Government and IT- "A Recipe For Rip-Offs": Time For A New Approach - Public Administration Committee Contents

4  Suppliers

Large Systems Integrators

26. A recurring theme throughout our inquiry was the dominance of Government IT by a small number of large systems integrators (SIs).[46] Professor Margetts, Oxford Internet Institute, said that "the concentration of the market in the UK [...] with a small number of suppliers getting the bulk of the contracts," was one of the features that contributed to successive governments' poor performance in IT.[47] The NAO's landscape review stated that "at present 80% of central government IT work is undertaken by 18 suppliers" and that this contrasted with 2004 when just 11 companies had undertaken 80% of this work.[48] Some of these contracts are extremely large and extend over a long period of time; the Aspire contract between HMRC and Capgemini covers a 13 year period and was originally valued at £2.8 billion.[49] This contract is a case study of what is wrong with the present procurement culture. Such a large contract is too complex to manage. The assessment of costs and benefits is opaque and it commits too much power and money to a single supplier.

27. There was widespread agreement among commentators, academics, the Government and the NAO that too much business went to too few companies, although we could not find a figure on which all groups would agree.[50] The Government ICT strategy described the current situation as an "oligopoly",[51] a sentiment echoed by the Public Accounts Committee.[52]

28. Some SMEs that contributed to our inquiry went further. Martin Rice, CEO of Erudine, an IT SME, described the situation as a "cartel".[53] Many of the SMEs who participated in our private seminar echoed this view, although they were unwilling to put these concerns on the record for fear of losing business. Some alleged that large suppliers intentionally vary the effort they put into their bids for government contracts based on whether they or their competitors have been successful in previous competitions. This suggestion was also made during public evidence sessions:

    Chair: And does that mean they actually decide, "You go for that contract and we'll go for this one"?

    Martin Rice: I don't know if it is as much as that but I know that if they win one, they will bid for other ones knowing that they will lose some and they will not put as much effort into the bid.[54]

29. These accusations were strongly contested by representatives of large IT companies. Craig Wilson, Hewlett Packard, argued that:

    Last year [...] there were over 700 contract award notices through public procurement in the UK. This is public procurement for these kinds of projects. Those awards were made to some 460 different companies, so that does not sound to me like a cartel.[55]

Intellect, the IT industry trade body, issued a similarly robust response saying that:

    We were very concerned about the suggestion that the technology industry may operate a cartel with no supporting evidence or information being offered to the committee. Such a suggestion is not only inaccurate and misleading, but also potentially damaging to an industry that is a vital part of the UK economy.[56]

Nevertheless the same memorandum went on to say that the:

    government's current go-to-market approach presents significant barriers to new entrants to the market, especially in terms of the change-averse culture in government and the preference given to suppliers with UK government experience.[57]

30. Extremely serious allegations have been made about the behaviour of some large suppliers. There are clearly very strong feelings on both sides of this debate. We are not in a position to come to a firm verdict on this matter. Having described the situation as an "oligopoly" it is clear the Government is not happy with the current arrangements. 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. The Government should also provide a trusted and independent escalation route to enable SMEs confidentially to raise allegations of malpractice.


31. Government has a large number of older, legacy IT systems. The IfG Report noted that a large proportion of IT expenditure was devoted to maintaining and updating legacy systems and that "developing interoperability between legacy systems and new services and applications is a complex and costly undertaking."[58] This reliance on legacy systems represents a serious risk to government and can act as a barrier to expanding its supplier base. Only a limited number of companies have the expertise and the intellectual property rights to operate these systems so the government is locked in to dealing with this small group of companies.

32. We received suggestions from some SMEs that the major SIs used legacy systems as leverage to maintain their dominance. Some SMEs reported that there were solutions that could easily transfer data from old platforms, but that a combination of risk aversion and vested interests prevented these solutions being adopted.

