Out-Law News 4 min. read

Significant barriers to entry make it hard for small suppliers to compete for Government IT contracts, says expert

The significant barriers that exist to entry into the market for the supply of IT products and services within the public sector have an impact on the competitiveness of that market, an expert has said.

IT and telecoms contract specialist Clive Seddon of Pinsent Masons, the law firm behind Out-Law.com, said that the competitiveness of the market can only be viewed in the context of the procurement environment in which suppliers are being asked to engage. He said that, currently, some smaller suppliers may not be attracted to bid for public sector IT contracts.

Seddon said it would be wrong for the Office of Fair Trading (OFT) to "pillory large, dominant suppliers" in the market without understanding and accounting for the barriers to entry SMEs encounter in the sector.

"The Government wants a wide range of suppliers, big and small, to be involved in the procurement market for public sector IT services, and there are a number of ongoing initiatives, driven by the Cabinet Office, to achieve this diversification," Seddon said. "The Government understandably wants to drive down the cost of buying IT products and services to the tax payer, and sees greater competition within the market as helping to achieve this aim."

"However, participation in public sector IT procurements is not without cost or risk to suppliers. Complex procurement rules and the length of time that passes between the tendering for bids and the signing of contracts are among the factors that put off some suppliers from engaging in public sector IT procurements," he added.

"Suppliers must demonstrate that they can protect confidential and personal data held by Government departments, for example, in line with recognised standards on information security as set out under the ISO risk framework. Whilst it is only right that the Government seek to ensure the protection of its data, it is not surprising that some suppliers may view the legal and contractual hoops that need to be jumped through to win work in the public sector as not being worth their trouble," the expert said.

"Additionally, there has been a step-change in the extent of scrutiny given to Government IT service contract management and milestones, whilst there is also a move away from large, long-term IT contracts to smaller ones with flexible sourcing, tower-based arrangements and featuring cloud-based services. This highlights the Cabinet Office's toughened stance towards driving the best value from their arrangements with suppliers and squeezing profit margins," Seddon said.

On Tuesday the OFT announced that it has launched a market study into the supply of public sector ICT goods and services. It follows an information gathering exercise the OFT undertook with market stakeholders earlier this year. The OFT said some of the issues brought to its attention through the exercise "merit further analysis".

"Most notably, concerns were raised that certain businesses appear to have a large share of contracts in some areas of the sector, that there are high barriers to entry and expansion (especially for smaller scale ICT businesses) and that public sector organisations face difficulties and high costs in switching suppliers," the regulator said in a statement.

The OFT said that its study would particularly focus on the public sector market for the supply of "commercial off-the-shelf software" as well as the outsourcing market for the building and maintenance of public sector IT infrastructure and applications.

"Information and communications technology is vital for the efficient and cost effective delivery of today's public services and for many aspects of public service reform," said Nisha Arora , the OFT's senior director of services, infrastructure and public markets. "When competition works well, it can help drive down costs, encourage innovation and ultimately ensure that the taxpayer gets the best value for money. We want to look further into this market to understand whether it is really serving its customers' interests."

The OFT is expected to complete its market study and publicise the findings in March 2014.

Competition law specialist Alan Davis of Pinsent Masons said that the OFT will have a number of options available to it depending on their conclusions as to the existence of any competition concerns. This includes referring the market to the Competition Commission, or Competition and Markets Authority (CMA) when it assumes regulatory duties for competition matters from 1 April 2014, for "full-blown" investigation.

"This outcome could occur if the OFT finds there are features of the market that restrict or distort competition," Davis said. "On the other hand, the OFT, or  CMA, could seek to remedy the concerns by negotiating an industry code of practice and/or by making recommendations to Government on changes to public sector procurement practices in this market."

"In relation to the latter, the strategic steer from the Government is that the CMA will have a key role in challenging Government where it is inadvertently creating barriers to competition. Moreover, there will be a presumption that the Government will accept all of the CMA’s recommendations and the CMA will assist in implementing them," he said.

The market for the supply of public sector IT goods and services is estimated at being worth £13.8 billion. The OFT previously said that the top 20 software and IT service providers currently earn about £10.4 billion in annual revenues from UK public sector bodies.

The Cabinet Office has previously set out a target of ensuring that SMEs win 25% of the business being outsourced by the Government, either directly or through the supply chain. According to data published by the Cabinet Office in the summer, 10.5% of all Government procurement expenditure in 2012-13, £4.5 billion, made its way directly to SMEs. The figure was up from £3bn spent by central Government departments on services offered by SMEs in 2009, it said.

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