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Parting shot from OFT regarding supply of ICT to the public sector

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16/04/2014

ICT suppliers and their public sector customers both need to take action following the publication of the results of the OFT’s market study into the sector. In particular, the OFT recommends that:

  • its successor body, the CMA, should prioritise any future antitrust investigation into the sector and warns suppliers to review their existing competition compliance programmes and procedures;
  • public sector buyers take steps to improve data collection regarding prices and supplier performance to enable more effective management of contracts and appointments; and
  • buyers should engage with suppliers earlier in the procurement process (at tender / specification design stage) to assist in identifying alternative suppliers.

Background

We reported in October that the Office of Fair Trading (OFT) had launched a market study into the supply of information and communications technology (ICT) to the public sector.  On 25 March, just a week before its competition law powers and duties were transferred to the Competition & Markets Authority (CMA), the OFT published its report setting out its findings on competition in the sector.  The OFT’s conclusion is that competition could be working better in the supply of ICT to the public sector and it sets out various recommendations to make this happen.

Problematic features of the market

The OFT found that there are barriers to entry in the market and that buyers are deterred from switching between suppliers. In particular, these barriers are:

  • overly complex procurement processes in the public sector
  • limited early engagement with suppliers, meaning that alternative solutions and suppliers are not considered when designing tender specifications
  • the inherent advantage held by incumbent suppliers (such as providing bespoke services or having detailed knowledge of the buyer’s business) is acting as a barrier to entry. The OFT noted in particular the use of specialist software for local authority housing, planning and pensions administration and the attendant lack of switching in those parts of the market.

Supplier behaviour

The OFT found that ICT suppliers have much greater knowledge of the quality and suitability of ICT products and services than their public sector customers. This disparity means that buyers can struggle to make informed choices when buying ICT, a problem compounded by a lack of transparency by suppliers, such as through the use of opaque pricing structures.

The OFT also reported a lack of cooperation from suppliers when asked to assist public sector customers in migrating to a new supplier. Examples given include imposing high charges for data migration and using bespoke or proprietary solutions to encourage buyers not to switch.

Following up on allegations previously made in a Public Administration Select Committee report of collusion between suppliers in the sector, OFT found there was insufficient evidence to either establish or rule out whether suppliers were acting in breach of competition law.

The OFT therefore recommended that its successor body, the CMA, should prioritise any future antitrust investigation into the sector and sent a warning shot across the bows of suppliers to review their existing competition compliance programmes and procedures, i.e. to effectively “get their house in order” ahead of any investigation and ideally to avoid one.

Buyer behaviour

On the other side of the coin, buyers lacked sufficient expertise to enable them to procure or manage contracts effectively. Whilst the OFT accepted that there is evidence that the public sector is improving in its approach to procurement – and that the government is taking steps to simplify processes (the new procurement Directive) – there is still room for improvement to enhance competitiveness in the sector. In particular, the failure of the public sector properly and routinely to collect data acts as an impediment to effective comparison later on.

Outcomes of the investigation

The key outcomes are identified above in the introduction. The supply of ICT to the public sector has clearly been identified as a priority and suppliers to the sector can expect the CMA to follow up on the OFT report.

We recommend that suppliers: conduct an internal audit encompassing tendering processes, customer contracts and relationships with competitors; introduce any appropriate changes to policies and procedures; and re-fresh their internal training, to help ensure compliance with competition law across the business.

At the same time, there are processes which the public sector should look to implement more proactively such as monitor and manage relationships with, and the appointment and performance of, suppliers and to help place themselves on something approaching a level playing field in negotiations with suppliers.

Additionally, the public sector should re-examine the way it uses public procurement processes to ensure they are not unduly costly, complex and lengthy and ensure that in their approach to scoping and evaluation of requirements they ensure they maximise the advantages of fair and open competition.

At Walker Morris our multi-disciplinary team, including competition law, public procurement, commercial, data protection, outsourcing and ICT specialists advises the full spectrum of ICT suppliers and customers from both the private and public sectors. Should you require further information or assistance on the matters raised in this briefing note, please contact a member of our Competition or Public Sector Teams in the first instance.

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