The Changing Procurement Landscape

Published in Government Technology

The government’s austerity programme is having predicable knock-on effects on IT procurement and outsourcing strategies, and while there are a number of interrelated themes they all stem from a single overriding imperative: the need to cut costs. Very few infrastructure project plans, outsourcing contracts or other ICT activities are being spared (those that is, that haven’t simply been shelved altogether). While it may be a truism to say that cost reduction has always been at the heart of government procurement strategies, in the past it was wrapped in euphemisms about efficiency savings and productivity gains. Now the gloves are off: it’s about paying less, both in capital investment and servicing charges. Without, of course, compromising current levels of service and productivity.

How is this ‘thrust to cut’ impacting government IT strategies? One of the most obvious signs we are seeing among our clients in the public sector is a tendency towards smaller, shorter projects and engagements. The assumption here is that such engagements will cost less and so offer quick wins, being more likely to reflect the rapid ongoing cost reductions required over the next 12-36 months.

Collaboration & consolidation

There is a trend towards partnering, collaboration and service sharing among local authorities, agencies, NHS Trusts and other public sector entities. Collaboration has many benefits, including greater negotiating clout with suppliers, economies of scale and the cost efficiencies of system rationalisation. In addition to reduced financial footprint, any risk can be amortised over a number of partners if the project runs into trouble – the so-called ‘no-risk/low-risk’ strategy that is an increasingly popular part of public sector culture.

Rationalising systems is also gaining in popularity. Central government is encouraging local authorities to co-operate with each other to deliver services. Since local authorities frequently use similar applications. Central government argues that it makes economic sense, and reduces deployment risk, to consolidate and share services rather than funding multiple discrete duplicates. This approach, however, increases the supplier’s risk and cost since they have to ensure these larger central systems have more robust capabilities and sufficient scalability from the outset to handle future additional demand.

Pressure on the suppliers

For IT service partners these new government procurement strategies involve some serious challenges. Suppliers will need to adapt to lower but steadier revenue streams, and look at new ways to optimise operational cost models to compensate for smaller projects, shorter-term implementation cycles (typically 2-3 years) and government resistance to being ‘locked-in’ to a single long-term supplier relationship.

Supplier bid teams must be able to accurately access and understand the risks involved in winning a government contract. They must also have a long-term strategy that focuses not just on the revenue and profitability of a single project, but on how to win additional business by implementing similar solutions across the same infrastructure. It should be noted here that the risks may be greater for smaller players who find they are less able to endure the increased risks and the demands imposed by implementing these highly scalable infrastructures, and may find it more challenging to win further revenue opportunities on their own. Larger providers are typically better positioned to withstand the lean upfront periods in a project, and usually better able to roll out multiple similar programmes for economies of scale. Moreover, government bodies are usually inclined to adopt either their incumbent or a large established supplier.

The seven trends

From our work with government CxOs, here is a recap of the 7 main trends taking place in the industry. Service providers should take serious note.

Reduce Costs – Projects that cannot show cost reductions in 12-15 months will be difficult to justify. Project that increases costs in the short term will require political and business case validation to be authorised.

Local decisions, but centralised oversight – the mantra has been to reduce centralised ‘interference’ in favour of local investment independence. The idea is that cost is ultimately controlled by a centralised approval ceiling beyond which central government has sign off. The result is that local authorities generally seek to stay below this approval ceiling.

Targets have not gone away – although some may claim the previous government’s obsession with targets is over, it is, in fact, as prevalent as ever. SLAs will be even stricter, with sanctions levied when service targets are missed.

Low/No risk mentality – this may be the biggest change in procurement attitudes: a reluctance to incur any kind of investment risk, particularly those involving upfront costs for any projects other than those delivering guaranteed cost reduction.

Small is good, but large can be better – much has been made of the push to allow smaller suppliers access to government and public sector contracts. However, while this is an opportunity for some new mid-tier entrants, if they are to survive they must establish their customer bases quickly and monitor their costs rigorously, starting by shrinking the bid cycle where possible.

Reuse, inter-operability and transferability – government wants cross-department IT projects to be as open and standardised as possible – new or upgrading projects must not lock users into any particular supplier or proprietary technologies.

Pay as You Go – one of the most influential trends today. This strategy indicates government will not pay (or will pay as little as possible) to develop and deploy infrastructures and only as required. They want the flexibility to switch between services and suppliers without the pain of migration costs.

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