Study to identify options to ensure that the Government’s ICT and SME
policies are mutually reinforcing
Prepared by the Department of Finance and Deregulation and the
Department of Innovation, Industry, Science and Research
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Study to identify options to ensure that the Government’s ICT and SME policies are
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SME Study 2009
Contents
1.
EXECUTIVE SUMMARY ................................................................................... 3
Introduction........................................................................................................... 3
Summary Findings .............................................................................................. 3
2.
POLICY OVERVIEW .......................................................................................... 3
Commonwealth Procurement Guidelines ........................................................ 3
Limited Liability in ICT Contracts ...................................................................... 3
2002 SME Participation Procurement Policy .................................................. 4
Statistics on Australian Government Procurement Contracts .......................... 4
Industry Concerns ................................................................................................... 4
3.
CURRENT INITIATIVES .................................................................................... 5
4.
INTRODUCTION ................................................................................................. 7
5.
POLICY OBJECTIVES ....................................................................................... 8
6.
ICT REVIEW FINDINGS AND SME CONCERNS ......................................... 9
Shortfalls between policies and administrative practices ........................... 10
Lack of procurement process standardisation .............................................. 10
Showcasing Opportunity .................................................................................. 11
7.
ICT REVIEW INITIATIVES .............................................................................. 11
8.
AUSTRALIAN GOVERNMENT PROCUREMENT STATEMENT ............. 12
9.
REVIEW OF POLICIES SPECIFIC TO THE ICT INDUSTRY ................... 13
Limited liability policy for ICT contracts.......................................................... 13
SME Industry Participation Procurement Policy ........................................... 14
10.
GENERIC POLICIES ..................................................................................... 16
The Procurement Framework.......................................................................... 16
SME Generic Industry Participation Policy ................................................... 16
Use of AusTender: provision of information, opportunities and
accountability ..................................................................................................... 18
Annual Procurement Plans .............................................................................. 18
Prompt Payment Policy for Small Business .................................................. 19
11.
COMPARISONS WITH OTHER JURISDICTIONS .................................. 19
States and Territories ....................................................................................... 19
Victoria ................................................................................................................ 19
United States of America (USA) ..................................................................... 19
United Kingdom (UK) ........................................................................................ 20
12.
FINDINGS ....................................................................................................... 21
ATTACHMENT A ...................................................................................................... 22
TERMS OF REFERENCE ............................................................................... 22
2
SME Study 2009
1.
EXECUTIVE SUMMARY
Introduction
The “Review of the Government’s Use of Information and Communication
Technology” (ICT Review) (August 2008, Sir Peter Gershon CBE FREng),
recommended that the Government commission a study involving the relevant policy
agencies, a cross-section of user agencies and representative industry bodies to
identify options for the mutual reinforcement of the Government’s Information and
Communication Technology (ICT) and Small and Medium Enterprise (SME) policies.
Summary Findings
The Department of Finance and Deregulation (Finance) and the Department of
Innovation, Industry, Science and Research (Innovation) found that existing
Australian Government ICT and SME policies are in alignment and fit for purpose.
Problems cited by industry relate to shortfalls in the application of the policies
themselves.
2.
POLICY OVERVIEW
Commonwealth Procurement Guidelines
The Government’s overarching procurement framework is predicated on delivering
value for money, fairness, accountability and probity. The Government is committed
to Financial Management and Accountability Act 1997 (FMA Act) agencies sourcing
at least 10 per cent of their purchases by value from SMEs. The 10 per cent threshold
can be seen as a mechanism for ensuring that procurement practices are not
unfavourable to SMEs, including ICT SMEs.
The framework also states that agencies should include contract provisions requiring
contractors to comply with materially relevant laws and should, as far as practicable,
require suppliers to apply such a requirement to sub-contractors engaged in respect of
the procurement contract.
Limited Liability in ICT Contracts
Government policy states that the liability of ICT suppliers contracting with agencies
should, in most cases, be capped at appropriate levels. Unlimited liability clauses
should only be required when there is a compelling reason.
The policy governing limited liability for ICT contracts is Government policy for the
purposes of Regulation 9 of the Financial Management and Accountability
Regulations 1997 (FMA regulations) and the Commonwealth Procurement Guidelines
(CPGs). The “Guide to Limiting Supplier Liability in ICT Contracts with Australian
Government Agencies” is available on the Innovation website and is currently being
updated.
3
SME Study 2009
2002 SME Participation Procurement Policy
For ICT contracts with an expected value of $20 million or more, agencies are to
flexibly administer a requirement that tenderers meet the following minimum SME
participation levels:

hardware (for example, personal computers, network equipment) – minimum
SME participation level of 10 per cent of contract value; and

