The Federal Government ICT market is now in the midst of a significant downturn according to new research from Intermedium.
Although unrelated to the doom and gloom caused by the global financial crisis, the news that Government is spending less with suppliers will further dampen the economic outlook, especially in Canberra.
Following strong growth in recent years, the value of this market slowed by more than 16% during the 2007-08 financial year.
Although we expect the final figure to be higher as late contracts are reported, it appears the value of the Federal Government ICT market in 2007-08 will be just over $3.1 billion, compared with $3.7 billion in 2006-07.
Along with a decline in the total value of ICT contracts reported by Federal Government agencies, the number of ICT contracts also fell, by approximately 5%. In addition, the average value of contracts declined to $215,899, compared with $221,623 the previous year.
In recent years, the market has been sustained by strong growth in IT Services. This category continues to dominate the market, but IT Services spending was down by more than $300m in 2007-08, or more than 11%. IT services includes IT outsourcing, consulting, labour hire, training, and hardware and software support.
One sector to be hit by the downturn is hardware. This sector lost 46% of its value in 2006-07, then continued to decline in 2007-08 with a further 12% drop. These figures cover direct purchases of hardware by agencies, and do not include any expenditure on hardware by outsourcing companies on behalf of client agencies. The hardware downturn is therefore likely to reflect three year cycles, linked to depreciation.
After more than doubling in 2006-07, spending on software decreased by more than 20% in 2007-08, following project run-downs at Centrelink, DIAC and Customs.
At the same briefing last year, Intermedium reported a significant decline in the number and value of ICT contracts reported by the Department of Defence for 2006-07. Defence ICT spending increased by more than 10% in 2007-08, and Defence continues to dominate with more than one third of the Federal ICT market.
However, at just over $900m, Defence spending in 2007-08 was still substantially down on the peak 2005-06 level of $1.33b. There are a range of reasons for this decline in Defence spending, including key reviews and the impact of the new CIO, Greg Farr, delaying key purchasing decisions until he had a chance to adequately assess the situation.
Even before the economy slowed, Government ICT spending slowed as agencies took a conservative approach to procurement in the lead-up to the Federal election. Earlier this year, the impact of a number of Government measures, especially the blunt application of a 2% efficiency dividend on agency spending, began to bite in the ICT market.
The current downturn in ICT spending by the Federal Government does not reflect the economic downturn, but rather the coincidence of three cycles that uniquely affect the public sector: a change of Government (the political cycle); the first year after an election (the electoral cycle); and seasonal spending patterns (the budget cycle). However, what is worrying is that this has occurred as Australia begins to face the full force of the global financial crisis.
Intermedium expects ICT spending to pick up as we move into the second year of the electoral cycle and the various reviews conclude. However, the impact of the world economy and particularly the dramatic fall in Australia’s exchange rate means any predictions are especially risky at present.
This and other more detailed market information is contained in Intermedium’s Federal Government ICT Market Report 2007-08. It provides a concise view of the market over the past three financial years (2005-06 to 2007-08). It’s an invaluable source of information about the market for anyone involved in strategic market or sales planning.