Prevailing market theory suggests that competition leads to reduced prices. Recent information suggests in the Government ICT market now even if there is very limited competition, ICT suppliers are increasingly under pressure to reduce their prices.
The Department of Immigration and Citizenship (DIAC) recently announced that it had negotiated an extension of its infrastructure outsourcing contract with CSC (a two year extension worth $110 million), saving around $16 million over the costs in the original 2001 contract.
In the same vein, at an industry briefing on the last tranche of its IT sourcing program for Centralised Computing Services, the ATO made it quite clear that it expected to achieve a reduction in the cost of this aspect of the system compared with its existing outsourcing arrangement (with EDS) in place since 1999.
The ATO plans to shortlist potential vendors and through a series of workshops, RFTs and negotiations, gradually “whittle down” the field until it arrives at a single vendor. Agencies which take advantage of contract extensions make often significant savings on the cost of going to open tender, both time and resources. They are now increasingly negotiating favourable terms because the incumbent supplier is eager to retain the business.
But it’s not only in contract extensions that agencies are negotiating aggressively and expecting suppliers to cut their prices.
Industry sources report that suppliers on NSW Government panels are also under significant pressure to reduce their prices. The argument advanced is that having secured a place on a contract with very little competition, the guaranteed volume of sales to the supplier should provide sufficient reason to significantly lower price.
Intermedium research shows that only 47% of Federal Government ICT contracts reported in the 2007-08 financial year went to open tender. Another forty seven percent (47%) were sole sourced (purchased directly form a single supplier without an approach to the market) or went to restricted tender. Sole sourcing was noticeably significant for higher value contracts, particularly major variations or extension to existing contracts for outsourcing or existing hardware/software platforms.
The current Gershon Review of Federal Government use of ICT is expected to recommend a move towards coordinated procurement and a reduction in the number of suppliers for some generic systems. In addition, it seems likely the Federal Government will also look more closely at implementing a shared services facility to reduce the cost of back office systems such as finance, HR and document management, especially for smaller agencies.