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Why the Digital Marketplace is not meeting expectations, yet

by Poppy Johnston •
Free resource

Although a large portion of the ICT suppliers listed on the Digital Marketplace are the kind of new and innovative vendors the government is hoping to do more business with, Digital Transformation Agency CEO Gavin Slater says the presence of these suppliers on the portal is not yet translating into frequent wins.

The marketplace has managed to open the door for new and innovative suppliers, with Intermedium estimating in July 2017 that as many as 30 per cent of ICT suppliers on the Digital Marketplace Panel were new to the federal government ICT market*. However, Slater admitted in a Senate estimates hearing on Tuesday 27 February 2018 that despite improved access, the Small to Medium Enterprise (SME) "conversion rate" for securing government business through the platform is low.

“I guess the question for me still is, how can we increase the participation rate? Some of the feedback we get from SME companies is, 'We registered on [the] Digital Marketplace. It's been great. We don't mind the process, but it's been doughnuts. We don't get any business coming out of that’”, according to Slater.

Further doubt was cast over the marketplace’s performance with Senator Jenny McAllister citing an “innovation survey” that suggests SMEs are successfully securing government business through other channels. According to the survey, 72 per cent of registered small business sellers say they have not won business through the marketplace, yet 60 per cent claim to be existing suppliers to the federal government.

Slater gives two primary reasons for the Digital Marketplace’s underperformance: the limited product and services types offered through the marketplace, and a culture of risk aversion keeping government contracting with the same ICT suppliers.

He says that although the DTA hopes to expand the types of products and services offered through the marketplace, the majority of purchases made are currently “around skills and labour” rather than “broader software service or hardware procurements”.

The DTA has already expanded the range of products and services offered through the portal since the marketplace was set up in August 2016. In February 2017, several new categories were introduced: cybersecurity; data science; emerging technologies; content and publishing; support and operations; and marketing, communications and engagement. The marketplace was also opened to suppliers offering digital software products, but functionality was “limited to a catalogue listing”, according to tender documents from the time.

Slater also addressed the persistent issue of procurement culture as a barrier to SME participation. In terms of solutions, he says it’s largely about educating agencies to make better purchasing decisions, and “in a sense, encouraging them to experiment and try some different providers of a service, rather than defaulting to someone who's been well established and providing that service for the last decade or so.”

Efforts to change procurement culture in government are already underway, with reforms currently taking place in line with recommendations in the August 2017 ICT Procurement Taskforce report. Slater says a range of short-term actions have already been taken, such as standardising contract terms, with further transformations in the pipeline.

The reforms are largely focused on increasing SME participation in the government ICT market to overcome sluggish innovation, and include a new target to increase its annual $6.5 billion IT spend to smaller operators by 10 per cent. SMEs have received 30 per cent of the ICT procurement contract in 2015–16 by value, and 59 per cent by volume, according to the report.

Another key part of the reform package impacting SME participation is the capping of federal IT contracts to less than $100 million or three years’ duration. This breaks up what would have previously been large ICT projects into smaller components SMEs are more capable of delivering.

The DTA expects to have a clearer idea of how the Digital Marketplace is tracking towards its goals, as well as how it sits in relation to other reform efforts, at the May estimates in three months’ time.

The UK’s experience with SME-friendly policies

The United Kingdom is often a couple of steps ahead of Australia in terms of digital government, including in the field of SME-friendly policy. Emerging reports show that the UK government is facing similar issues to Australia, which suggests that transforming procurement culture in favour of SMEs is universally challenging.

The centrepiece of the UK government’s January 2014 package of reforms was a value cap on new IT contracts to £100 million. The reforms also limited new hosting contracts to a term of less than two years, and banned automatic contract extensions, among other SME-friendly initiatives. However, there is no wide-ranging ICT contract term limit like in Australia.

The rationale for the UK’s controls is also centred on increasing competitiveness by opening up the government tech market to smaller firms, as well as reducing the size of IT projects and the associated risks of failure.

But several emerging sources show minimal effect on government procurement practices. A March 2017 UK NAO report found: “While new digital and procurement frameworks targeting SMEs have had some impact, most government procurement with digital and technology suppliers continues to be with large organisations.”

In 2015-16, 94 per cent of UK government ICT spending was with large enterprises, “a fall of less than one percentage point since 2012-13”, according to the audit report.

In late December last year, the UK Cabinet Office released figures that showed that the share of government spending (not specific to ICT) that went to SMEs directly and indirectly actually fell, from 27 per cent in 2014-15 to 24 per cent in 2015-16. The Cabinet Office also pushed back the target deadline for achieving 33 per cent of government spending on SMEs from 2020 to 2022.

Like in Australia, the UK Government continues to struggle with the “fixed system” that poses a barrier for SMEs to break into the market, which will require adopting a new procurement ethos throughout the public sector. As Minister Taylor indicated in an August 2017 press release, “[t]he Taskforce found a culture of risk aversion in government procurement had undermined the freedom to innovate and experiment. If we are to reward the entrepreneurial spirit, a new procurement culture is necessary”.

In terms of solutions, a 2016 UK National Audit Office (NAO) report challenged the underlying assumption that dismantling the barriers to SME participation would directly translate to increased participation, and provided a number of recommendations urging the government to alter its approach to SMEs.

This included focusing on areas where SMEs can deliver real benefits, rather than defaulting to SMEs in every instance. This ‘focused approach’ involves taking into consideration the full range of risks and opportunities that contracting with SMEs presents when compared to working with larger providers.

* For the purpose of this analysis, a supplier deemed by Intermedium as new to the federal government ICT market is any supplier yet to win a contract with a federal agency over $10,000. Also note that Suppliers can be registered to the Digital Marketplace without being active sellers through the Digital Marketplace Panel.

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