Government breaks grip of IT oligopoly

Figures for public sector software and IT services investments reveal a dwindling share for IT giants, but can the oligopoly be removed in the long term?

Although SMEs remain disappointed in their opportunities to supply IT to the public sector despite positive noises from government, there is evidence that the mid-sized portion of this sector is gaining ground.

Figures published by TechMarketView revealed that most of the biggest suppliers of IT services and software to the public sector saw a reduction in sales in 2013. But a number of mid-sized firms, in terms of supplying to the public sector, reported strong growth.

A glance at the top 10 IT services and software suppliers to the UK public sector in 2013 reveals a usual suspects list (see below), but on closer inspection, all but four suppliers had falling sales in the sector.

Although Capita, the biggest supplier of IT services and software to the UK public sector, was the exception to the rule with 11% more sales in value terms, IT giants such as HP (-10%), Capgemini (-6%) and BT (-5%) took big hits.

India-headquartered suppliers Tata Consultancy Services (TCS) and HCL, which are tier one in most sectors but emerging in the UK public sector, did not make the top 20 despite reporting big increases in sales to the sector. TCS made £103m worth of sales – 24% more than in 2012 – while HCL's UK public sector sales grew 22% to £2m.

In 2012, Cabinet Office minister Francis Maude claimed the government was on track to double the amount of SMEs doing business with it across all sectors, including IT, from 6.8% in 2011 to 13.7% by the end of 2012.

But according to the most recent government figures, central government spent 10% of its total budget with SMEs in 2011/12, which is a significant improvement on the 6.5% spent with SMEs in 2009/10 and 6.8% in 2010/11.

TechMarketView said some SME software providers outside the top 20 are reporting success, but it added: “For all those SMEs that are succeeding, as is always the case, there are those that are struggling or even failing.”

According to the report, UK public sector sales at SME Allocate Software were up 15% to £21m in 2013, while Unit4's sales increased 4% to £36m, Advanced Computer Software's grew 25% to £60m and EMIS's revenues were up 26% to £82m.

One IT services consultant described the figures as “a moment in time” and he expects the top 10 companies to increase their sale again next year as the government tries to complete its plans before the general election. 

“There is a lot of stuff in the pipeline and the government will push it through next year so that the next government can’t change things,” he said. The Department for Work and Pensions and the Ministry of Justice are two government departments with huge pipelines, the consultant added.

But although the big players will inevitably increase their sales, this will filter down as a result of rules such as limiting how much a supplier can win from a single department.

Steve Tuppen, director at service integration specialist Mozaic, said business is filtering down to SMEs and this looks set to continue. Mozaic, which has a workforce of 30, provides consultative and operational service integration services to government departments including the Home Office, Transport for London and Defra. “The push is starting to build more momentum,” he said. “Disaggregation of services will continue.”

Tuppen pointed out that a number of big contracts are up for renewal in the next couple of years and because government departments have targets for buying from SMEs, it is inevitable that more business will move away from the big suppliers. “There is still a role for big suppliers supporting legacy systems but, as new systems come in, there is a good opportunity for SMEs,” he said.

TechMarketView said the market was generally flat. “Our analysis leads us to conclude that it is those players just outside the top 20 that are significantly outperforming the market,” it said.

The analyst company said the big suppliers recognise this and are engaging in partnership building. “As these newer entrants make their mark, the larger suppliers are trying to reassert themselves,” it said. “Notably, they are playing the ‘working with larger suppliers can bring significant benefits’ card. 

“And it is a strong card to play in some situations. After all, you would be hard pushed to find an SME willing to help out at the drop of a hat in an emergency situation and think about the commercials later.”

“The Cabinet Office seems to be accepting that a mixed-supplier economy is the right answer.”

Top 10 suppliers of IT services and software to the UK public sector

1 Capita, £1.59bn, +11%

2 HP, £1.48bn, -10%

3 Capgemini, £1,03bn, -6%

4 Fujitsu, £889m, -1%

5 BT Group, £788m, -5%

6 IBM, £626m, -5%

7 Atos, £590m, +4

8 Serco, £425m, +1%

9 Microsoft, £402m, +1%

10 CGI (inc Logica), £338m, -7%

Source: TechMarketView