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Cover story: Intensive care needed for ICT

Peter Davidson, Information Age

11/02/2005 11:39:36

A wide-ranging strategic analysis of the state of Australia's ICT industry calling for greater government support has brought a swift response from ICT's newly appointed minister Sen Helen Coonan.

Produced by the Gartner research group's senior VP Bob Hayward, the 44-page report digs deeply into a lack of awareness of ICT issues on both sides of politics, the frustration of the ICT industry which believes government doesn't understand it, and political and public disillusionment with the industry in Australia.

"Senator Coonan's department thought it was a balanced appraisal, although taking exception to some things, but agreed to discuss the issues raised as soon as possible, "Hayward says of the analysis which was presented late last year.

"Government feels that ICT has failed to influence it, particularly the Department of Finance and Administration, and Treasury, but these people are professionals who want the same things as ICT does and want to work through the issues raised."

Hayward's analysis examines why the Australian ICT industry has "failed to produce many recognised IT companies or significant exports" and calls on the Federal Government to review completely its attitude and policies for the Australian IT industry.

His paper offers a comprehensive range of policy changes not only for government but for industry which must put its own house in order to grow.

High on his list of priorities are changes to government procurement procedures to remove unlimited liability clauses, to allow local developers to retain and commercialise their IP, and increased export development funding.

The Export Market Development Grant scheme, he points out, has had no significant funding increase since its inception in the mid-70s.

Funding for IT skills must also be provided to avoid a skills shortage following the IT slowdown of the first three years of this century.

The number of IT courses available in Australian universities should be raise to at least the average per capita in developed countries, and the Backing Australia's Abilities funding must go beyond 2006.

More must be done, Hayward says, to create a vibrant IT sector in Australia. Policy alone can't achieve this, but a better understanding of IT's needs, combined with an improved tax climate, can help revitalise the industry.

His document, structured in three parts, contains a number of summaries which are reproduced here.

The first part explains why the Australian IT industry has had a difficult time engaging with Australian politicians to put favourable policies in place. Some of the main reasons have been:

• The background of politicians who often lack exposure to the IT sector and face a steep learning curve • The lack of a politically concentrated IT workforce in areas that are hotly contested by both major political parties and, therefore, a lack of government focus • The failure to recognise the problem: the frustration of the local IT sector is not understood by the Government. Government disillusionment with the IT sector is not understood by the IT sector either. • A lack of general public support: apart from Telstra (Australia's dominant telecommunications company), the public is unaware of the domestic IT sector. Many believe the industry is in decline or recession. • "Cultural cringe": many Australians think innovation and technology are purchased only overseas. • The conflicts between levels of government: often, each state competes with the others, and they all compete with Canberra. • Protectionists: sentiment for legislation favouring local IT companies is never far from the surface, but protectionism is the only word to describe such a move. Assisting the development of local IT companies should help, and changes are needed in government priorities. But such initiatives must be implemented with great care, because multinational IT companies are significant contributors to the local IT industry in terms of jobs, R&D and exports. • A diffuse industry lobby effort: too many lobby groups have struggled to gain consensus on industry issues, weakening their ability to force change on government policy. But they have had success in stopping matters from deteriorating further, and recent consolidations and clarity in lobby groups is promising. • Australia's economy continues to grow, regardless: the country has exploited its natural resources while having success in niche industries, resulting in an economy that grows faster than all other major developed countries (for more than 13 years). This means less motivation for the Government to support the local IT sector. • Mixed results from past efforts: despite best intentions and some progress in certain areas, some policy initiatives promoted by the IT industry have remained unfinished, powerful vested interests have determined a few industry policy matters, and several issues remain poorly understood by government agencies that craft policies.

The second section discusses why Australia has failed to produce IT companies that have been globally successful outside of niche markets. Australian IT companies seem to stumble early in their development or fail to reach their full potential in international markets. Some of the reasons for this are:

