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The Dynamics of Outsourcing in Australia

Although information technology did not occupy the place it deserved in party platforms during Australia’s September 1998 election, IT was brought to the public forefront by industry bodies. Australia is currently at a critical juncture of its multi-billion-dollar outsourcing industry, and the general concensus is that reform is needed.

The nation’s Liberal Coalition introduced a modest change — to include IT in the portfolio of the incumbent Minister for Communications, Senator Richard Alston. But will that change improve the focus and delivery of industry policies? By definition, “dynamics” refers to the motion of systems under the action of forces that are usually from outside the system. Who or what is affecting the status of the outsourcing industry in Australia?

The Past

A broad vision for future IT&T service delivery was outlined in 1995 in what later became known as the “Whole of Government IT Infrastructure Initiative.” At that time, IT was, by far, the largest segment of the government’s demand for outsourcing services. The cabinet declared its intention to be a world leader in government administration and the cost-effective provision of affordable, equitable, and accessible information and services to Australians.

The policy, managed by the Department of Finance and Administation, had a number of objectives, including effective IT&T support of agency business needs; economies of scale; enhanced effectiveness, due to standardized operating environments; efficient use of processing capacity and better services at lower costs; and leveraged access to private sector technology and expertise. Most importantly, significant industry development objectives were to be achieved through the IT Infrastructure Initiative, including growth in the Australian IT&T industries; promoting their competitiveness; and addressing employment and development needs.

A study published by PA Consulting in February 1997 predicted that the Australian marketplace might be unable to support the rapid growth of outsourcing anticipated. Domestic growth was expected to exceed the global market for five years, with the government demand to contribute significantly to that growth.

Contrary to plans, though, industry development objectives soon became the first casualties of federal outsourcing policies. Government failure to support the local IT&T industry has been blamed for the disappearance of small and medium-sized companies (such as Ferntree and Praxa, that fell in foreign hands) and for Eracom, a security and encryption company that chose to move offshore. The domestic market did, in fact, grow — but not because of government support.

The Present

Australia is only 2% of the global market; yet its market grew 74% in 1997 and 70% in 1998. According to the November 1998 IDC report, the Australian market will top 24% compound growth by 2002 (the worldwide comparison is 11.8%) and it will have an annual volume of $3.87 billion.

The outstanding growth is due to private sector deals, rather than the government. Although the government has pending tenders for contract with the Australian Taxation Office and the Department of Health/Health Insurance Commission (for $400 million each), two of the most recent mega Australian private sector deals are among the top seven long-term outsourcing initiatives in the world. The first is the $5 billion Commonwealth Bank/EDS contract; the second is the $4 billion Telstra-IBM/GSA agreement.

The government ranks third in segments of the outsourcing market this year, with 21% of the spending. The finance industry is the largest consumer of such services (37% in 1997), followed by communications (22%), then utilities (10%). Although government agencies provide most of the headlines, it is the private sector that accounts for the biggest share of the market.

Current Developments

Currently, IBM, EDS and CSC are the top suppliers of outsourcing services. IBM, with over $5 billion in contracts, dominates the scene through its IBM Global Services Australia and Advantra (a joint venture including local partners, such as Telstra and Lend Lease Corp.). Advantra has been the subject of serious controversy; EDS and Ipex (who compete with Advantra for the $100 million government contract to manage agencies’ desktops) have questioned the “Australianness” of Advantra.

A major $130 million lease-back deal with between Telstra and IBM/GSA (involving the sale of over 80,000 PCs and notebooks to IBM) was closed in November 1998. The complexity of the deal ranks it among the top twelve IBM accounts worldwide. Telstra’s procurement and asset management will be conducted electronically; the emerging electronic supply chain management system involves eight suppliers, two resellers, and IBM (to run various makes of desktop systems).

In the telecommunications arena (besides the $4 billion Telstra-IBM/GSA deal), EDS signed a five-year contract to deploy a new billing system; and Optus (the second largest Australian carrier) has outsourced management of its desktop systems to Digital Equipment (now part of Compaq Computers).

November 1998 also saw the formation of Integrated Process Solutions, a BPO joint venture with four partners, including Aspect Computing (local computer service company), Global Customer Solutions, Citibank and Manpower.

The Future

The top suppliers of outsourcing services (IBM, EDS, CSC) in Australia drive the cost of entry for new individual players higher, so joint ventures are becoming the preferred vehicle. Competitive pressure is coming, though from emerging players, such as Citibank, Lend Lease, Shell, Andersen Consulting, and other service providers specializing in business process outsourcing. BPO is poised for rapid growth and viewed as a welcome change to the traditional model of high volume, low-margin outsourcing. In recent weeks, several second-tier providers have established a foothold, including Pink Elephant, a subsidiary of the Dutch State-owned Roccade Group; the company has already collected such blue-chip customers as Oracle, Merrill Lynch and Australia Post.

The Australian market is still small (worth $30 – $50 million); but it is gathering momentum, and its value may increase tenfold in five years, for it is growing at twice the speed of international industry. This is due in part to the fact that the market does not shy away from innovations, such as large-scale, lease-back deals or BPO contracts.

The supply side is highly concentrated with a limited number of established players dominating both government tenders and long-term private contracts. On the demand side, the government’s IT&T program has to be completed in 1999.

The Australian Financial Review commented in January 1999 that John Fahey, the Minister for Finance and Administration, who is in charge of the government’s IT outsourcing program, has made it clear he would like to see a local company act as prime contractor in the first non-mainframe federal outsourcing deal.

Small and medium enterprises are becoming the focus of attention in Australia for IBM, and EDS is planning for a 20% growth of e-business and BPO services. If the dynamism of Australian outsourcing is sustained, there will be room for new niche players — although it is unlikely that the current ranking of players will be changed (first IBM, then EDS).

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