services (for example, systems integration, software and telecommunications)
– minimum SME participation level of 20 per cent of contract value.
Statistics on Australian Government Procurement Contracts
In practice, based on analysis undertaken by Finance, market shares for SMEs
supplying a broad range of goods and services to Government routinely exceed the
10 per cent threshold. Based on information reported on AusTender in financial year
2007-08, SMEs accounted for 37 per cent of market share, by value. This is
reasonably consistent with SME market share, by value, in 2006-07 of 41.6 per cent
and 35.8 per cent in 2005-06.
Innovation commissioned a report from Intermedium, a company specialising in
Australian public sector markets and providing procurement decision support,
research and consulting services to both industry and government. The report found
that the SME proportion of total contract value for ICT and Large Office Machines
had remained consistent, averaging 25.55 per cent between 2003-04 and 2007-08.
Industry Concerns
The ICT industry put forward a range of general and ICT procurement concerns as
part of the initial ICT Review by Sir Peter Gershon. The main concerns include:

scant opportunities for SMEs to showcase their products and services to
potential Government buyers;

agencies too often requiring unlimited or unnecessarily high levels of supplier
liability in contract arrangements;

agencies too often applying inconsistent and unconsidered approaches to
Intellectual Property ownership;

the need for supplier panels to be operated transparently;

the need for agencies to engage with industry earlier in the procurement
process;

the need for Government to consider implementing best practice and
standardisation of contracts and procurement processes;
4
SME Study 2009

agencies are often overly focussed on process and specified inputs rather than
procurement outcomes, which adds significantly to project costs;

agencies too often setting inappropriate procurement timescales; and

lack of transparency surrounding assessment of financial viability.
SMEs have also raised concerns that there is insufficient policy guidance. Where
relevant, this will be addressed through the ongoing review of Finance’s better
practice procurement guidance, as well as noting those opportunities to better
publicise existing guidance to industry as they arise.
3.
CURRENT INITIATIVES
A number of initiatives are currently underway that will mutually reinforce the
Government’s ICT and SME policies. In implementing upgrades of policy guidance,
Finance will ensure that:

the benefits of encouraging participation by SMEs in the Government
marketplace are explained to agencies; and

the concerns of industry, brought to attention in the course of the ICT Review,
are addressed through the following initiatives.
Finance notes that a number of current initiatives will greatly assist the mutual
reinforcement of ICT and SME policies. These initiatives address a range of ICT
industry concerns and improve the application of procurement policies in the
Australian Public Service (APS).

ICT Review, Recommendation 5.6.1a
- Optimise the number of ICT panel arrangements in order to reduce
administrative and transaction costs.
- This initiative will reduce costs of tendering for the ICT industry and
help to standardise contracts and procurement processes.

ICT Review, Recommendation 5.6.2
- Develop client and supplier codes of conduct.
- This initiative aims to improve ICT procurement processes through
collaboration, transparency and accountability. It also seeks to foster
SME participation in large ICT contracts, while still providing value
for money.
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SME Study 2009

ICT Review, Recommendation 5.6.3
- Reassess the current intellectual property policy for reduced costs to
agencies and increased opportunities for industry participation since
vendors are able to grow revenue through leveraging intellectual
property.
- This policy assessment examines options to improve the method of
assignment of ICT intellectual property ownership to obtain economic
leverage, industry development and increase the range of ICT suppliers
and solutions available to Government.

ICT Review, Recommendation 2
- Strengthen Agency Governance.
The P3M3 organisation capability methodology includes measures to
improve procurement and contract management support to
programmes and projects, including professional skills-utilisation.
The Australian Government Procurement Statement announced initiatives in July
2009, which include a package of reforms to achieve greater transparency, better
value and better outcomes for small businesses, jobs, training and the wider
Australian community consistent with value for money principles, the procurement
framework and Australia’s international obligations.
Elements of the Statement include:

the appointment of a Procurement Coordinator to have oversight of
Commonwealth procurement practices and policies
- the role of the Procurement Coordinator will include providing
external parties with an understanding of the Commonwealth
Procurement framework; handling of complaints; monitoring issues
related to Australian Government procurement; and reporting to the
Minister for Finance and Deregulation on procurement matters;

upgrading AusTender to improve the quality and searchability of agencies’
published Annual Procurement Plans;

additional funding for the Industry Capability Network, with an emphasis on
connecting Australian suppliers to Commonwealth-funded infrastructure
projects;

the appointment of Supplier Advocates to help Australian SMEs market their
capabilities to Government buyers in Australia;
6
SME Study 2009

the strategic application of the Australian Industry Participation National
Framework to large Commonwealth tenders generally above $20 million;
- the framework requires prime contractors for procurements over
$20 million to prepare and implement an Australian Industry
Participation plan to show how they will afford full, fair and
reasonable opportunity for SMEs to participate in the supply chain of
the project;