• The size of the domestic Australian IT market: the market is big enough to make it interesting but not small enough to force companies to look offshore for growth. • Australia's location: Australia is remote and vast. When Australian technology companies do venture offshore, they often make a poor selection of initial target markets. • The public sector: Government is a disproportionately large part of the Australian IT market. Selling technology to governments is hard, especially for small Australian IT companies. But the size of the Australian public sector relative to the entire economy is hard to ignore. • The lack of a national role model: Australia does not have an SAP, a Nokia, an Infosys, or a Samsung as a compelling national IT success story. Success breeds success, and the country's entrepreneurs are short on inspiration. • Focus: a lack of focus by Australian IT small and midsize businesses (SMBs) that are too quick to take on too many different types of work for customers in their communities. • The "brain drain": too many of the best and brightest Australians IT workers are easily lured to jobs with multinational corporations in Australia or abroad. • The open economy: foreign companies long ago realised that Australia produces great innovations but has difficulty exploiting them. So, multinational corporations shop for local companies and snap them up as they prepare to enter international markets. Globalisation has also driven a cost-focused business mentality, rapid industry consolidation and the commoditisation of many IT products where economies of scale are required to survive in global markets. It is becoming harder for any small IT company to break into the international market. • Naive local IT entrepreneurs: too many local IT entrepreneurs and IT company owners expect too much government assistance, have unrealistic goals and seem incapable of putting together a sound business plan. • The lack of an Australian-owned IT services company with sufficient business scale and export ambitions: Australia does not have the equivalent of Infosys Technologies, Satyam Computer Services, Tata Consultancy Services (TCS) or Wipro Technologies. Domestic IT services companies of a certain size have routinely been acquired.

The third and final section puts forward a series of recommended policy actions for any incoming Australian government to take to start to put the IT industry on a better footing for growth and export, in partnership with a receptive IT industry eager to assist. The recommendations fall into six main areas:

• Government procurement, including issues such as unlimited liability clauses in contracts • Taxation issues, including the need to treat employee stock options in much the same manner as other countries • Trade issues, including offshore outsourcing and the need to exploit free trade agreements • Government support programs, highlighting the need to increase funding for excellent programs, such as the Export Markets Development Grant (EMDG) • The need for a national broadband vision, which points out that, despite recent progress, other countries are improving their infrastructure at a faster pace, and Australia is falling behind. • Partnering with industry, which finishes on a plea for some new national initiatives to stimulate R&D • and innovation for global competitive advantage.

The aim of these recommendations is to help Australia create more globally competitive domestic companies that generate intellectual property (IP). This is not the case today.

Under current policy, an Australian IT company:

• Must pay a 30 per cent corporate tax • Must compete for investment from local business "angels" against the attractions of established tax benefits that encourage investment in property (negative gearing) or already established, listed companies (franked dividends). • Lacks ability to attract or retain top talent through stock incentives such as employee stock-ownership programs, because they are complex and offer few tax advantages in some cases • Has many employees who pay approximately 45 per cent of all of their salary as income tax • Has to deal with the complexities of a fringe benefits tax, a goods and services tax and various other taxes • Must pay 9 per cent of employee compensation as superannuation • Can claim only 125 per cent of the their R&D expenses against tax • Has access to slow broadband (usually only 256 Kbps or 512 Kbps), using plans that add extra costs or slow the connection beyond low download limits • Struggles to sell products to government

In contrast, in many other nations, an IT company:

• Must pay 20 percent or less in corporate tax • Has zero-rated capital gains tax to attract investors • Has no real competitive investment asset class to deal with • Can attract talent with attractive stock-option schemes • Has employees who - for the most part - pay less than 20 percent of their total salary in income tax • Does not have to deal with fringe benefits tax and other complex taxes • Can usually claim 150 to 200 per cent of their R&D expenses against taxes • Has access to extremely fast broadband connections with no penalties for large amounts of download • Can usually convince its government to use its products.

An appendix to the report lists the final tables of recommendations (see panel, page XXX) .The top three immediate new policies the Australian federal government and IT industry should deal with are:

• Remove unlimited liability clauses in government procurement contracts. • Allow IT companies that develop government solutions to commercialise these and own the IP • Increase the funding for the EMDG scheme.

Hayward concludes: the Australian IT industry is dynamic and vibrant. It consists of many thousands of companies, large and small that have contributed a great deal to the success of the Australian economy in recent years.

The innate intelligence and passion of people in this industry has led to frustration with the inability of the nation's IT industry to make its mark on the world stage. Most IT professionals are well travelled and highly versed in what has occurred in other parts of the world. They know that much of what has been achieved elsewhere is certainly in the grasp of Australia.

Australia's IT companies do not want to rely or depend on government handouts. It is a free-market industry that favours open markets and competitive forces.

Nevertheless, Australia's IT sector needs active government assistance in certain specific areas, nearly all of which would also benefit other industries as well. It is hoped that the incoming Australian government will heed the industry's concerns and translate them into concrete actions in a mutually beneficial partnership.

