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Giants vs SMEs: the battle for the UK public sector

Stuart Lauchlan Profile picture for user slauchlan August 13, 2013
HM Treasury looks set to become a test bed for a more SME-centric approach to outsourcing deals in the UK public sector. But it's going to be a long journey yet...

It might not be the end; it's not even the end of the beginning; but it is perhaps the beginning of the end.

The end for the IT mega-deal in the UK public sector that is.

It's a promise that's been bandied around a lot over the past couple of years as the Coalition Conservative-Liberal Democrat administration has set about on a radical reform of the way the UK public sector buys and deploys IT and services.

First, all the major suppliers to government were called in for a dressing down by Cabinet Office Minister Francis Maude, whose personal political crusade procurement reform has become, and told to re-pitch their contracts at significantly better rates for the government.

New ways of purchasing commodity IT and services have been introduced, most notably the G-Cloud national cloud computing programme with its CloudStore for pre-certified, pre-authorised sales and purchases.

G-Cloud is about to embark upon its fourth procurement framework and is deemed to have been a great success. That said, total sales via the Cloudstore are a tiny drop in the ocean of overall public sector procurement.

Not to worry, say enthusiasts, we're just in the warm-up stage. At the moment, the UK public sector is still locked into 'old school' multi-year, multi-billion pound contracts with major suppliers - the so-called oligopoly of big-ticket providers - and those contracts are getting in the way of new ways of working.

But not for long, promises the UK's Chief Technology Officer Liam Maxwell who is keen to emphasise that despite some overly optimistic vendor spin (or self-delusion), it's not a case that these contracts are coming up for renewal over the next year or so:

“No. A lot of departments are having contracts finished in the next couple of years!"

Francis Maude - on a mission

Of course many long term observers of the UK public sector's IT track record at this point smile quietly, nod gently and assume that in the event nothing much will change. It never has before, so why should it now?

But they could well be wrong this time.

This week HM Treasury formally signalled its intention to break up its existing single-supplier outsourcing mega-deal with Fujitsu as part of its ICT 2015 programme in favour of a new approach reflective of the wider Government Digital Strategy.

The department is inviting suppliers to provide feedback on a new sourcing model that would make it easier for smaller IT suppliers to bid for and win government business.

This new sourcing model will be based on a number of discrete “service towers”, operating under an over-arching managed IT services function. The towers, suggested by the Treasury, include core IT services such as business applications; hosting and delivery; wide area networks (WAN); and printing services.

In a Prior Information Notice published by the Treasury, the department notes:

“To ensure alignment with the current direction of government ICT, to encourage SME participation and to deliver efficiencies in its supply chain, the department intends to break up this single provider arrangement into a number of discrete contracts.

“As this is a new operating model for government ICT, HM Treasury is proactively seeking feedback from the market on our proposed model. We intend to test with the market both our proposed operating model and the individual requirements and contracts. The objective of this exercise is to seek feedback on our proposals and to test the ability of the market to respond."

Test bed?

Clearly much attention will be paid to progress on this. HM Treasury is actually one of the smaller central government departments in the UK, so it may well be regarded as a safe test bed for a new approach.

There's a lot at stake. The news of the Treasury plan came in the same week as IT trade magazine Computing obtained some interesting stats from Her Majesty's Revenue and Customs (HMRC) which perhaps reflect the way that costs appear to mount up under traditional 'big ticket' contracts.

In 1994, HMRC in ts previous guise as the Inland Revenue  became the first major UK government department to outsource its entire IT operation, in this case to EDS (now part of HP) in a deal that was to cost a projected £1.03 billion over 10 years.

When that contract came to an end in 2004, the cost had soared to around £2 billion.

Capgemini signed a new contract to run from 2004 to 2014 (later extended 2017) which was to cost £2.83 billion over ten years. But when Customs and Excise merged with the Revenue to form HMRC, that number rose to £3.7 billion.

Now Computing - using a Freedom of Information request - has found that annual IT outsourcing costs at HMRC are running at about £770 million a year which comes to £7.7 billion over 10 years.

SMEs needed

So that's the problem. The solution, according to the government, is to bring in smaller, more innovative, less expensive suppliers working as part of a more modular, ecosystem-based approach to contracts.