33. Another area of lock-in to the current large suppliers arises as a consequence of SIs taking ownership of the intellectual property (IP) of the information systems they supply. As a result the government may not have rights over systems it has paid for. This can make it costly for government to migrate to newer and more cost-effective systems or suppliers.

34. We recommend that the Government develop a strategy to either replace legacy systems with newer, less costly systems, or open up the intellectual property rights to competitors. Alternative means of dealing with legacy systems should be explored with the widest possible range of suppliers, including SMEs.

Widening the supplier base and the role of SMEs

35. The Government's analysis has shown that its large IT contractors are not performing well. A Cabinet Office review in September 2010 of the performance of the 14 largest IT suppliers found that none of them were performing to a "good" or "excellent" level, with average performance being a middling "satisfactory with some strengths". Some were performing significantly worse.[59]

36. At the Conservative Spring Conference in March 2011 the Prime Minister said that he wanted to "throw open the bidding process to every single business in our country" to provide "a massive boost for our small businesses".[60] The Government has announced a number of initiatives aimed at increasing the number of IT SMEs that undertake government work: including increasing the use of SMEs as subcontractors, increasing the number of SMEs that contract directly with government; reducing the size of contracts; and simplifying the procurement process.

37. However, despite these intentions, we received numerous reports from SMEs about poor treatment by both Government departments and large companies who sub-contract government work to SMEs. There is a strong suspicion that the Government will be diverted from its stated policy and that its objective will not be achieved.


38. The NAO considered the issue of SMEs being involved in the delivery of Government IT by subcontracting with large SIs and concluded that "it remain[ed] to be seen whether this approach will deliver the expected benefits of reduced costs and greater diversity and innovation in the supply chain."[61] An article in Computer Weekly has criticised the use of subcontracting to improve SME involvement, arguing that when large companies were "given the power to hire and fire SMEs vying for government business or to cut everyone else out and do the work themselves" they inevitably chose the latter.[62] The Minister also pointed out that subcontracting could lead to the Government paying a high price as it had to cover the margin of both the sub and prime contractor.[63]

39. SMEs approached us informally to express concerns based on their own experiences of subcontracting. We heard of cases where SIs had involved SMEs in the bidding process so they could demonstrate innovation, only for the SME to be dropped after award of contract. In some of these cases SMEs felt that they have provided innovative ideas which had then been exploited by the larger SIs. We were also told by SMEs that by subcontracting with an SI they were barred from approaching government directly with ideas that might allow it to radically transform its services and reduce costs. This was because SIs did not want the Government to be provided with ideas that could result in them losing business, or having to reduce costs.

40. When we put these concerns to the Government we were told that their contracting arrangements did not stop subcontractors speaking directly to Departments.

    Commercially, when we say "go through" it does not mean there is a wall between us and them [...] there are many suppliers who have innovations and ideas they want to share with us, and they can directly do that to us.[64]

However, during our private seminar with SMEs, we were told that this did not reflect their experiences. SMEs reported that they were instructed to approach the SI first in order to obtain permission to talk to a Department and that some Departments refused to deal with them directly.

41. The Government has established the Innovation Launch Pad programme which is intended to address this concern. This scheme should enable SMEs to pitch their business proposals for products and services they can provide to drive better value for money.[65] We welcome the scheme, but as a one-off exercise it does not address the fundamental concern that SMEs have no permanent route which enables them to bring innovative ideas directly to Government.

42. We take seriously the concerns expressed by many SMEs that by speaking openly to the Government about innovative ideas they risk losing future business particularly if they are already in a sub-contracting relationship with an SI. The Government should reiterate its willingness to speak to SMEs directly, and commit to meeting SMEs in private where this is requested. We recommend that the Government establish a permanent mechanism that enables SMEs to bring innovative ideas directly to government in confidence, thereby minimising the risk of losing business with prime contractors.