The IT industry in Australia seems able to play its part in the future through the export-driven success of Australian-made technology and innovation. But Australia's IT industry needs some help from the new government to convert these ambitions into reality.

The impediments to Australian IT industry development

Beyond all the factors covered in the previous section (which deals with market environments which hinder Small to Medium Business development), the main reason so many Australian IT companies have failed to gain sufficient volume to become midsize or larger companies that export products and services is because of several impediments to the growth of IT startups in Australia.

Australia's domestic IT industry has become disillusioned with the Federal Government. For too many years (and through several governments of both major parties), reasonably simple and positive changes that would benefit the entire sector (and other parts of the economy dependent on innovation and the commercialisation of technology) have not been addressed.

Many government officials have turned sour on the IT industry, suggesting that a number of programs to assist the industry have been implemented, but the industry has failed to capitalize on them. This attitude ignores the fact that the global IT industry has gone through a three-year recession (now over) and that a number of impediments remain. Certain agencies harbour the view that the industry has received too much government help already.

This contrasts with industry frustration over unsuccessful government frameworks, visions and strategies of the past 15 years. Australia's IT industry is looking for measurable outcomes, based on a clear set of actions, objectives, benchmarks and milestones - jointly agreed on by industry and government.

Both sides must make concessions if they are to collaborate for the benefit of Australia. Government must appreciate the vital importance of technology-based innovation for the future health of the Australian economy and society. And the Australian IT industry must appreciate the fact that politics is about prioritisation and trade-offs between social needs and resources across the entire economy.

While Australia's political leaders may lack a deep understanding of challenges to the commercialisation of technology, they reflect the wider community that elected them. The IT industry should be more proactive in selling its case, overcoming perceptions, educating the community about IT, and delivering well-researched and comprehensive policy recommendations to government.

Australian IT industry associations have stated that the industry does not want too much government support or investment. Industry representatives cite a risk that expensive programs might fail to deliver, negatively influencing government attitudes toward the sector.

Additionally, most Australian IT professionals do not want governments to jeopardize economic growth, low inflation and low interest rates through deficit spending used to prop up or develop any industry. These factors are essential for the overall health of the sector and are more important than any single industry development policy agenda item.

In addition, several Australian state governments have, within the limitations of their regulatory and legal authority, performed quite well in articulating strategies and programs for their local IT sectors. In particular, the governments of Victoria and Queensland have been innovative, supportive and aggressive in their efforts.

The following policies are what Gartner believes should be the new coalition Government's action items to help unleash the potential of the local IT sector. Some of these requests will cost money, yet most are revenue neutral in the short term to midterm. They improve the ability of Australian IT companies to grow.

As a result, employment would rise, exports would increase, and economic activity would be amplified. The following is not an exhaustive list, but it is a list of outstanding issues that have either been outstanding for some time or are current significant barriers to the growth of the local IT sector.

Government procurement A series of measures could improve the ability and chances of success for Australian IT SMBs to respond to government business opportunities. If the Australian IT sector is to grow, government and industry must give all practicable support to domestic IT SMBs, because these constitute the best prospects for the future.

They have an emotional attachment to the country and a long-term commitment to staying in Australia. Foreign companies can be tempted to relocate operations across national borders whenever a more attractive market or location becomes available. Domestic IT SMBs will produce most of Australia's future growth in jobs, exports, product development, regional development and national prestige. While multinational IT investment in Australia is desirable and should be pursued vigorously, it should not be obtained at the expense of domestic IT companies.

The hardest part of success for many small Australian suppliers is to get their first 20 customers, to gain sufficient scale, cash flow and client references. IT SMBs desire access to the public-sector markets in Australia, partly because of the size of these markets, partly because of the sophisticated and demanding nature of the work, but also to act as a springboard into international markets. Local reference sites are important in the early phases of an IT company. Because too few large Australian companies are known globally and are not effective references, a government reference installation is often critical.

Australia is not a signatory to the World Trade Organization Government Procurement Agreement. This means the country is free to adopt preferential government procurement arrangements for local companies if it wanted to. However, under the free trade agreements already in place, the government cannot discriminate in favour of local companies against those from New Zealand, Singapore, Thailand or the United States.

In practice, the Australian government has not mandated or prescribed IT procurement from local IT companies, although it has required certain "offsets" or use of local content, labour, sub- contractors and manufacture in large contracts with foreign companies.

The practice should continue (that is, there should not be mandatory rules that govern procurement that explicitly favour one company over any other, regardless of nationality). However, unintentional barriers that have the effect of restricting access for local IT companies to government business must be removed quickly.

