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Avalanche of IT Outsourcing Contracts in Next 2 Years

by Staff Writers •
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A large number of IT infrastructure outsourcing contracts signed in the late 1990s are due to expire in the near future. This will result in new contracts worth more than $600 million per annum coming to the market during the next 2 years.

Intermedium has identified 23 Federal Government agencies with major IT infrastructure contracts that have almost run their course. These agencies will need to go to the market to meet their ICT requirements by mid 2009. Seven of them have contracts that expire in 2007 (with presumed extensions in place), seven in 2008, and nine in 2009.

This situation, where a large number of agencies are at end of their outsourcing contract life (many are now into their last possible contract extensions) has arisen because the majority entered the outsourcing market at about the same time, in the late 1990s.

These agencies will now need to engage in market testing exercises to ensure that they achieve value for money from their infrastructure outsourcing arrangements or make a decision to revert to in-house arrangements. While there is no guarantee that they will continue with the same infrastructure outsourcing model, it is clear that agencies will need to go to the market to meet their ongoing ICT requirements.

There is a discernible trend away from whole-of-agency, single supplier outsourcing within the Federal Government, towards strategic outsourcing. Therefore, significant opportunities should arise for specialist suppliers.

IT outsourcing is a significant part of Federal Government ICT procurement. Intermedium research shows that 48% of agencies (those spending more than $1m on ICT products and services) are involved in outsourcing. This situation is likely to continue, and in fact, the value of outsourcing is likely to increase. Agencies that have not yet engaged in infrastructure outsourcing in the past may see it as a more appealing prospect, now 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 a remarkable 31.7%.

Assuming continued growth at the five-year average of 31.7%, Managed Services would reach $2.1 billion per annum in new contracts by 2009-10. Intermedium believes growth at this level may be sustainable because of the high rate of growth in public sector staff numbers creating increased demand for ICT infrastructure. If a more conservative growth rate of 15% per annum is assumed, then by 2009-10, the Federal Government managed services market will be worth $1.25 billion per annum in new contracts.

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