43. When SMEs subcontract with a large SI they do not always enjoy the same payment terms that the SI has secured with the Government. Craig Wilson, Hewlett Packard, explained that the reason for this was that "the procurement process is decoupled from the contract piece."[66] He noted that the Government had been very active in pressing companies to pass on favourable payment terms to SMEs and remarked that large companies "should not be taking advantage of the leadership" which the Government was showing in this area.[67] Mr Wilson committed to taking up this issue and seeing if improvements could be made.[68]

44. Where SMEs do subcontract with a large SI, the SI should ensure that it pays the SMEs on the same terms on which the Government pays the large SI. We welcome the Government's own efforts to improve the speed with which it pays its contractors, and we encourage it to ensure its prime contractors pass these benefits on to SMEs.


45. To increase the number of SMEs who secure business, the Government is reducing the size of its contracts. The intention is to create more opportunities of an appropriate size for SMEs to bid for. The Minister told us there was a presumption that no projects should have a lifetime value of more than £100 million,[69] although this is still large by international standards.[70] Reducing contract size has other positive benefits for the Government such as reducing procurement timescales, as contracts of a lower value are subject to simpler procurement procedures. It could simplify the process of benchmarking the quality, performance and pricing of existing contracts, by breaking information down into smaller units that are easier to analyse.

46. We welcome plans for IT contracts to be broken up to allow for more effective competition and to increase opportunities for SMEs to win Government work. We urge the Government to create more contracting opportunities worth much less than £100 million.


47. Following the Green Review the Government has been moving to act as a single buyer to obtain economies of scale. Using its collective purchasing power has considerable merit for government when purchasing commodity products or services (such as desktop computers). Doing this will also support efforts to commoditise government IT procurement, which was a central recommendation of the IfG's IT Report.[71]

48. This approach can be counter-productive. The effect of demand aggregation can be to aggregate supply, further concentrating contracts in the hands of a few large SIs. Departments are following instructions from the Cabinet Office Efficiency and Reform Group (ERG) to switch away from their existing direct SME contracting arrangements in favour of centralised procurement models. This would mean that SMEs would become tier 2 suppliers behind selected large suppliers, preventing SMEs from contracting directly with departments. The Cabinet Office has confirmed that:

    Spend is being channelled into three current channels: a) existing framework contracts where spot buying is undertaken centrally (this is known as Home Office Cix), b) department-specific arrangements based on their unique needs (such as FCO's arrangements with Hays) and c) an existing contract with Capita, owned and managed by DWP and available to all government departments.[72]

49. It is unclear to us how narrowing the supply channels will create a more open and competitive market. The nature of this supply-side aggregation of SMEs under large contracts appears to be in direct contradiction of the policy articulated by the Minister when he indicated his desire to encourage Departments to secure more direct contracting with SMEs.[73]

50. We welcome the efforts the Government is making to reduce the cost it pays for IT. However the Government's plan to act as a single buyer appears to be leading to a consolidation towards a few large suppliers. This could act against its intention to reduce the size of contracts and increase the number of SMEs that it contracts with directly. We are particularly concerned with plans to move SME suppliers to an "arm's length" relationship with Government. The Government needs to explain how it will reconcile its intentions to act as a single buyer, secure value for money and reduce contract size to create more opportunities for SMEs.


51. SMEs also suffer as a result of the complexity and cost imposed by the public procurement regime. Janet Grossman, Chair of Intellect Public Sector Council described the challenges the system poses, especially for smaller companies:

    as a small and medium player with innovation, the cost of entering a procurement cycle can be life threatening [...] if you are a small innovator and you want to do something radical or even a bit different, it can be very hard for you.[74]

David Clarke, Chair of BCS,[75] described the procurement process as the "root cause" of many of the problems facing Government IT, arguing that if this issue was not resolved "nothing else will be fixed".[76]

52. Government procurement for public works, goods and services is subject to EU regulation to enable the operation of a single market. The procurement procedure used varies depending on the value of the contract; the higher the value of the contract the more rigorous the process which must be observed.[77] There are a number of different procurement procedures which the contracting authority can use (open, restricted, competitive dialogue and negotiated). The choice of procedure determines both the number of stages the process will involve as well as the minimum length of those stages.