Many of the recommendations that follow have already been studied exhaustively and recommended to the Government. In particular, a joint IT industry and Australian federal government (the Department of Communications, IT and the Arts, or the DCITA) working party was established in 2002, the outcome of which was a report titled "IT SME Facilitation" delivered in October of 2002. This report contains a very detailed and well-researched list of steps government and industry should take to reduce the problems local IT companies are experiencing in dealing with the Australian public sector.

Reduce the costs of bidding for government IT work Government must take steps to reduce the cost associated with responding to requests for proposals (RFPs) and government tenders. An objective should be to ensure that vendor costs of response are always less than 5 percent of the value of any contract. Gartner has previously published a series of reports on government procurement reform, particularly in April 2003 ("How Government Procurement Must Change," AV-19-7746) and in December 2003 ("Tactical Steps to Government Procurement Reform," AV-21-6115).

The key elements of reform required to assist local Australian IT companies are:

• Only one list of approved IT suppliers (the Government's Endorsed Supplier Agreement program), that must be mandated for use across all parts of the Government. Currently, suppliers must duplicate efforts to ensure they are on multiple lists (or panels) for different parts of government, with frequent renewals and demands for yet more information. This imposes a severe burden on all IT companies. • A single template for government IT contracts (based on the established template of GITC4), requests for registration of interest, RFP and request for tender (RFT) documents should be mandated for use across all part of government, and these need to be made consistent for years at a time. Currently, IT suppliers encounter a variety of contracts and other commercial documents that varies by agency and by time. • Best practices in IT procurement should be recognized and disseminated across agencies, perhaps through the use of a ranking table. Success stories that involve Australian IT SMBs should get a high profile. • Every effort should be made to simplify and increase the use of electronic tendering systems for procurement. • Agency RFPs and requests for information (RFIs) should be dramatically simplified (concentrating more on outcomes than implementation requirements) and should only be issued in true competitive situations (not just as a way of going through the motions for the sake of appearance, when a decision has already been made).

Review Standard Contract Terms and Conditions Certain government IT contracts are not commercially sound and place smaller companies at a significant disadvantage. In particular, the insistence on unlimited liability in contracts deters most domestic IT companies from responding, as well as a fair number of large multinational corporations.

Recent research on unlimited liability conducted on behalf of the AIIA shows that both parties would be in a better position if this onerous provision were relaxed. Limiting liability to a reasonable multiple of contract value would not only increase the number of responses and therefore options for government, but would also accelerate the contractual negotiations and reduce the costs of IT procurement on both government and suppliers.

Ensure guidelines on IP are followed The federal DCITA has previously worked with the AIIA to develop a set of guidelines that govern the treatment of IP created as a result of an IT vendor working on a government project.

Unfortunately, these guidelines are rarely taken into consideration by most government agencies. If followed, they would ensure that government has royalty-free use of IP that results from any work, but that ownership and subsequent commercialisation should reside with the company best able to exploit the IT for the benefit of the country (which is normally the vendor that helped to create it).

This issue is important, because one area of IT in which Australia excels is in the provision of sophisticated solutions for the public sector. These implementations of technology are confined to use in the Australian government sector only, and are not appropriately leveraged on a global basis by any commercial entity. In contrast, the South Korean Government makes a tidy business in many parts of the world from its own e-government initiatives.

Create Incentives for agencies to use more domestic IT SMB suppliers The following steps would encourage and reward government agencies to consider the use of local IT companies when going to market for solutions: • Create, maintain and publish a database on the participation levels of local IT companies in agency IT contracts. • Require that agency heads report annually on their use of local IT companies in their IT projects, and any active steps they are undertaking to increase such participation. Consider making some element of agency head compensation tied to the use of local IT companies. • Appoint a CIO for the Australian Government Information Management Organization and provide that role with increased power and authority (along the lines of the position of the government CIO in the state of Victoria) to enforce "whole of government" standards, architectures and procurement policies. • Ensure that the CIO has a clear and unambiguous objective to contribute to local IT industry development through the way IT is used, acquired, managed and supported in government. • Work with industry associations to create and maintain a database that promotes local IT competencies and capabilities to government agencies. It would be preferable if such a database were populated with only vetted or accredited companies with a demonstrable ability to fulfill government work to satisfactory levels. • Establish a review and arbitration mechanism that regularly surveys local IT industry to uncover any issues with government procurement and allows companies to report any problems they experience (in a confidential manner, possibly through an appointed ombudsman). • Set a clear and unambiguous requirement that government procurement should assist the development of the local IT industry wherever possible, and that agencies should weigh local companies heavily in their deliberations and certainly favour them when most other considerations are equal. • Require certain minimum local contribution and participation (offsets) in larger contracts that are granted to foreign IT companies. These requirements may range from a minimum of 10 per cent for hardware contracts larger than A$20 million, to a minimum of 20 per cent for certain types of IT services and consulting work on contracts larger than A$5 million.