For ICT procurements above the $20 million threshold, both the SME
Participation Policy (percentage offsets policy mentioned earlier) and the
Australian Industry Participation policy will apply. Since both policies have
the same objective of fostering SME participation in large Government ICT
contracts, the policies will be implemented in a mutually consistent manner
that minimises duplication and the compliance costs imposed upon prime
tenderers;

Under the Australian Government Fair Work Principles, Commonwealth
agencies will be responsible for ensuring that their sub-contractors comply
with the relevant provisions of the Fair Work Principles.
Other initiatives planned by Finance include the feedback received from stakeholders,
and provided to the Procurement Division within Finance, being incorporated into
relevant procurement policy guidance material as appropriate.
4.
INTRODUCTION
This study implements the Government’s decision to:
- “Commission a study to identify options for mutual reinforcement of the
Government’s ICT and SME policies, with support from relevant policy
agencies, a cross-section of user agencies and representative industry bodies”.
This decision was made as part of the Government’s response to the ICT Review.
The terms of reference for this study were formulated following consultation with the
Secretaries’ ICT Governance Board (SIGB) outlined at Attachment A.
Unless otherwise defined, a small business is an Australian or New Zealand firm with
fewer than 20 full time equivalent employees, and an SME is an Australian or New
Zealand firm with fewer than 200 full time equivalent employees.
7
SME Study 2009
5.
POLICY OBJECTIVES
Recommendation 6 of the ICT Review made a number of statements directed at
improving the efficiency and effectiveness of the ICT marketplace.
This study forms one element of this work and was recommended to address issues
and concerns highlighted by SMEs as part of the ICT Review process.1
The efficiency and effectiveness of any market are dependent on many factors. In the
context of the Government’s ICT market, critically relevant criteria include:






adherence to non-discriminatory purchasing practices;
the number of market participants prepared to compete in the market;
the absence of barriers to entry;
transparency of information (opportunities and outcomes);
minimisation of transaction costs; and
the balance achieved between competing objectives (for example, minimising
risk while maximising innovation).
Mutual reinforcement of the Government’s ICT and SME policies is defined in this
study as instances where a policy has the dual impact of delivering beneficial
outcomes for ICT procurement, through a more efficient and effective marketplace,
and beneficial outcomes for SMEs, through participation in that marketplace.
Procurement outcomes, including the achievement of value for money, can benefit
from SME participation through:






enhanced competition (products, services and prices);
innovation (the early exploitation of new technology; SMEs’ incentive to
differentiate from larger suppliers’ established offerings);
new market entrants and a broader supplier base (counteracting consolidation,
through acquisitions and mergers of industry structure);
SMEs’ commitment to servicing local and regional markets (where larger
companies may have less reach);
the flexibility and responsiveness associated with SMEs’ lower administrative
and management costs; and
SMEs’ preparedness to respond to limited, or niche, demand.
SMEs can benefit as suppliers to government through:




1
an expanded customer base;
the security of a blue chip customer;
recognition and reputation in the marketplace;
a platform for growth and internationalisation; and
Paragraph 5.6.4 of the Review
8
SME Study 2009

the opportunity to supply innovative and bespoke products.
In assessing the alignment of the Government’s ICT and SME policies, it is important
to note that value for money principles and international trade obligations preclude
blanket local preferences. It is also important that policy alignment is cognisant of
circumstances where the same policy can impose a disparate impact on different
market participants.
6.
ICT REVIEW FINDINGS AND SME CONCERNS
The ICT Review reported the following issues which were raised in consultation with
industry representatives:

costs of tendering to the Government are too high, and decision making in
terms of defining business needs and evaluating technology solutions as too
slow;

contractual terms and conditions are often overly onerous or uncommercial
and adoption of fair and acceptable policies on liability, insurance and IP has
been inconsistent;

agencies are often too focused on specifications or inputs rather than outcomes
and are too prescriptive. The Government also often selects the tender with
the cheapest minimum compliance offer, thus not achieving true value for
money;

supplementary evidence sought from the AIIA supported these views. In
addition, most of those who do participate regularly decline to bid for
individual tenders. The main reasons given for non-response were:
- cost and complexity of the tendering process;
- punitive terms and conditions; and
- poorly defined outcomes and risks.

