Microsoft gouges government on pricing

By Julian Bajkowski

The federal government could soon usher in sweeping changes to the way it buys hundreds of millions of dollars of software from technology giants like Microsoft to extract much better value for money and greatly boost the flexibility and productivity of public sector computing.

A landmark public submission from the Australian Government Information Management Office (AGIMO) to a parliamentary inquiry into information technology pricing in Australia reveals that the agency mandated to steer government technology procurement appears to have serious reservations whether the way Microsoft licences are now bought is sustainable in the future.

Known as the Microsoft Volume Sourcing Arrangement (VSA), the government-wide procurement mechanism is intended to provide favourable pricing and licensing conditions for the once dominant software giant’s products in Australia.

However AGIMO has now directly raised questions over whether the structure of the present Microsoft VSA is a good deal in its submission to the House of Representatives Standing Committee on Infrastructure and Communications Inquiry into IT Pricing – which is examining price gouging by overseas technology suppliers.

AGIMO’s submission takes particular issue with the fact that Microsoft insists on selling to Canberra through a large account reseller (LAR), Data#3, rather than being able to buy directly from the software maker.

“This procurement structure appears to provide little additional value to the Australian Government and introduces additional complexity and some extra cost,” AGIMO’s submission says of the Microsoft purchasing arrangements.

“The Government negotiates the discount percentage and contract arrangements with Microsoft and these are applied to the price the LAR charges the government. This arrangement does not apply to all other governments and specifically not to the US government. Microsoft has been reluctant to amend this model,” AGIMO’s submission says.

Asked by Government News whether AGIMO is now considering or evaluating alternative software procurement structures, AGIMO’s First Assistant Secretary, Agency Services – John Sheridan says AGIMO is leaving the door for change firmly ajar.

 “This will be a matter to be discussed with Microsoft in the context of negotiating a new volume sourcing agreement,” he says.

“The VSA is an agreement with Microsoft. The current VSA expires on 30 June 2013. AGIMO has begun discussions with Microsoft regarding renewal,” Sheridan explains.

The latest Microsoft LAR government deal (known as a head agreement) with Data#3 Ltd was announced by AGIMO on the 15th of March 2012 and runs for an initial period of three years, with the option of three more one-year extensions.

But just how steep Microsoft’s prices are for the federal government, relative to other comparable large and small developed public sector markets, has been laid painfully bare. Citing advice from analyst firm Gartner, the AGIMO submission estimates the prices that Australian government clients pay are more expensive by half, thanks largely to currency fluctuations.

“The difference in the base government price means the US government is paying some 50 per cent less than the base government price in Australia. The Singapore Government prices also appear to be some 50 per cent below those charged to the Australian Government,” AGIMO’s submission says.

The use of the relatively small market of Singapore as a reference is significant because it counterbalances a prevalent argument from software makers that mid-size markets like Australia simply cannot produce the economies of scale necessary to obtain much lower public sector prices like those available in the US.

The official estimate of total federal government information technology spending from the Department of Finance is now around $5 billion a year.

The public exposure of Microsoft’s high prices for Australian taxpayers is certain to stimulate strong interest among state and local government software buyers who are keen to increase value and reduce prices from big suppliers.

There is similar pressure from policymakers and legislators to make savings and generate further efficiencies from technology purchasing against the background of a subdued taxation base.

Microsoft has for more than a decade been the dominant desktop operating system (Windows) and productivity applications (Office) across most government and large corporate computing environments.

This situation has prompted repeated criticism from open-source software advocates and competitors that a technology ‘lock-in’ has been created that makes it hard to impossible for competing products to gain a competitive foothold in the government technology market.

A big dilemma now confronting government and corporate technology buyers alike is the deflationary effect of service-based or ‘pay-for-what-you-use’ software models that are offered by cloud computing providers. Because the pricing of such services is dynamic, there is the potential for traditional, longer-term fixed price licensing deals for products like Microsoft’s to be more expensive because they are less elastic in response to demand.

Asked if the pay-for-what-you-use software purchasing is an option for government purchasing, AGIMO’s Sheridan says that forthcoming “data-centre-as-a-service procurement will test that model.”

At the same time, large state government purchasers, including the NSW Department of Education and Training, are increasingly buying competing applications like Google’s Gmail platform to replace once endemic products like Microsoft Exchange and Outlook.

There is also public pressure on agencies to get far more savvy about mobile and consumer technologies quickly, a situation compounded by frenetic activity in the private sector. As banks and other businesses move rapidly to deploy a wide range of web and mobile applications, consumers soon come to expect similar online functionality from government.

The burgeoning popularity of Microsoft’s competitors among consumers presents frontline government agencies dealing the public with an increasingly difficult set of expectations to manage.

The Australian Taxation Office, which most people are required to deal with, opted for a Windows-centric approach in developing its eTax application, a situation that makes it the subject of increasing criticism from Apple, Android and open-source software users for whom the eTax application is unusable.

Government buyers are also being forced to contend with Microsoft’s late entry into the smartphone and tablet markets where consumers have been rapidly dumping traditional Windows powered desktop and notebook computers in favour of user friendly, touch screen devices that run Apple’s iOS or Google’s Android mobile operating systems.

A crucial issue for government services looking to tap into the benefits of developing mobile applications for staff and citizens is to make a call as to which core markets they will develop applications for.

Microsoft’s managing director for Australia, Pip Marlow, would not be drawn for comment on AGIMO’s submission or the wider inquiry into IT pricing when Government News contacted her for comment.

However the company is one of the few large multinational technology vendors to lodge a submission under its own name to the IT pricing inquiry.

“There are a range of additional factors that impact pricing in the Australian market, including the relatively high cost of labour and rent; the impact of Australian specific regulations; the higher costs marketing, training and advertising; supply chain costs, including transport and distribution and exchange rates,” Microsoft’s submission says.

Some of Microsoft’s products are clearly more profitable than others. In July 2012 the company posted a US$492 million quarterly loss – reported to be its first ever – that was triggered by a charge for its internet business, which includes search engine Bing.

“The ICT industry has witnessed continuing, rapid and at times dramatic changes over the past decade,” Microsoft’s submission to the IT pricing inquiry says.

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