Health undecided on IT outsourcing future

Officials from Australia's Federal Department of Health have refused to answer questions in Parliament pertaining to a long-standing IT services agreement with IBM, which expires in mid-2011.

Health has five times renewed IT services outsourcing with IBM GSA - beginning with a controversial five-year, $350 million agreement in 2000.

In the years since, Health has spent well over half a billion dollars with IBM GSA in a series of 'direct' tenders in which IBM's competitors have had no opportunity to bid for the business.

During Senate Estimates last week [PDF], Liberal Senator Concetta Fierravanti-Wells asked Margaret Lyons, chief operating officer of the Business Group within the Department of Health, whether existing contracts with IBM had been put out to open tender - the answer being that the services had been "sourced directly" from IBM.

With reference to the expiration of the current agreement, the Liberal Senator ask whether it was the department's intention to "direct source or go out to tender."

"There is a process underway at the minute where we will make a determination about whether or not we go to market for our ICT services," Lyons replied.

Curiously, Lyons was interrupted by Department of Health secretary Jane Halton, who stepped in to shut the line of questioning down.

"We cannot provide any further detail because of the commercial sensitivity of that at the moment," Horton said.

iTnews has since contacted IBM and the Department of Health and Ageing. IBM has refused to comment, citing client confidentiality.

The Department of Health and Ageing said that it is tossing up one of four options for the future delivery of IT services. The first is to use 'selective sourcing', the second to rely on access to existing Federal Government agency procurement panels, the third an 'open market tender for either sole supplier or bundled approach'.

The fourth is the tried and tested approach for the last decade - "direct source with existing provider."

Background

Should Health sign with IBM a sixth time, it would represent close to 14 years of renewal business for Big Blue.

The most recent renewal was a $70 million deal struck for the period of December 2008 to June 2011.

The largest - and most controversial - was for the initial five years between 2000 and 2005, under which Health (which at the time included Medibank Private and HIC) outsourced the "administrative and operational responsibility" for enterprise IT infrastructure services to IBM GSA in a deal worth $350 million over five years.

A 2001 report by the Australian National Audit Office found that IBM gained privileged information about its competitors in bidding for this initial contract, adjusted its offer price accordingly and submitted a revised bid after the tender's deadline to win the tender.

"ANAO is not able to provide an assurance that no tenderer unfairly gained a competitive advantage in the Health Group process [and] there was a lack of transparency of the manner in which probity issues were considered," the auditor's report said.

The Federal Office of Asset Sales and IT Outsourcing (OASITO) claimed at the time that the disk containing the bid information of competitors CSC and EDS was mailed to IBM in error.

But Senator Kate Lundy - who at the time was in opposition - accused IBM GSA of altering its bid price and including "as yet unknown 'out-of-scope' Industry Development commitments between the disclosure event and late lodgement of their final offer."

IBM has won significant business from the Department of Health that are out-of-scope from the IT services contracts over the past decade.

In only the last two financial years (since July 1, 2009), iTnews has counted no less than 50 IT projects in which IBM has won additional "out-of-scope" business with the Department.

This includes over $15 million of additional business in Fiscal 2009/10 and over $2.5 million in the last four months.

Out-of-scope work includes projects such as network extensions, office relocations, the purchase of additional server and storage capacity, scoping studies, software licenses, maintenance and support fees, training, and provision of IT services considered out of scope to the Department's routine operations.

IBM and the Department refused to confirm whether the outsourcing agreements - or any other deals signed between IBM and Health - give IBM first right of refusal for any IT-related work that does not fall in scope of the outsourcing deal.

"Any commercial arrangements that the Department enters into are commercial-in confidence," the department said in a statement.