Earlier and more ongoing consultation with industry is required throughout the
procurement process which may affect the quality of the decision made,
favouring the incumbent.
These points were confirmed in a subsequent round table meeting the ICT Review
held with nine SMEs. This meeting also identified some difficulties SMEs had
experienced with large prime contractors.
Discussions by Innovation and Finance with industry have sought to understand the
lack of attractiveness of the Government’s ICT marketplace relative to the
attractiveness of dealing with private sector procurers.
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SME Study 2009
Shortfalls between policies and administrative practices
In many instances, the problems cited by industry do not concern the Government’s
procurement framework but, rather, shortfalls between policy and practice. Examples
that have been put forward include:

procurements do not always take place in accordance with the CPGs;

agencies too often specify a preferred technology solution rather than define
the business requirements that a solution must address;

agencies too often set inappropriate procurement timescales;

agencies too often fail to provide prompt advice of procurement outcomes;

agencies too often propose unlimited liability in contract arrangements, rather
than conducting a thorough risk assessment process;

agencies too often require lengthy and costly negotiations about ownership of
IP created under procurement contracts;

agencies too often fail to align the cost of bidding with the value of the
procurement;

agencies rarely indicate whether they have a budget for a ‘Holden’ or a
‘Mercedes’ despite policy guidance that may assist potential suppliers to
understand the scale of the likely procurement;

agencies rarely disclose the weightings that will be assigned to evaluation
criteria despite policy guidance that, while not mandatory, this is sound
practice;

agencies sometimes misuse procurement instruments for example, to shop for
ideas and then conduct the work in-house; and

agencies sometimes minimise procurement effort by unduly aggregating
(bundling) procurement requirements and thus put the scale of work beyond
the reach of SMEs.
Lack of procurement process standardisation
In addition to the above issues, SMEs have pointed to disadvantage in accessing the
Government’s ICT marketplace.
Foremost among such concerns is the lack of standardisation of procurement
documentation and the protracted contract negotiations that can ensue from this. The
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SME Study 2009
financial burden of such negotiations, in terms of time, cost and legal advice, impacts
disproportionately on SMEs compared to larger firms.
Although the Government has developed model contracts such as SourceIT to provide
templates for simple ICT procurements, these are not mandatory and they are not
designed for complex procurements. SMEs have also raised concerns that there is
insufficient policy guidance, and a lack of transparency, surrounding assessment of
financial viability.
Showcasing Opportunity
The other main issue that has been raised by industry is that there are scant
opportunities for SMEs to showcase their products and services to potential
Government buyers and larger suppliers generally find it easier to gain access to
Government customers.
7.
ICT REVIEW INITIATIVES
Some of the issues raised by industry in the course of the ICT Review are being
addressed through separate bodies of work. This parallel work has significant
potential to contribute to improving the alignment of the Government’s ICT and SME
policies.
The ICT Review recommends the development of client and supplier codes of
conduct and is expected to encourage participants to work together to achieve better
outcomes.
The ICT Review recommends the optimisation of the number of panels for ICT
procurements and eliminates problems related to:



the multiplicity of panels and the associated costs of gaining membership;
non-standard contract terms; and
the requirement for multiple submission of standard corporate information.
In line with the recommendations of the ICT Review, P3M3 is being implemented as
a common organisational capability maturity model in portfolio, programme and
project management across FMA agencies from October 2009. This will contribute to
long term improvements in internal procurement processes in agencies with flow-on
benefits to all suppliers. These benefits will be realised through:



robust and consistent standards for risk management across initiatives;
integration and leverage of supply chain management in strategic planning and
programme/project management; and
improved procurement and contract management support to programmes and
projects, including professional skills-utilisation.
A review of the Government’s current IP policy will determine whether the current
policy, or its implementation by agencies, is a significant barrier to entry to the
11
SME Study 2009
Government’s ICT marketplace and a cost driver for suppliers and, if so, whether any
change of policy is warranted.
8. AUSTRALIAN GOVERNMENT PROCUREMENT
STATEMENT
In addition to the parallel work being undertaken to implement other ICT Review
recommendations, the Statement announced initiatives in July 2009, designed to
improve the efficiency and effectiveness of procurement policy, including
highlighting a need to increase opportunities for Australian industry participation in
Government procurement.
The Statement announced a package of reforms to improve and foster greater
transparency in Government purchasing, improve value for money for taxpayers and
achieve better outcomes for small business, jobs and the wider community.
This package seeks to extend and strengthen participation by Australian businesses in
the Government’s procurement activities.
These elements include:

the appointment of a Procurement Coordinator to have oversight of
Commonwealth procurement practices and policies
- the role of the Procurement Coordinator will include providing external
parties with an understanding of the Commonwealth Procurement framework;
handling of certain complaints; monitoring issues related to Australian
Government procurement; and reporting to the Minister for Finance and
Deregulation on procurement matters;

upgrading AusTender to improve the quality and searchability of agencies’
published Annual Procurement Plans;

additional funding for the Industry Capability Network, with an emphasis on
connecting Australian suppliers to Commonwealth-funded infrastructure
projects;

the appointment of Supplier Advocates to help Australian SMEs market their
capabilities to Government buyers in Australia;

the strategic application of the Australian Industry Participation National
Framework to large Commonwealth tenders generally above $20 million; and
12
SME Study 2009