That's fine in theory, but progress to date has been less than spectacular given that the government target is to see 25% of central government procurement spend, by value, go directly to SMEs by 2015. That's all government spend BTW.

Chloe Smith

In IT specific terms,the ambition is that at least 50% of spend on new government IT goes to SMEs directly. In exceptional cases where large IT contracts are required, at least 25% of the supply chain should be SMEs.

Direct SME spend currently stands at 10.5% for 2012/13, an improvement on 6.5% in 2009/2010, but still a long way to go.

In a new report from the Cabinet Office this week - Making Government business more accessible to SMEs: Two Years On - the government concedes that while there has been progress, it's not been good enough.

Chloe Smith MP, Minister for Political and Constitutional Reform, does the usual political self-congratulation bit, although this is largely based on seemingly having a better understanding of just how ruddy difficult the job ahead is:

"The good news is, at this midway point, we are clearer about the task ahead; we have much better data than in the past, and through our on-going engagement with SMEs a better idea of the ‘roadblocks’ remaining that we need to tackle."


But let's look at those numbers again.

In 2012/13, £4.5 billion of direct spend went to SMEs. That's a 0.4% increase on the previous year's £.4.4 billion at a time when there is what Smith calls a "relentless focus" on the SME agenda.

Heaven alone knows what the numbers would be if the government were to become distracted from this focus!

There's a half-hearted attempt to bump up the numbers by arguing that the Ministry of Defence (MoD) accounts for 45% of all central government spend and that if we were to take to MoD numbers out, then direct spend with SMEs across the rest of Whitehall could be counted as 15%.

Long road ahead

To be fair, there's a massive ship to turn here. Whitehall is used to working with the oligopoly and decades of outsourcing have robbed the UK public sector of critical IT and procurement skills.

While there is clear political intent at the top of government to change the way things are done, that political will still crashes headlong into an administrative won't on a regular basis. It's going to take time to change buy side culture.

Sadly it's also apparent that it's going to take time to change the sell-side culture in many cases. While many providers - most notably Oracle and CapGemini - have engaged with the new world order and offered up revisions to existing contracts or new pricing models for government, it's common knowledge that many suppliers thought they'd been here before and that crusading ministers or not, this too would pass.

But it hasn't. Maude survived the last ministerial reshuffle and is still firmly in place.

Tim Gregory

Yet, some suppliers still don't seem to be at peace with the new direction. Last month Tim Gregory, CEO of CGI - new owner of UK services firm Logica - gave an astonishing interview to ComputerworldUK in which he laid into the UK government's approach in a way that some might consider prospect-limiting in the extreme.

Choice nuggets included:

"The government is making life difficult for IT vendors. I find this adversarial approach quite unhealthy."

Reflections on SME ability to perform:

“The first time one of these SMEs doesn’t deliver, when something goes pear-shaped, there will be no safety net. There’s no point in a government organisation trying to sue them, there’s nothing to sue. It will be gone.”

Why we need long outsourcing deals of the old school variety:

"For a ten year contract we are prepared to make a big investment in the first year, which really helps to drive the cost out, because we will gain it back over the next nine years. However, if it’s a contract over three years we can’t do anything with it!”

And an implicit threat to the government that:

"Certain companies will stop investing. It’s as simple as that. If you are being given an opportunity in the UK government that says: you can’t make a profit, you have to give X percent of your business to an SME, you have unlimited liability, there are lots of service credit penalties, it takes you anything up to two years to bid to win the deal - companies will simply take their investment to another country.”

To which last point I suspect many - including perhaps Maude and Maxwell - would quietly think: "Don't let the door hit you on the way out", followed by "You still don't seem to get it, do you?"

If HM Treasury sets the best practice example that many in the Cabinet Office will be hoping that it will, then there may be an even steeper learning curve to come for many on the sell side.


Keep right on to the end of the road!

Change doesn't come overnight, but it's worth pursuing.

If the CGIs of the world can't operate in the new world order, there are plenty of others who can.

But the SME agenda needs to be pushed harder yet and barriers - such as unhelpful European Commission procurement rules - need to be torn down.

There's still a hell of a long way to go.

Disclosure: at time of writing, Oracle is a premium partner of diginomica. 

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