Public sector IT market has 'barriers to entry, expansion and switching', says OFT

Will Green is news editor of Supply Management
26 March 2014

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26 March 2014 | Will Green

An investigation by the Office of Fair Trading (OFT) into the procurement of IT by the public sector has found “barriers to entry, expansion and switching” in the market.

The OFT said “suppliers often have more information about IT solutions than buyers”, firms used complex pricing models and costs are not transparent, and incumbent suppliers had “an inherent advantage” over others.

In a report the OFT said public sector buyers “may not have the access to the requisite commercial and technical expertise”, were averse to switching suppliers, and did not “routinely collect procurement data or make full use of market intelligence”.

The report said: “Public sector ICT contracts typically contain contractual provisions dealing with contract exit and transition. We heard that these provisions are often inadequate for achieving smooth transition and therefore may restrict or prevent public sector organisations from switching suppliers.”

The investigation, launched last summer, covered off-the-shelf software and outsourced IT services, which make up around half of the UK public sector’s IT spend. In 2011/12 the public sector spent around £13.8 billion on all IT products and services.

The OFT found in local authority housing, planning and pension administration software, and management information systems for schools, “the largest one or two suppliers have a total share of supply of at least 60 per cent and in some cases over 80 per cent”.

The report also said procurement practices were a “key barrier to entry” for firms and “responding to tenders can be time consuming and expensive for suppliers and there is a risk of tenders being cancelled or delayed, which can result in substantial irrecoverable costs for suppliers”.

The OFT also found evidence of “tacit coordination”, where “suppliers recognise that they can reach a more profitable outcome by coordinating their actions to dampen competitive rivalry but achieve this outcome through implicit understanding of each others’ future actions, rather than through arrangements”.

“Tacit coordination enables firms to raise prices above those that would otherwise be expected in a competitive market,” said the report.

The OFT called for buyers to work with suppliers to collect data about products, prices and supplier performance, and share this across the public sector. IT suppliers should “do more to improve understanding and the flow of clear information to public sector buyers”.

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