the framework requires prime contractors for procurement over $20 million to
prepare and implement an Australian Industry Participation plan to show how
they will afford full, fair and reasonable opportunity for SMEs to participate in
the supply chain of the project;

for ICT procurements above the $20 million threshold, both the SME
Participation Procurement Policy (percentage offsets policy mentioned earlier)
and the Australian Industry Participation policy will apply. Since both parties
have the same objective of fostering SME participation in large Government
ICT contracts, the policies will be implemented in a mutually consistent
manner that minimises duplication and the compliance costs imposed upon
prime tenderers;

under the Australian Government Fair Work Principles, Commonwealth
agencies will be responsible for ensuring that their sub-contractors comply
with the relevant provisions of the Fair Work Principles.
9. REVIEW OF POLICIES SPECIFIC TO THE ICT
INDUSTRY
There are two polices in place that are specific to the ICT sector:

limited liability policy for ICT contracts; and

the SME industry participation procurement policy.
Limited liability policy for ICT contracts
Finance Circular 2006/03 sets out the Government’s policy on the limiting of liability
in ICT contracts.
Government policy is that the liability of ICT suppliers contracting with agencies
should, in most cases, be capped at appropriate levels. Unlimited liability clauses
should only be required when there is a compelling reason.
In 2006, the then Department of Communications, Information Technology and the
Arts (DCITA) published A Guide to Limiting Supplier Liability in ICT Contracts with
Australian Government Agencies. The Guide is available on the Innovation website
and is currently being updated.
The ICT Review found that the Government's ICT liability policy is not consistently
implemented, which results in unlimited liability or results in limits on liability that
are set so high, they are essentially the same as unlimited liability.
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SME Study 2009
Requiring unlimited liability or inappropriately high levels of supplier insurance can
be a significant impediment to companies wishing to bid for Australian Government
contracts. This is particularly so for SME ICT businesses, which are not in a position
to negotiate with their insurers. SMEs cite unlimited or inappropriate liability
requirements as a significant determining factor that can simply make some tenders
uncommercial.
The policy is considered appropriate in terms of its design, but falls short in terms of
implementation.
SME Industry Participation Procurement Policy
The current SME industry participation procurement policy applies to the
Government’s contracted procurements of ICTs valued at $20 million and above.
This policy was introduced by the former Government in 2002 and imposes
obligations on the Government’s prime subcontractors.
The policy requires agencies subject to the FMA Act to ensure that prime ICT
contractors meet the following minimum level of SME participation:

10 per cent of the contract value of hardware purchases, for example, personal
computers, network equipment, mainframes, printers; and

20 per cent of the contract value of services purchases, for example, systems
integration, software development/support, service provision and
consultancies.
The policy is ‘administered flexibly’. It allows exemptions and also allows for
adjusted levels of SME participation where the minimum SME participation
requirement unfairly excludes potential suppliers or unjustifiably impedes the
efficient procurement of ICT goods and services.
It is important to note that for the purposes of the SME industry participation
procurement policy, an SME is defined as a body corporate incorporated in Australia
or New Zealand which, together with its related corporate and parent entities, has an
average annual turnover over the last four years of less than $500 million2.
The stated intent of the policy is to foster SME participation in large ICT contracts
(that is, those over $20 million in value). In 2002, the then Government considered
that SMEs were well placed to compete successfully as prime contractors for small
and medium-value Australian Government ICT contracts (that is, those less than
$20 million in value).
Responsibility for policy oversight of the ICT-specific policy was held by the then
DCITA until late 2007. As part of machinery of government changes, responsibility
for policy oversight was transferred to Innovation. Individual agencies are
2
This definition, used in the 2002 policy, contrasts starkly with the standard definition of an SME as a
firm with fewer than 200 full time equivalent employees.
14
SME Study 2009
responsible for implementing the policy in the course of making ICT procurements of
$20 million or above.
In early 2009, Innovation commissioned research to determine the extent to which the
application of the SME industry participation procurement policy in 2006-07 and
2007-08 had delivered benefits to SMEs.
The research found that in these two years, there had been 26 ICT contracts, with a
contract value of $20 million or above, reported on AusTender. The aggregate value
of these contracts over their contract terms, which extended beyond the financial
years in which they were reported, was $1.8 billion.
Suppliers reported that six of the twenty-six contracts had been treated by the
procuring agency as exempt from the policy on the basis that the core contract
requirement was supply of an Original Equipment Manufacturer product or service
which accounted for the majority of contract value. These six contracts had an
aggregate value of $329 million.
The remaining twenty contracts with an aggregate value of $1.47 billion had the
potential to generate subcontracts for SMEs of between $147 million and
$294 million, depending upon the nature of the goods and services supplied and the
extent to which the policy was applied.
Suppliers indicated that take-up of the (flexibly applied) policy had varied across
contracts and agencies. As at early 2009, the value of subcontracts to SMEs that
suppliers claimed as readily demonstrable amounted to $58 million, with more to
come as the contracts ran their terms.
In the course of discussions with suppliers on contract outcomes in 2006-2007 and
2007-2008 it was evident that the major prime contractors have established programs
in place to develop subcontracting arrangements with SMEs. The primes
acknowledged that, typically, they have neither the full range of skills, capability,
capacity or specific geographic presence to deliver large, Australia-wide projects from
their own resources. The two basic criteria for selection of SME sub-contractors were
reported by prime contractors to include:

