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OFT scrutiny of Government ICT market could drive IT suppliers to diversify their own supply chains, says expert

Out-Law News | 05 Jul 2013 | 12:45 pm | 2 min. read

Major suppliers of IT products and services to the UK Government could look to diversify their supply chains in light of a regulator's interest in the Government information and communication technology (ICT) market, an expert has said.

On Wednesday, the Office of Fair Trading (OFT) launched an information gathering exercise in a bid to find out more about competition in the market for the supply of ICT goods and services to the public sector. The OFT said that the top 20 software and IT service providers currently earn about £10.4 billion in annual revenues from UK public sector bodies. It said it wants to ensure that there is healthy competition in the market.

Expert in IT contract negotiations David Isaac of Pinsent Masons, the law firm behind Out-Law.com, said that the OFT's information gathering exercise should help raise awareness in the market of the need for more diversified supply chains. He said, though, that there are some very large IT projects which only the biggest suppliers are capable of priming.

"The Government has demonstrated that it is keen to ensure that greater diversity in its supply chain for IT products and services," Isaac said. "There has been a real effort to bolster the number of SMEs that make it onto Government ICT supplier frameworks, such as the G-Cloud."

"The challenge is that on the biggest transformational IT projects, SMEs will be unable to offer the track record and financial credentials required to deliver these projects. For these reasons SMEs generally lack the experience and credibility of delivering very large projects. However, this does not mean that SMEs cannot form part of larger suppliers' supply chain," he said.

"The OFT's information gathering initiative is clearly a step in the right direction if we want to move away from the pre-dominance of tier one suppliers. The OFT's market review will raise awareness of the importance of SMEs in the supply of Government ICT. It may, however, take more specific action by the OFT or the Government to generate real change in the industry," Isaac added.

Competition law specialist Alan Davis of Pinsent Masons said that there are a number of possible routes that the OFT may choose to pursue once it analyses the evidence and views it will receive from suppliers and purchasers in the market.

"These include a more formal market study being launched by the OFT, potentially leading to a full-blown market reference to the Competition Commission if the OFT concludes that there are features of the market that restrict or distort competition," Davis said.

"Alternatively, the OFT could encourage suppliers and/or purchasers to commit to a voluntary code of practice around the supply of ICT to the public sector," he added. "Interestingly, the OFT also highlights the possibility of competition law enforcement action.  This could occur if the OFT finds evidence of any collusion between suppliers or abuse of a dominant position by any of them. Moreover, the OFT has included reference to its leniency programme procedures for reporting and investigating cartel activity."

"It is too early to say what action the OFT is likely to take but larger suppliers will want to consider carefully their responses to the OFT's information requests to mitigate the risk of adverse findings. But they will also want to engage constructively with the OFT's review to shape the outcome of the review and any remedial action by the OFT. For smaller suppliers, it is a chance to influence the OFT's conclusions on competition in the market and possible actions to open up the market to greater opportunities for smaller players," Davis said.

In a statement, the OFT's chief executive Clive Maxwell said: "Information and communication technology is a crucial part of any modern economy and is key to improving productivity in public services as well as businesses. Given the vital role that this technology plays in the delivery of public services and the cost to the taxpayer, the OFT believes it is important to explore whether there are any restrictions on competition. We want to hear both from industry suppliers and public sector users about how competition in this market works, any problems that they have experienced, and how it could be made to work better."