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IBM Dominance of Government Markets Set to Continue

by Dorothy Kennedy •
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IBM’s dominance of the Federal Government market for ICT is taking on new dimensions as the company heads into massive engagements with DIAC, Customs, and Centrelink. In a market where ICT skills have been in short supply, the question arises as to how IBM might resource this massive level of business.

IBM stands head and shoulders above its competitors, with Federal Government contracts worth $662m reported last financial year, streets ahead of the number two supplier, Telstra, with contracts worth $218m reported.

IBM’s hold on the national capital’s purse strings saw it snare almost 20 percent of total Federal Government ICT business in 2006-07, as the value of its contracts jumped $187m from the $474m reported in 2005-06. Boosted by its Customs win (gained at the expenses of incumbent outsourcing supplier EDS), IBM laid claim to nearly 30 percent of the IT Services market.

IBM’s growth curve seems unlikely to flatten in 2008. So far this year, the company has secured a $142 million extension to its outsourcing agreement with Centrelink, and a smaller, $2m contract with Medicare. The success follows last October’s $40.8m rollover of its outsourcing agreement with the Department of Health and Ageing.

Then there is IBM’s role as consortium lead of the Department of Immigration and Citizenship’s (DIAC) massive, $496m Systems for People project. IBM is likely to reel in $200- $250m over the life of this project. 66 individual statements of work have recently been reported under the contract with a total value in the order of $168.6 million. The largest single component was a $34 million software and maintenance engagement. Each job was worth at least $250,000, and there could be more money on the way.

It seems that IBM may already have been experiencing resourcing problems with the DIAC project. It has been reported that DIAC has asked the Department of Finance and Deregulation (DFD) for a further $44m to cover budget shortfalls partly the result of a $5 million blow out in contract labour costs following a 22 per cent spike in contract labour costs for the project during the 2006-07 financial year.

The huge DIAC project is in addition to IBM's five-year, $203m Customs deal. It means IBM’s number 1 ranking is almost certain to stay in place this year. Watch out for IBM leveraging its recent acquisition of business intelligence company Cognos, which has its own foothold in Federal Government departments such as Defence and the ATO.

IBM has effectively transformed its Federal Government business in recent years. In 2003-04, IBM's Federal Government business was evenly spread across Hardware (27%), Software (33%) and IT Services (30%). By the 2006-07 financial year, IT Services represented 96% of the value of contracts reported for IBM. Where once services might have been used by IBM to support hardware sales, services are now the dominant segment of the company's business.

State Government contracts are also attracting IBM’s attention. Australian IT recently reported that the Queensland Government’s CorpTech has taken the implementation of a centralised HR and payroll systems away from Accenture, and awarded it to IBM Global Business Services Australia.

Outsourcing rival EDS is another victim of the IBM ascendancy, as it waves goodbye to its ten-year, $550m single-supplier outsourcing deal with Customs. IBM picked up the $203m contract for the management of Customs’ main processing environment. Separately, the ATO’s decision to open up $1.8 billion worth of IT outsourcing contracts, previously held by EDS, to multiple suppliers, has hurt. Naturally, IBM – along with CSC and others - was among the vendors registered for a December briefing by the ATO on the new agreements.

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