Yes, thank you, Mr. Chair.
My name is Herman Yeh. I am president of Canadian Information Technology Providers Association, CITPA, and the owner of Northern Micro Inc.
CITPA was formed in 2005, and it is an affiliation of Canadian-owned companies that provide information technology solutions to Canada's public sector. Currently we represent over 40 SME companies in the Canadian IT sector. The combined annual sales volume from our members is well over $400 million a year in providing computer hardware, software, and professional services.
Northern Micro Inc. is a privately held Canadian company and has been serving the Canadian federal government IT market for the last 26 years. Based in Ottawa, we currently have over 70 employees, and annual sales of $60 million.
From the CITPA members' point of view, OSME has been helpful and creative. The creation of buyandsell.gc.ca is the best attempt at using current technology in providing information for SMEs to navigate through the PWGSC procurement jargon. It is light-years ahead compared to previous efforts. I’d like to congratulate OSME on this project, and I hope they can continue investing in this website.
However, the question remains whether OSME is an effective advocate on behalf of SMEs in federal procurement, and if OSME has been able to meet its goals. If I can provide my answer to this question, I’d like to use this opportunity to examine the current SME involvement with PWGSC in the IT hardware market segment and the challenges facing our member companies. Once that is explained we can better address the question of OSME’s effectiveness.
It is estimated that the annual Government of Canada IT hardware spending is $452 million, and $296 million of that was procured through various national master standing offers, or NMSOs, all from the services and technology acquisition management sector, STAMS group at PWGSC. There are 24 contracts listed in those NMSOs, 13 of which are held by SMEs. Most of the NMSO holders assign hundreds of SME resellers from coast to coast to fulfill orders. A conservative estimate of the SME market share for IT hardware can be as high as 75%, or $335 million out of the $452 million total.
Overall, PWGSC awarded over $11 billion in contracts last year. Of this amount, $4.73 billion, or 43%, was awarded to SMEs. So the above data show that SMEs provide a higher percentage of IT hardware as compared to the entire bundle of goods and services purchased by the Government of Canada. It is worth taking a deeper look into why the IT hardware segment is so different from the general set of goods and services.
The STAMS group at PWGSC actively engages SMEs. Currently they have over 50% of the suppliers coming form SME-sized firms. STAMS goes to the client departments and suppliers to solicit additional value-added services to fill in client requirements.
The informatics and technical services division, ITS, of the STAMS group is the technical authority for the IT hardware NMSOs. ITS has been partnered with the computer hardware division, the EJ division, by providing technical and environmental requirements and strategic advice on technology trends and issues. This partnership reduces the communication gap between technical and contract authorities and shortens the procurement cycle. The EJ division allows contract holders to assign their contracts to their SME resellers, and in turn allows SMEs to provide services to the Government of Canada from coast to coast.
The above clearly demonstrates that a positive result can be delivered when PWGSC consults with both its departmental clients and SME suppliers, even while working within the limitation of a lack of a policy framework specifically targeting SMEs.
CITPA believes OSME can achieve its mandate in two ways. First, the existing base of SME firms already selling to the Government of Canada could be assisted to sell more to the Government of Canada and occupy more market space than the current piece of the total procurement pie.
Second, OSME can contact, educate, and energize additional SME firms to do business with the federal government and grow the total SME market share in this fashion.
Clearly, the lowest-hanging fruit is to protect the established market share with the existing players, as shown by the bottom left quadrant in the diagram attached in your briefing notes. Finding new markets for the existing players, shown in the top left quadrant, and finding new players, the bottom right quadrant, and doing both at the same time, top right quadrant, requires added resources.
OSME is to be congratulated for trying to do all of these activities both with limited financial resources and in what remains at least an unclear and generally unhelpful policy vacuum on this subject matter at Treasury Board Secretariat. OSME has opened regional offices and made good strides to communicate with additional SMEs and bring awareness to new SMEs. Where OSME could use some help is to protect the existing base in the next few years and help that base and the newcomers to gain new ground. This will require new policy support and that policy is probably best based within the Treasury Board, and that would meet the OSME objectives.
I foresee increased challenges for CITPA member firms and for OSME to just protect its existing base, much less make headway. It is easy to see how some new management trends and the advent of the new Shared Services Canada, SSC, could potentially apply opposing pressures to what has already been achieved to date. Specifically, there is a sort of “assumed conventional wisdom”, in some quarters, that savings and efficiencies can always be found through simply increasing the scale of procurements. Experience has shown that there are often diminishing returns to ever-increasing scale.
At some point, for some activities, scale can cross over from being of benefit to become a negative and create its own set of new risks. Since 2005 there have been strategies circulating within the Treasury Board and PWGSC to consolidate procurement. The strategy is essentially to reduce the number of suppliers and hold larger, bundled contracts, under the theory that larger purchases will increase buying power and may be able to produce larger savings. However, there is no empirical data showing these savings hold true for all commodities. In fact, in the overall IT operation, the IT capital cost is around 15% to 20% of the total IT operation. The major savings opportunities are not in capital spending but rather within the operating and support costs of the IT operation.
Here are the two recommendations regarding OSME.
First, it’s very difficult to evaluate the success of OSME because of the lack of data. OSME should have solid data upon which to manage and evaluate its activities and there is little available. It’s not OSME's fault.
Second, OSME also suffers by operating in essentially a policy vacuum or, even worse, operating within a series of unresolved conflicting policies or strategies. Prime among these is the unresolved question as to how SMEs are to be promoted in an environment where ever larger bundled contracts are being promoted and ever fewer suppliers are being sought.
Due to the lack of SME procurement policy and, specifically, an SME IT policy framework from the Treasury Board, CITPA found it is extremely difficult to work with PWGSC in resolving conflicting policies within the Government of Canada. The required SME procurement policy, which would properly enable OSME, should contain an authority for data collection from Government of Canada contracts that would enable OSME to develop a series of key performance indicators, KPIs.
With such a policy in place, OSME will be able to work with its client departments including SSC to design a functional procurement strategy to achieve a win-win for both SMEs and the Government of Canada. With such a policy in place, OSME can put in place tighter KPIs to measure its efficiency and effectiveness. OSME and PWGSC, right now, are having a difficult time pointing out their success in the past five years other than some evidence that they have done a good job in listening to their community and trying their best in providing information to SME with their limited budget.
This just is not good enough, and it’s not OSMEs fault. The failure here lies with the absence of a proper clear enabling policy framework for SME IT procurement at the Treasury Board.
By simply issuing a few large bundled contracts, the Government of Canada would just be performing a risk transfer and cost transfer to private sector contractors. It would have no guarantee that very few and very large bundled contracts would be successful. In fact, if the contractor failed, the whole IT transformation and modernization project could become a large failure. The risk factor could become unbearable, and it could potentially be a political embarrassment to the government.
Today, the SME IT sector is being challenged by many new threats, most importantly by the misguided notion that SME procurement is expensive and inefficient. There are several management trends that are being used to apply pressure to SMEs, such as consolidated procurements that focus on large multinational manufacturers and cut out SMEs in the sometimes misguided search for savings.
As currently constituted and funded, OSME can do little to assist its SME clients today. If you want my advice, you would look to the success story of IT procurement and the opportunities it has provided for the growth of Canadian IT SMEs. It has provided the very necessary political push to create an enabling national policy framework within Treasury Board policy that would support OSME and PWGSC in achieving its combined goals of strengthening SMEs and the associated economic development benefits for Canadians, while at the same time achieving procurement savings for Canadians.
CITPA would be very pleased to help this committee and the relevant civil servants to develop the road map to broaden and deepen this existing success story.