specific capability for project delivery; and/or

the ability to deliver ‘surge’ capacity in terms of team resources when
required, or where required.
The review of contract outcomes in 2006-07 and 2007-08 has raised questions about
the effectiveness of the existing ICT-specific industry participation policy. There is
little evidence, for example, of demonstrable benefit for SMEs ($58 million, to date,
from a pool of $1.8 billion) and there are concerns that the subcontracted work does
not necessarily represent high value work.
15
SME Study 2009
The offsets nature of the policy does not encourage the strategic development of
Australian industry capabilities and there is also the risk of market distortion when
work is awarded in order to meet an offset target at a higher cost than would apply in
a less regulated market. The devolved nature of the policy also leads to inconsistent
implementation by individual agencies.
Given the Government’s recent initiative to encourage the provision of full, fair and
reasonable opportunity for local suppliers through the strategic use of Australian
Industry Participation Plans, questions arise about the value of retaining the SME
participation procurement policy.
Informal consultations indicate that while the Australian Information Industry
Association (AIIA) may support the abolition of this policy, there would also be
sections of AIIA’s members that would oppose it.
10. GENERIC POLICIES
The Procurement Framework
The Australian Government’s overarching procurement framework is predicated on
delivering value for money, fairness, accountability and probity. The framework
includes the:



FMA Act;
FMA Regulations; and
CPGs and associated guidance.
This framework, at a policy level, provides a level playing field for all potential
suppliers to the Government’s ICT marketplace, including SMEs.
SME Generic Industry Participation Policy
The CPGs state that to ensure SMEs are able to engage in fair competition for
government business, officials undertaking procurements should ensure that
procurement methods do not unfairly discriminate against SMEs. The CPGs also
state that the Government is committed to FMA agencies sourcing at least 10 per cent
of their purchases by value from SMEs.
Innovation commissioned Intermedium to continue the longitudinal study of SME
participation in ICT contracts which was first commenced by the then DCITA in
relation to 2001-02. It should be noted that the data detailed in this report provides a
point in time representation of SME participation in ICT contracts.
The report3 highlights that the total value of ICT and large office machine contracts in
the Australian Government ICT market continued to grow in 2006-07, but declined in
3
Intermedium (2009), Report for the Department of Innovation, Industry, Science and Research SME Participation in Australian Government Information and Communications Technology
16
SME Study 2009
2007-08. Taking into account the original eleven sample agency methodology used,
the market in 2007-08 has grown by $618 million or 25.7 per cent since 2001-02.
Overall, the average annual rate of market growth has been 4.67 per cent. In 2007-08,
the total SME proportion of contract value was 27.05 per cent ($816.77 million). This
compares with:




