Cat among the government IT pigeons

Well that's put the cat among the pigeons!

Since the Coalition government of Conservatives and Liberal Democrats took power in the UK in 2010, there's been a new swear word in Whitehall ICT circles - oligopoly.

The oligopoly is made up of the traditional big suppliers to government including - but not limited to - the likes of CSC, Accenture, IBM, Oracle, Microsoft et al.

Such firms were accustomed to being granted multi-million pound, multi-year contracts to deliver ICT products and services to the UK public sector that - it is widely alleged - failed to deliver proper value for money to the taxpayer.

In other words, the oligopoly was riding a nice gravy train - and it was time to slam on the brakes according to the likes of Cabinet Office Minister Francis Maude.

Dressing down

Maude himself took a highly active role in tackling the issue head on, pulling in the top 20 suppliers to government for a dressing down and a demand to renegotiate their existing contracts.

Some didn't believe he meant it. Some thought he was a here today, gone tomorrow minister who would be moved on in the next reshuffle, so all they had to do was sit it out and this too would pass.

But Maude survived and remains in situ and those in denial are now having a (late in the day) wake-up call.

To be fair, some vendors did get to grips with the new reality. Oracle signed a single customer agreement with the Cabinet Office that is intended to save £75 million across central government by 2015, while Capgemini renegotiated its Aspire outsourcing contract to run Her Majesty's Revenue and Customs (HMRC) IT, promising savings of around £200 million.

For Maude and his colleagues, this shake-up of the old order is an integral part of plans to revolutionise government IT through the introduction of initiatives such as Digital By Default and the G-Cloud cloud computing programme.

Just yesterday, UK government CTO Liam Maxwell was making some by now familiar points at The Economist CIO Forum in London:

“The British government has spent 15 years spending large amounts of money, in fact about 1 percent of GDP, with an outsourcing community [the oligopoly]. So most of the IT we do and the ownership of our systems, ownership of that information, rests not with us but with outsiders. We have no access to it and that’s fundamentally a massive problem to the government."

He added:

“The majority of major contracts we are locked into finish by 2014/2015 and so there is an enormous amount of change going on about how we do things differently. We are not going to replace. We are going to base our services around user need and in many cases that means not doing the same thing again.”

Initiatives, such as the G-Cloud with its pricing transparency, have exposed the 'rip-off' culture that resulted from previous bad practice:

“In one case, a contract that had  had a bid from a traditional vendor of £52 million was won by a bid of £940,000 and in another a £4 million bid was beaten by £40,000 from an SME.”

Demonic

But all of this demonising of the IT establishment was bound to attract attention beyond Whitehall - and yesterday it did.

The UK Office of Fair Trading (OFT) has launched its own investigation into the oligopoly allegations.

The reason this matters is because the OFT has the power to initiate competition enforcement if it deems it necessary - and that could have a major knock-on effect on the future shape of public sector IT in the UK - for better or worse.

Clive Maxwell, OFT Chief Executive, explains:

"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.”

In its call to action, the OFT says:

There appears to be a high level of concentration in the supply of ICT to the public sector. The Public Administration Select Committee reported that 'a recurring theme throughout our inquiry was the dominance of government IT by a small number of large systems integrators'. Concentration may be particularly high in individual segments. For example, Capita is by far the leading supplier of ICT to local government.

Stakeholders have told us they believe margins may be high and that competition may be restricted by other practices and features of the markets. These include the costs and difficulties of switching because of factors such as the terms of licence agreements / contracts; lack of interoperability with other systems / software and the risk of disruption to critical services.

The OFT wants to hear from any interested party on:

• the structure of the market, for example the number of suppliers and their market share

• whether there are barriers to entry which make it difficult for smaller businesses to compete

• whether public sector users face high barriers to switching suppliers, such as costs of transferring and restrictive licence agreements

• whether some suppliers seek to limit the interoperability and use of competitor systems with their own

• whether outsourcing of ICT service provision results in a high level of dependence on supplier expertise, undermining the ability of public bodies to drive value for money.

If the investigation concludes there is something rotten at work across government, the OFT says its options include:

• launching a market study into a specific aspect or aspects of the market

• initiating competition enforcement proceedings

• seeking voluntary action from the industry and\or public sector buyers

Be careful what you wish for

What is interesting about this - apart from the prospect of supplier business practices coming under close scrutiny - is that the scuttlebutt in Whitehall is that this action by the OFT took the Cabinet Office by surprise. A case of 'be careful what you wish for' perhaps?

As Georgina O'Toole of Techmarketview puts it:

We all know that the Cabinet Office has had its eyes fixed firmly on working with a broader range of ICT suppliers, including SMEs. Its focus has been on getting Whitehall departments and agencies to act differently in their procurement exercises.

But we noted that we have often taken the Cabinet Office’s use of the word “mandate” with a pinch of salt. It is slowly changing behaviours but, regardless of the Cabinet Office directives, departments are the ones responsible for their actions, and ensuring that their actions don’t impact the quality and performance of public services they deliver.

The OFT investigation is rather different, argues O'Toole:

Whereas previous OFT investigations have, like the Cabinet Office, focused on the impact of the ‘buy side’ i.e. the impact of public sector procurement on competition, today’s calling seeks to gather information to determine whether supplier behaviour is preventing healthy competition.

Verdict

Well, this is going to be fun, isn't it?

This isn't going to drag on for a long time. The OFT hopes that its findings and any proposed actions/next steps will be published in October.