53. Procurements that go through the most rigorous process take an average of 77 weeks to complete in the UK. This length means that many small businesses cannot commit staff to work on a bid for the duration of the procurement process. The length of the process also makes it difficult for Government information systems to keep up-to-date; as by the time a procurement cycle has finished both the policy and available technology may have changed. Janet Grossman argued that the cost and effort involved in running a procurement process encouraged departments to tender for large contracts to decrease the frequency with which they have to bear these costs.[78]

54. While EU procurement law was often seen as a barrier to effective procurement the IfG's System Error report noted that the timescales imposed by the EU Directives account for less than 10% of the average 77 week procurement period.[79] Similarly, Olswang LLP, a firm specialising in business law, argued that:

    the regulatory regime is not as inflexible from a commercial perspective as is commonly made out by the press and others. More often than not, restrictions arise because those who interpret the rules in central government either adopt an overly restrictive approach - for fear of European Commission infringement proceedings against the UK - or simply do not provide guidance on an issue and thus leave small, less expert, individual public authorities to find their own way through the Regulations.[80]

55. However there is always a risk of infraction proceedings if any potential contractor can prove that it has been materially disadvantaged by having been treated differently from the winner. This makes it difficult for the Government to have too many bidders. We also heard evidence to suggest that the current procurement regime mitigates against "agile development."[81]

56. The Minister provided us with a similar analysis, arguing that the problem was not caused by the way the EU directives have been implemented, saying that he was "reasonably confident [...] that we have not gold-plated the European Directives in our own law."[82] Instead he believed the problem lay with the amount of guidance issued:

    What we have done in terms of the guidance that goes out is massively embellished this. There are 6,000 pages of guidance that went out from the Office of Government Commerce on big IT procurements.[83]

He also stated that he was pressing for deregulation of the contracting process and a change to the European Directive.[84] The Government has already taken steps to simplify procurement and has issued two procurement notes which have implemented some reforms.[85]

57. The way procurement currently operates favours large companies that can afford to commit the staff and resources to navigate the convoluted processes. It also encourages the Government to confine discussions to as few potential contractors as possible. If the Government is serious about increasing the amount of work it awards to SMEs it must simplify the existing processes. We welcome the Minister's assurance that the Government is simultaneously seeking to change the current European Directive regarding procurement and taking steps to simplify official guidance that surrounds the procurement process. We ask the Government to update us on the progress it is making on both initiatives in its response to this Report.


58. We also heard that the Government's standard contracts discriminate against SMEs, since they include complex obligations regarding unlimited liability, limiting the percentage of business that a government contract would represent in terms of annual turnover, and length of trading history. It was suggested that standard government contracts should be designed for SMEs by default, with SIs left to negotiate exceptional arrangements for more complex work.[86]

59. Another bureaucratic burden is that similar questions are often asked during the pre-qualification stage of procurement exercises: requiring companies to provide three years' worth of accounts, and detail how much of a company's business the contract would represent. Whilst the intention is to prove a company is financially viable and to ensure that the company is not overly dependent on any other single contract, it can also have the effect of eliminating SMEs from a competition. The Government has already committed to removing pre-qualifying questionnaires from the majority of its tenders.[87]

60. We recommend that the Government investigate the practices which seem unintentionally to disadvantage SMEs. When contracts and pre-qualifying questions are drawn up thought must be given to what impact they could have on the eligibility and ability of SMEs to apply for work, and whether separate provision should be made for SMEs. We believe it would be preferable if the default procurement and contractual approach were designed for SMEs, with more detailed and bespoke negotiation being required only for more complex and large scale procurements.