23.82 per cent ($903.27 million) in 2006-07;
25.47 per cent ($830.78 million) in 2005-06;
22.44 per cent ($679.61 million) in 2004-05; and
28.96 per cent (784.56 million) in 2003-04.
The SME proportion of total contract value has remained consistent, averaging
25.55 per cent.
The report4 also found that the SME supplier sector noticeably did not suffer as much
as other supplier sectors when the market turned down in 2007-08, with contract value
to SMEs declining by 9.52 per cent. In contrast, the contract value to multinationals
declined by 25.14 per cent. In 2007-08, an SME was the largest supplier in 48 of 95
agencies (50.52 per cent). While multinationals dominate the large contract market,
the report found that there is a ‘sweet spot’ for SMEs for procurement contracts
ranging from $100,000 to $500,000.
In practice, based on analysis undertaken by Finance5, market shares for SMEs
supplying a broad range of goods and services to Government routinely exceed the
10 per cent threshold. Based on information reported on AusTender6, in financial
year 2007-08, SMEs accounted for 37 per cent of market share, by value. This is
reasonably consistent with SME market share, by value, in 2006-07 of 41.6 per cent
and in 2005-06 of 35.8 per cent. These market shares are likely to be understated as
procurements of less than $10,000 are not required to be reported on AusTender and
historical information indicates that SMEs win a greater share of small value contracts
than do larger suppliers.
The 10 per cent threshold can be seen as a mechanism for ensuring that procurement
practices are not inimical to SMEs. At the same time, by limiting the threshold to a
relatively low level, distortion of the market is avoided.
Procurement 2006-07 and 2007-08, pp 8 and 10.
4
Intermedium (2009), Report for the Department of Innovation, Industry, Science and Research SME Participation in Australian Government Information and Communications Technology
Procurement 2006-07 and 2007-08, pp 24 and 25.
Australian Government, Department of Finance and Deregulation (July 2009), ‘Statistics on
Australian Government Procurement Contracts’,
http://www.finance.gov.au/publications/statistics-on-commonwealth-purchasing-contracts/index.html
5
6
For FMA agencies, the reporting threshold is $10,000, that is, contracts of $9,999 or less are not
reported on AusTender.
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SME Study 2009
Use of AusTender: provision of information, opportunities and
accountability
AusTender is the central web-based facility for publication of Australian Government
procurement information, including business opportunities, annual procurement plans
and information about contracts awarded.
AusTender, by publishing approaches to market, is a central plank in providing full,
fair and reasonable opportunity to potential suppliers. The reporting of information
about contracts awarded provides accountability.
Annual Procurement Plans
Of particular interest to potential suppliers are the Annual Procurement Plans that
must be published on AusTender by each agency by 1 July for the forthcoming
financial year.
As noted earlier, the Australian Government Procurement Statement announced the
Government’s intention to improve the quality and searchability of agencies’
published Annual Procurement Plans.
Improved quality would be beneficial to potential suppliers and may also provide
agencies with an opportunity to take a more strategic approach to procurement.
There is scope for agencies to improve the quality of information in their Annual
Procurement Plans through the provision of:








more user-friendly descriptions;
information on the likely scale and volume of the procurement;
advice of delivery locations;
relevant procurement code classification7;
contact officer details;
whether the procurement is a new requirement or will replace an existing
contract;
the planned method of procurement; and
the likely duration of the contract.
The Australian National Audit Office (ANAO), in a 2006-07 report on
Implementation of Revised Commonwealth Procurement Guidelines commented on
the high proportion of procurements that were late, deferred or cancelled in
comparison with the procurement activity foreshadowed in the Annual Procurement
Plans.
The ANAO concluded that this finding reinforces the importance of entities
periodically reviewing the status of forecast procurements and updating their Annual
Procurement Plans to remain useful to potential suppliers.
7
For example, the United Nations Standard Product and Services Code.
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SME Study 2009
Prompt Payment Policy for Small Business
Finance Circular 2008/10 sets out the Government’s prompt payment policy for
procurements of up to $5 million from small businesses (defined as enterprises that
employ fewer than 20 full time equivalent employees). Penalty interest applies if
payment is not made within 30 days of receipt of a correctly rendered invoice.
This policy can be seen as a case of affirmative action to counter the disparate impact
that late payment has on small business compared to larger companies with less
sensitivity to delayed cash flows.
Some variation occurs across agencies in making payments within the 30 day period.
The policy’s strengths are that it provides agencies with a financial incentive to pay
promptly and has the potential to encourage improved performance over time through
‘name and shame’ disclosures.
The policy does not extend to medium or large enterprises.
11. COMPARISONS WITH OTHER JURISDICTIONS
States and Territories
Within Australia, there are a number of state and territory policies that make provision
for local industry participation in major infrastructure projects or give preferences to
local suppliers through government procurement. These policies generally apply
across the board with variations and exceptions to ensure compliance with Australia’s
international trade obligations. In some cases regional suppliers, regardless of size,
are given a price preference in the evaluation of tenders.
Victoria
The Victorian government is currently piloting a competitive grants research and
development (R&D) program known as the Smart SMEs Market Validation Program8
(‘the Victorian Scheme’). The program has funding of $28 million and is designed to
help Australian SMEs with annual turnovers of less than $50 million to conduct R&D
in Victoria. The R&D is required to meet specific technology needs, including ICT
needs, identified by Victorian public sector entities. Funding is available for
feasibility studies ($100,000 over three months) and, dependent on the outcome of the
study, to develop Proof of Concept ($1 million to $1.5 million over two years).
United States of America (USA)
In the USA, the federal government has a statutory goal (target) that 23 per cent of its
procurement, by value, will be awarded to small businesses (defined more flexibly
than in Australia and with the number of employees varying from industry to
industry).
The USA government’s Small Business Administration negotiates with agencies on
the goals they are expected to achieve and prepares an annual scorecard of agency
outcomes.
8
Victorian Government, Smart SMEs Market Validation Program,
http://www.mmv.vic.gov.au/MarketValidationProgram
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SME Study 2009
In addition, the USA federal government runs the Small Business Innovation
Research (SBIR) scheme9. This scheme was established in 1982 and requires USA
government research agencies with annual budgets of over $100 million for external
R&D to spend 2.5 per cent of that budget assisting small business (fewer than 500
employees) to engage in R&D that has the potential for commercialisation and public
benefit.
Although both the USA’s SBIR and Victoria’s Smart SMEs Market Validation
Program share a policy objective of encouraging R&D by SMEs, this study concludes
that the Victorian scheme is superior to the SBIR in concept, if not in scale. The
SBIR has the disadvantage of representing, in effect, a tax on research. In order to
reach the set target, funds may not be allocated as efficiently as if the research body
had free rein to select its research fund dispositions. In contrast, Victoria’s Market
Validation program is targeted at developing solutions to identified problems.
United Kingdom (UK)
In the UK in 2008, the government commissioned a report from a committee headed
by Professor Anne Glover CBE for advice on two matters:

