OFT launches investigation into public sector IT supply

The Office of Fair Trading (OFT) is launching a formal investigation into the market for supplying IT and communications to the public sector.

The OFT intends to “examine whether competition in this sector could work better and the reasons why it may not be working as well as it could”.

The move follows a call to suppliers and buyers of IT services to the public sector to provide information about their experiences.

As a result, the watchdog identified several issues it believes require further investigation, in particular:

• Some suppliers appearing to have a large share of contracts in some areas of the sector.
• High barriers to entry and expansion, especially for smaller IT companies.
• Difficulties and high costs in switching from one supplier to another.

“This study will focus on the degree of competition between the companies which supply these goods and services, in a sector that is vital for the efficient and cost effective delivery of all public services,” said the OFT. 

“It also accounts for a significant proportion of total public sector expenditure, with an estimated £13.8bn spent in 2011-12.”

Existing reports and ongoing initiatives to improve public sector procurement will be used in the study and the OFT will attempt to avoid duplication.

Following the July call for information issues were raised regarding public sector procurement practices in two areas - the use of commercial off-the-shelf software and outsourced IT.

The OFT estimates that between them these two areas make up around half of UK public sector IT expenditure.

Nisha Arora , OFT senior director of services, infrastructure and public markets, said in a statement: “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.

"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.”

Caroline Hobson a competition partner with law firm CMS said this is a significant development. “The ICT sector has hitherto escaped the gaze of the competition authorities and the study is likely to last roughly a year. There is now a realistic chance it could lead to either a market investigation by the future CMA or targeted enforcement against individual companies. They should treat this as a warning to get their house in order."

In 2011, Cabinet Office minister Francis Maude said: "We will end the oligopoly of big business supplying government IT by breaking down contracts into smaller, more flexible projects. This will open up the market to SMEs and new providers."

Despite government procurement strategies aimed at addressing the issue, some commentators have observed it is taking longer than expected to loosen the oligopoly’s grip. 

Speaking at the Better Deal for Small Businesses event in March 2012, Maude said government was on track to double the amount of SMEs doing business with Whitehall, from 6.8% in 2011 to 13.7% by the end of 2012.

But according to the most recent government figures, central government spent just 10% of its total budget with SMEs in 2011/12.

A report by MPs on the House of Commons Public Administration Committee published last year called for an independent investigation into possible anti-competitive behaviour among the large systems integrators that dominate Whitehall IT.

"Extremely serious allegations have been made about the behaviour of some large suppliers," said the committee report. 

"Whether or not this constitutes a cartel in legal terms, it has led to the perverse situation in which the governments have wasted an obscene amount of public money. The government should urgently commission an independent, external investigation to determine whether there is substance to these serious allegations of anti-competitive behaviour and collusion."

But the OFT has not received any evidence to suggest suppliers are operating as a cartel - although it said it would still be keen to hear from anyone who suspects otherwise.

"The OFT is aware of an allegation of anti-competitive behaviour by some (unnamed) ICT suppliers made to the Public Administration Select Committee (PASC) in 2011. No respondents to our call for information provided evidence to support the allegation made to the PASC," said the OFT.

The investigation is open until 20 December, and the OFT expects to publish its findings in March 2014.