61. Increasing the use of SMEs will place extra pressure on departments. The management of smaller organisations is currently outsourced to the large SIs. For example the Aspire framework provides HMRC with access to over 200 IT suppliers.[88] Mr Pavitt, HMRC, Chief Information Officer (CIO) said that "managing those individually would be quite a heavy bandwidth for a Government department".[89]

62. It is not clear that Departments are willing to take on the additional work that contracting directly with SMEs implies even where this could yield significant savings. Erudine, an IT SME, told us that its mechanism for migrating a legacy system onto a more modern, cheaper platform, which could generate potential savings of around £4m a year was rejected by a senior DWP IT official who gave the following explanation:

    we have as you know an 'interest' in having SMEs present and working in the department for good political reasons. So you have other value to us [… is] purely political. You guys need to be realistic. I will be very candid with you [...] it is a huge amount of bother to deal with smaller organisations. Huge. And we wouldn't necessarily do that because it doesn't make our lives simpler.[90]

63. The DWP said that it did not comment on anonymous and unattributable comments but that the views expressed did not represent those of the Department and that the Department supported the use of SMEs in the delivery of its IT. It reported that in 2009/10 SMEs made up 29.3% of their supplier base, either as a prime contractor or a subcontractor to another supplier. We welcome this assurance from the Department but this account does suggest that attitudes at official level risk undermining ministers' ambitions to increase the number of SMEs Government contracts with directly.

64. The Government presumption in favour of smaller, disaggregated contracts should lead to more direct contracting with SMEs. This will require Departments to invest more effort in managing relationships directly with SMEs meaning that more systems integration work is performed in-house, but this will yield longer term benefits through increased innovation and lower costs. Ministers need to ensure their officials have the skills, capacity and above all the willingness to deliver on ministerial commitments to SMEs.

46   A systems integrator is a person or company that specialises in bringing together component subsystems into a whole and ensuring that those subsystems function together. Back

47   Q 5 Back

48   National Audit Office, Information and Communications Technology in government: Landscape review, para 2.8. Back

49   Computer Weekly, HMRC revises Aspire contract with Capgemini, 29 October 2009  Back

50   See National Audit Office, Information and Communications Technology in government: Landscape review, HC 757, 14 February 2011, Q 392, and Q497 [Mr Watmore] Back

51   Cabinet Office, Government ICT Strategy, para 14 Back

52   Public Accounts Committee, Fortieth Report of Session 2010-12, Information and Communication Technology in Government, HC 1050, para 10 Back

53   Q 149 Back

54   Q 152. Back

55   Q 397 Back

56   Ev 134 Back

57   Ev 135 Back

58   Institute for Government, System Error: Fixing the Flaws in Government IT, March 2011, p22 Back

59   Cabinet Office, Common Assessment Framework CAF 9, September 2010, version 1.4 Back

60   Error! Bookmark not defined. , 6 March 2011 Back

61   National Audit Office, Information and Communications Technology in government: Landscape review, para 3.19 Back

62   "End IT dinosaurs' reign of terror, MPs told", Computer Weekly, 23 February 2010 Back

63   Q 497 [Mr Maude] Back

64   Q 324 Back

65 Back

66   Q 424 Back

67   Q 424 Back

68   Q 425 Back

69   Q 479 Back

70   Q 190 [Mr Rice] Back

71   IfG, System Error, p 11 Back

72   Ev 154 Back

73   Q 520 Back

74   Q 146 [Ms Grossman] Back

75   Formerly the British Computer Society Back

76   Q 146 [Mr Clarke] Back

77   Error! Bookmark not defined.  Back

78   Q 166 [Mr Grossman] Back

79   IfG, System Error, p 68 Back

80   Ev w128 Back

81   See Chapter 6. Back

82   Q 540 Back

83   Q 540 Back

84   Q 540 Back

85   Ev 120 Back

86   SME seminar Back

87   Ev 122 Back

88   Q 323 Back

89   Ibid Back

90   Extract from an e-mail that Erudine provided in a private note to our inquiry. Back

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© Parliamentary copyright 2011
Prepared 28 July 2011