action that could be taken to reduce the barriers SMEs10 face when competing
for public sector contracts; and

the practicality of setting a goal for SMEs of 30 per cent of all public sector
business in the following five years.
All recommendations of the subsequent Glover Report (Accelerating the SME
economic engine: through transparent, simple and strategic procurement; November
2008) were accepted by the UK Government.
The Glover Report recommendations focused on actions that could be taken to make
procurement opportunities as open and transparent as possible, make the process
equitable and as simple as possible, and manage procurement strategically to
encourage innovation, procurer capability and ensure a fair deal for SMEs that
participate in the supply chain (that is, act as subcontractors).
The Glover Report recognized that small firms face substantial hurdles to compete on
an equal footing with larger enterprises in the UK public sector procurement
marketplace to the detriment of both the public sector and SMEs.
The Glover Report did not recommend establishing a target of SMEs winning
30 per cent (or more) of all public sector business for a number of reasons. Public
authorities did not support a target given the potential that it would either distort the
market (inefficient allocation of resources) or develop into a “tick box” process.
9
USA Government, Small Business Research Innovation,
http://www.sbir.gov/
10
The Glover Committee used the European Union definition of an SME: headcount of less than
250 and turnover of 50 million Euros, or less, or balance sheet total of 43 million euros, or less.
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SME Study 2009
Small firms and business associations consulted in the course of the review also
rejected setting a target. Small firms saw the overriding priority for government as
the need to tackle transparency, simplicity and making procurement strategic.
Other recommendations made by the Glover Report, and accepted by the UK
Government, that address issues that have also been identified by Australian industry,
particularly SMEs are:

contract opportunities should be advertised on the electronic portal with
standard indicative contract value ranges;

businesses should be permitted to tender electronically: “paper only” tenders
should be phased out;

greater standardization of pre-qualification questionnaires so businesses do not
need to repeatedly submit the same core information in different formats; and

greater use of outcome-based specifications as a means of driving innovation.
12. FINDINGS
The Department of Finance and Deregulation (Finance) and the Department of
Innovation, Industry, Science and Research (Innovation) found that existing
Australian Government ICT and SME policies are in alignment and fit for purpose.
In many instances, problems cited by industry relate to shortfalls in the application of
policies rather than the intent or wording of the policies themselves.
A number of initiatives are currently underway that will mutually reinforce ICT
procurement and SME policies. These are listed on pages 5-7 of this Study.
In implementing upgrades of policy guidance, Finance will ensure that:

the benefits of encouraging participation by SMEs in the Government
marketplace are explained; and

the concerns of the ICT industry, brought to attention in the course of the ICT
Review, are addressed.
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SME Study 2009
ATTACHMENT A
TERMS OF REFERENCE
Study to identify options for mutual reinforcement of the Government’s policies on
information and communication technology (ICT) and small and medium enterprises
(SME).
1. The Department of Innovation, Industry, Science and Research (‘Innovation’)
and the Department of Finance and Deregulation (‘Finance’) will jointly
conduct a study to identify options for mutual reinforcement of the
Government’s ICT procurement and SME policies.
2. In the course of the study Innovation and Finance will consult with relevant
policy agencies, a cross section of user agencies and representative industry
bodies.
3. The study is being commissioned as part of the implementation of
Recommendation 6 of the Review of the Australian Government’s use of
Information and Communication Technology.
4. The study will:
 identify initiatives already in place to align ICT procurement and SME
policies;
 review relevant existing and planned policies, as appropriate;
 consider concerns identified by agencies and industry representatives
about the effectiveness of the operation of the Government’s ICT market
place; and
 suggest measures to improve the alignment of policies relevant to the
Government’s objectives of obtaining value for money in procurement and
enhancing SME supply capability so that the ICT procurement
marketplace is vibrant, innovative and competitive.
5. Innovation and Finance will submit the results of the study to the Secretaries’
ICT Governance Board (SIGB) by December 2009 with recommendations for
further action.
22