Remain technology-neutral in procurement Despite the passionate pleas and pressure open-source software (OSS) advocates are putting on the Government to mandate or favour OSS technology in any procurement of IT solutions, the Government should hold firm to normal business process. That is, that any IT solution should be judged on its merits in relation to costs, performance, quality, support, risk and other factors in a technology-neutral fashion.

The IT industry does not want the Government to get into the business of spelling out in detail their technology requirements in any contract, but rather leave the details of implementation and technology choice to the vendor community.

The Government should not worry about technology choices but should focus on outcomes of a particular investment or project. That would lead to a specification of a service, leaving the technology up to the provider. This is a better long-term approach, as long as the contractual conditions and service-level agreements are set appropriately to maintain flexibility.

However, OSS offers some advantages for government IT projects. A government group can ensure that all agencies are knowledgeable about OSS as a viable option and offer their services to support any OSS initiative that is contemplated (in terms of legal, technical support, technology evaluation or other assistance).

Recommendations for reform

Bob Hayward's strategic analysis calls for sweeping reforms in procurement, taxation, trade, support, telco and partnering. In summary:

Procurement • Mandated use of single approved panel of IT suppliers. • Simplified, consistent, mandated templates for IT contracts, RFIs, RFPs and RFTs. • Best-practice table for local IT development distributed across government. • Accelerate and broaden use of electronic tendering. • RFPs, RFIs, RFTs simplified and issued for truly competitive situations only. • Revise unlimited liability clause in standard IT supply contract. • Commercialisation of IP by the supplier for national advantage. • Published database of agency local IT procurement achievements. • Agency reporting and incentives on local IT purchases. • Whole-of-government CIO with power and industry development incentives. • Database of vetted local IT suppliers. • Arbitration method of appeal for local IT companies. • Clear objective should be to develop local IT sector whenever possible. • Require local industry contribution offsets for larger contracts. • Remain technology-neutral, focus more on outcomes than technology details.

Taxation • Treat ESOPs in a similar manner to other countries, especially the United States. • Implement a tapered CGT to attract investment into startup technology companies. • Increase the R&D tax concession to 150 per cent. • Increase the R&D tax concession in certain situations. • Extend the R&D tax concession to cover IP protection and patent costs. • Revise treatment of R&D offsets for companies that spend more than A$1 million. • Revise R&D offset program to reduce problems related to ownership structures. • Allow individual retraining costs for new career to be offset against tax. • Reduce the high marginal rates of taxation on salaries of more than A$70,000. • Set an objective to compete with other nations on income tax rates.

Trade • Take a positive stand on offshore, increase overseas marketing of Australian IT. • Work with the industry to fully exploit all FTAs signed and future FTAs for Australian IT.

Support • Simplify admission and reporting requirements for EMDG, COMET, and R&D Start. • Increase funding for EMDG schemes. • Increase funding and revise small company entry requirements for COMET, and R&D Start. • Implement as many recommendations from the AVCC 12/03 paper as possible. • Actively work with industry to improve Australian software development standards.

Telco • Continue with some schemes, and review others • Implement as many of the 04 Senate Committee on Telco reform as possible. • Work with SPAN to rectify any lingering issues with competition. • Fund or otherwise enable pilot projects on wireless broadband technologies. • Maximise use of spectrum without imposing high auction costs. • Provide tax incentives to accelerate broadband network deployments. • Aggregate demand in regional areas for easier delivery of broadband. • Back municipal bonds for communities to build out broadband faster. • Ensure VoIP is implemented rapidly without protecting incumbents. • Roll out government broadband-using services faster to create demand. • Mandate installation of fibre to new premises, housing estates and apartments. • Take on vested interests in clarification of "datacasting" and digital TV. • Announce a new world-leading goal for broadband in Australia by 2012.

Partnering • Launch a national awareness campaign on Australian innovation. • Create a new national overseas IT/BPO promotion agency with Invest Australia. • Ensure all current national IT-related R&D initiatives remain funded. • Launch new national R&D initiatives to attack major issues that confront Australia.