Treasury puts cost of govt ICT at $980 million

ICT represents 56.9 percent of total government administration and support services costs

If there were ever any doubt about the pervasiveness of ICT in government, the Treasury’s second annual benchmarking report puts that to rest.

At $980 million, ICT represents 56.9 percent of total government administration and support services costs. Medium-sized and large agencies represent 96 percent of ICT service expenditure.

Earlier this month Prime Minister John Key told a business audience that he is “shocked” by the state of many government IT systems, which he says will need to be upgraded to improve public sector efficiency.

“I’ve actually been shocked at how obsolete many public sector IT systems are, and how big the challenge will be to upgrade and modernise them.”

Key made the observation in a speech about improving the public service, where he also announced the establishment of the new Ministry of Business, Innovation and Employment.

In the Treasury’s benchmarking report, Stuart Wakefield, director of the Office of the Government Chief Information Officer, saysthe overall ICT spending is likely to continue to trend upward as agencies invest capital in transformation projects that will realise savings in non-ICT business spending.

He says that at the time the document was written, his office, together with the Treasury, was exploring options for collaborating with Australian jurisdictions to share intellectual property and data for more detailed ICT benchmarking and insight.

Agencies reported spending $24.7 million more in the 2010-11 period covered, attributing the increases to the Christchurch earthquakes and one-time costs for change and improvement, including capital investment, transformation projects and preparation for outsourcing ICT.

Wakefield says that overall, New Zealand agencies report spending a significantly higher amount on ICT as a percentage of organisation running costs (ORC) than international benchmarks.

“There is an opportunity for $130.2 million in gross savings each year if all agencies reduce their cost of infrastructure as a percentage of ORC to their cohort median,” he says. “There also appears to be opportunities for greater efficiency by reducing spending and effort on applications development, implementation and maintenance by having a less complex ICT environment.”

He notes that agencies are effective at supporting systems, similar to international comparisons.

Agencies measured over two financial years reported a nominal ICT spending increase of $24.7 million, which was a $2.8 million increase when adjusted for inflation. (Presumably this relates to the consumer price index rather than the producer price index.) Thirteen agencies spent $40.6 million less, and 18 agencies spent $65.4 million more.

The small agencies spent $5.4 million less; the medium-sized agencies $14.5 million more; and the large agency cohort $15.7 million more.

Wakefield says there is high variability in ICT across agencies and within cohorts as a result of different operational needs. The timing of capital expenditure within individual agencies could cause spikes in ICT spending in a particular year.

“The full cohort in general – and the medium-sized agency cohort in particular – spend a significantly higher amount of ICT as a percentage of ORC than international comparators,” he says.

At the median, the small agency cohort (5 percent) has 95.9 percent higher spend as a percentage of ORC than the American Productivity and Quality Center benchmark; the medium-sized agency cohort is 248 percent higher; the large agency cohort is 139 percent higher.

Wakefield says ICT infrastructure is a good candidate for achieving gross savings through cross-agency collaboration for two reasons: infrastructure makes up 41.3 percent of total ICT spend; and infrastructure costs are lower when purchased in high volumes.

The medium-sized agency cohort is identified as the least efficient but the greatest potential for gross savings is the large agency cohort, which spends $257 million on infrastructure services.

The report notes that New Zealand fully loaded labour costs are significantly lower than international comparisons. They make up 25 percent of the total cost of the ICT function and are 50.5 percent lower than a measurement against world-class organisations.

Wakefield says reducing complexity in the ICT environment is not a quick fix. It requires agencies to move to a more common, standardised environment as current applications reach the end of their life. “Transformation must be driven by a clear vision for the future state of the applications environment and supported by a multi-year and coordinated action plan.”

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