development outcomes to be achieved or monitored, they've basically said to departments that this is not a priority anymore."

That message may not be all bad, however. Government agencies already recognise the importance of small businesses in their own right, and it's unlikely that they'll abandon the sector completely even though industry development requirements have been loosened for smaller contracts.

Rather, the new legislation - in particular, the removal of many obstacles to SME tendering - should give IT executives more leeway to plan relevant, meaningful engagements with SMEs in the areas in which they specialise. This freedom in procurement has come at just the right time for many departments, with many now able to use them in renegotiating their outsourcing and other contracts.

"We're in the process of renegotiating our contract, and one of the issues we're negotiating is the model of decision making that occurs within a relationship," says DVA's Harrison. "We're deliberately looking towards a more active role in decision making. At the end of the day, our decision making is based on things like value for money and the best service for our internal clients. We want to understand what people are able to offer and what it's going to cost us, and we want to be a part of the decisions about how the total service is constructed."

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More about Australian National Audit OfficeAustralian National Audit OfficeCSC AustraliaDepartment of CommunicationsGSA GroupIBM AustraliaIBM GSALogicaNational Audit OfficeSolace

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