The Office of Fair Trading ("OFT") has published its final report on its market study into the supply of information and communication technology ("ICT") to the public sector (the "Report"). The Report found that these markets possess a number of features of which prevent competition from working as effectively as it should, and that purchaser behaviour was, to a considerable extent, responsible for this.
The aim of the market study was to enable the OFT to better understand the nature of these markets and the degree of competition that exists between suppliers. Around £14 billion was spent by the public sector on ICT in 2011/12, accounting for around a quarter of the overall spend on such products and services in the UK. The procurement of ICT represents around 6% of the UK's overall public sector spend on third party suppliers, and the OFT chose to focus its inquiry on Commercial off-the-shelf Software ("COTS") and Business Process Outsourcing ("BPO"), which constitute around half of this figure.
The OFT found that there are some structural issues that contribute to a lack of competition in some markets for the supply of ICT. The market study found, for example, that in some cases incumbent suppliers benefited from high market shares which were stable over time, indicating the existence of barriers to entry and expansion. These may exist through incumbency advantages which are common in the sector, since complex, bespoke ICT solutions are often procured under long term contracts to justify significant up-front investments. Interestingly, the OFT identified suppliers' in-depth knowledge of the requirements of specific customers, and economies of scale, as barriers to potential competition. However, such factors often lead to higher levels of customer satisfaction and efficient service delivery, both of which might suggest overall consumer benefit.
Many suppliers were somewhat concerned about the outcome of the market study. This was, in part, caused by previous reports on the sector such as the Public Administration Systems Committee report in 2011 entitled "Government and IT – A Recipe for Rip-Offs". The report highlighted an "oligopoly of large suppliers" which some even suggested amount to "a cartel". While the Report avoids such inflammatory language, the OFT does highlight that, while no evidence was found of any infringements of competition law, certain supplier behaviour may contribute to the lack of competition in this sector.
The Report suggests that some suppliers are employing complex pricing mechanisms, which can make it difficult for public sector purchasers to compare competing solutions. Furthermore, some respondents suggested that suppliers made it difficult for customers to switch to a new supplier, failing to cooperate fully with exit obligations and obstructing or delaying migration processes.
However, the clear theme that emerges from the Report is that there is much more that public sector bodies can do to improve their position. In particular, the Report indicates that public sector bodies are designing and running procurement processes which do not serve their own best interests. The OFT found that procurement exercises are often unnecessarily complex, time consuming and costly, meaning that small and medium-sized enterprises are dissuaded from participating in tenders which would otherwise provide opportunities for market entry. The issue is compounded by the fact that public sector bodies often seek to aggregate contracts to achieve buyer power and reduce procurement costs. However, this has the adverse effect of limiting competition since smaller operators lack sufficient scale to service the contractual requirements in full. Furthermore, while many government contracts require security clearances, the Report found that these clearances are often included as pre-qualification requirements in tender processes even where they are not required to deliver the relevant services. This combination of factors means purchasers may be preventing market access to the very undertakings that might help improve the competitive landscape to their benefit.
The Report also highlights that there are significant information asymmetries between purchasers and suppliers which hinder public sector bodies in their efforts to procure value, due to a lack of commercial and technical expertise within the public sector regarding the services they are procuring. In addition, public authorities do not collect and share information from suppliers which would inform their purchasing decisions and help derive value, and the Report indicates that very little is done in the way of benchmarking suppliers to exert pressure on prices and service delivery. The Report also suggests that more could be done to facilitate purchasers' ability to switch suppliers, by incorporating appropriate exit/migration obligations on suppliers to protect them against attempts by suppliers to prevent switching.
The OFT has made a number of recommendations on the basis of its findings, the majority of which focus on what purchasers can do to help derive better value from their ICT spend. The Report encourages public sector bodies to improve their procurement processes to ensure they are not unnecessarily complicating tenders or otherwise discouraging new supplier entry. It also highlighted the value of improving technical skills of purchasers, to better understand where value can be achieved, and improve contract management to avoid being "locked-in" to a particular supplier or solution.
The Report highlighted that a number of measures have already been implemented in this regard, such as increased information gathering and a greater focus on cross-departmental collaboration. In addition, the Crown Commercial Service ("CCS") has finalised an updated model services contract, for use in the procurement of services exceeding £10 million in value and which require a degree of formal dialogue with suppliers. The CCS has highlighted that these are particularly likely to be utilised in the procurement of IT and BPO services. However, the OFT also emphasised that many of these initiatives remain at a very early stage and much more can be done to improve procurement practices.
The new EU Procurement Directives
The Competition and Markets Authority ("CMA"), which took over the OFT's functions from 1st April, and public sector purchasers are likely to welcome the publication of the new EU Directives on public procurement (the "Directives"), which were published in the Official Journal of the European Union ("OJEU") last month. The three Directives make a number of changes to the EU's public procurement regime which are likely to be of assistance to public bodies in implementing the OFT's recommendations. In particular, the Directives:
- introduce measures which encourage public authorities to divide contracts into smaller "lots" where appropriate, in order to improve SME access;
- confirm that public authorities may take past performance of public contracts into consideration when making award decisions, making it easier for public authorities to pool their experience and share knowledge;
- discourage the use of unnecessary pre-qualification requirements in order to facilitate SME involvement by reducing the resources required to participate; and
- seek to modernise the procurement rules and introduce greater flexibility and clarity to the law. As such, public authorities may perceive a reduction in the compliance burden when running procurement processes, and may be encouraged to procure services on a more frequent basis to maintain pressure on suppliers to deliver value.
The Directives must be implemented by EU Member States within two years of their publication in the OJEU, though the UK has indicated that it intends to implement the Directives as soon as possible.
A warning for suppliers?
In addition to the recommendations to public bodies and its observations on the market structure, the OFT did fire one warning shot to suppliers. The Report urges them to ensure that they have appropriate compliance policies in place, and public sector customers have criticised both the pricing methodologies adopted by suppliers and the perceived lack of cooperation they receive when they are seeking to migrate services to other providers. Furthermore, the OFT stated that the CMA should consider further investigation into this area to be an enforcement priority. However, the burden seems to have been placed, at least initially, on purchasers to improve their procurement practices, technical expertise and negotiation strategies, and ensure that their contracts impose adequate exit obligations on suppliers.
The Report provides some evidence that the market for the supply of ICT to the public sector may not be working as effectively as it should. However, the OFT has not yet found any evidence that this is caused by infringements of the Competition Act, and many of the Report's recommendations focus on how the public sector can take steps to improve its own position through more sophisticated procurement practices.
While the OFT may not like the structure of some of the markets identified where there are high, stable market shares for a few key supplies over time, this is not necessarily suggestive of any anti-competitive behaviour. As such, the CMA will exercise caution before intervening on the basis of the Competition Act, particularly since the OFT has highlighted the many steps that the public sector can take to increase competition and reap the resulting benefits. Nevertheless, similar market structures have been shown to have facilitated collusion in some previous cases, and there are clearly a number of dissatisfied customers in this market. As such, suppliers should be vigilant to ensure that their conduct does not leave them vulnerable to competition law challenges.