OFT launches a market study into the supply of public sector ICT services

The OFT has announced that it has launched a market study into the supply of information and communications technology (ICT) goods and services to the public sector. The study will focus on the degree of competition between the companies which supply these goods and services.

The OFT believes this sector is vital for the efficient and cost effective delivery of all public services. The sector accounts for a significant proportion of total public sector expenditure, with an estimated £13.8 billion spent in 2011-12. Although the focus of the study will be on the supply of ICT to the public sector, the OFT has expressly asked for submissions from buyers in the private sector, indicating that, perhaps, the OFT has concerns about the wider market.

Background: the OFT’s call for information

The announcement of this market study follows an OFT call for information (“CFI”) issued on 3 July 2013.

Under the CFI, the OFT sought information from industry stakeholders on the following:

• the structure of the sector, 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 in this sector;
• 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; and
• whether outsourcing of ICT service provision results in a high level of dependence on suppliers' expertise, undermining the ability of public bodies to drive value for money over time.

Summary of issues emerging from the CFI

The OFT has published a report on its findings. Most notably, the OFT is concerned that:

• certain businesses appear to have a large share of contracts in some areas of the sector;
• there are high barriers to entry and expansion (especially for smaller scale ICT businesses); and
• public sector organisations face difficulties and high costs in switching suppliers.

The main themes that the OFT has identified from responses to the CFI and which will form the basis of the market study are as follows:

• The OFT considers that supply chains in the ICT sector are particularly complex – suppliers may at times supply each other at different tiers of a supply chain and at other times compete directly in the same tier. Additionally, supply chains vary depending on the ICT product or service in question.
• The OFT believes that in some cases public sector organisations may find it difficult and costly to switch between suppliers, particularly where the ICT services are highly customised and bespoke.
• Many respondents said that public sector tender processes adversely affect the way the supply side of the ICT sector is structured and functions, since bidding processes can be lengthy and buyers can over-specify requirements and/or place onerous requirements on suppliers.
• In considering framework agreements, the OFT received responses indicating concerns that frameworks can lock out some suppliers for a fixed period of time or that the use of ‘call-offs’ can make the purchasing process non-transparent. Concerns were also expressed that frameworks do not always achieve the best quality or price.

Next steps

In looking at the supply of ICT to the public sector, the OFT will examine two types of ICT products/services:

• Commercial off-the-shelf software: all types of software commercially available to different public sector organisations, which have not been individually tailored to those organisations' needs.
• Outsourced IT: the contracting of private sector suppliers to build, run and/or maintain public sector IT infrastructure and applications.

Any party that wishes to submit their written views, feedback or evidence to the OFT’s market study team should do so no later than Friday 20 December 2013. The OFT expects to complete its market study and publish its findings in March 2014. Possible outcomes include a market investigation reference, competition law enforcement action or the OFT making recommendations for changes in laws or regulations.

Comment

This is a significant development. The ICT sector has, to date, escaped the scrutiny of the competition authorities. This market study will allow the OFT to take a close look at the sector and companies should be on notice that further action by the competition authorities is possible.

As well as looking at competition issues within the sector, the study will also consider the impact of public sector procurement practices at a time when the public sector procurement rules are changing and the government is trying to streamline procurement processes. This study will provide an important contribution to how the public sector procures ICT.