[ :: Intermedium - Newsletter 7 July 2008

While Sir Peter Gershon continues his review looking for fundamental ICT efficiencies, a quiet revolution appears to be already underway in how the Federal Government purchases its ICT commodities.

Last week Defence released its tender for one or more Large Account Resellers (LARs) of Microsoft software. In itself, the tender will be a quick and straight forward process. Tenderers are required to limit their responses to no more than twenty A4 pages, typed no smaller than 10 point Arial. The entire tender process is expected to complete quickly with the execution of the new Head Agreement by the end of August.

However significant ramifications for all commodity ICT suppliers lie behind this simple tender process. According to the Tender documentation, “While this is a tender conducted by Defence, the resulting Head Agreement may be used throughout the Commonwealth of Australia”.

Through its Whole-of-Government Volume Sourcing Arrangements the Federal Government is targeting commodity purchases. It is leveraging its whole-of-government purchasing power to drive down prices. Microsoft software is just the first piece of a much larger ICT commodity agenda.

AGIMO is taking policy leadership, while large 'Lead Agencies' are driving the negotiations. Currently Defence and Microsoft are locked in negotiations for the purchase of Microsoft software. It is the government’s expectation that Microsoft will substantially sharpen its pricing in return for more streamlined purchasing arrangements.

There is a fine balance here for achieving real success. On one hand, the government has a right to expect favourable pricing given the government’s enormous buying power. However, if efficiency-based negotiations are pushed too vigorously, government agencies may miss out on future value added services that could provide improvements in overall government effectiveness.

Microsoft itself is only part of the software supply chain. Typically, Microsoft sells its software through various supply channels. In the case of large agencies, the government typically deals with Large Account Resellers (LARs), such as KAZ, Dimension Data, HP and Commander. Such companies provide a number of supply chain services. They arrange for delivery of the software and may also provide value added services such as managing licenses and version changes. LARs typically operate on wafer thin margins, relying on volume sales for income.

So with profit margins under pressure at all points in the supply chain, new business models will need to exploit the efficiencies of commodity selling in order to maintain profitability. This could mean that agencies themselves will need to move to more standardised configurations, and they may need to look to other contract relationships for their value added services.