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Does the UK Budget have a silver lining for the ICT market?

The Chancellor of the Exchequer confirmed in the Budget that he would seek £15 billion per year of ‘efficiency savings’ across the public sector by 2013/14 compared to 2007/08. Significant back-office and IT savings will be sought and ICT suppliers will be expected to step up to the mark and take a radical look at the cost of services they sell into the public sector. The silver lining will only come should departments and agencies look increasingly to ICT outsourcing to achieve the targeted savings, or turn to the supplier community to help them finally tackle the shared services agenda with a sense of urgency.

The Operational Efficiency Programme and IT

To achieve the identified savings, the Efficiency Programme target announced in the Comprehensive Spending Review 2007 (CSR07) for 2007/08 to 2010/11 has been increased from £30 billion to £35 billion, and additional efficiency savings will be sought over the next Spending Review period, rising to £9 billion per year by 2013/14. These savings will be found in back-office functions and IT, improved procurement, and better collaboration and innovation at the local level.

For ICT suppliers, the relevant savings relate to back office and IT – the Operational Efficiency Programme (OEP) workstream led by ex-Logica chairman Martin Read. Read has identified a potential 20–25% in savings in the back office, or £4 billion of the total estimated spend of £18 billion per year, by April 2012. He has also identified a potential 20% of savings, or £3 billion of the total estimated spend on IT of £16 billion per year, over the same period.

Potentially significant for the ICT market

The government will take into account these estimated achievable savings when deciding on future departmental settlements. Departments and agencies will not be able to ignore them and they will expect their suppliers to feel some of the ‘pain’ with them. Suppliers can expect existing ICT outsourcing contracts to be scrutinised for potential savings and renegotiated as a result; this has already occurred at HM Revenue & Customs (HMRC) and the Department for Work & Pensions (DWP), and we expect other departments to follow suit. However, it will take some time for these changes to filter through such that the impact on supplier revenues will likely be seen no earlier than 2011 or 2012. There will also be increased scrutiny of ‘off-contract’ spend, and the days of substantial expenditure over and above the initial contract value could be coming to an end. Suppliers with existing major outsourcing contracts should be preparing themselves for delivering more for less revenues and lower margins going forward.

Nonetheless, there is also potential for further outsourcing in some areas of the public sector as departments and agencies look to shift from internal spend to external suppliers in their pursuit of savings. Ovum estimates that the UK public sector software and IT services market was worth just over £7 billion in 2008 (excluding business process outsourcing), or just 45% of the total IT spend identified by the Operational Efficiency Report. It is in local government (including police forces and educational establishments) that we believe much of this potential could be released, as there is currently a far lower proportion of IT spend directed to external suppliers. 

On a positive note, Read has highlighted the potential for savings to be achieved via greater use of shared services and, potentially, the increased use of outsourcing in the back office. We estimate that the UK government’s current spend on white-collar business process outsourcing is in the region of £1.7 billion; this is a drop in the ocean compared to the estimated £18 billion currently spent on back-office functions. However, suppliers will only feel the benefit of this if widespread interest in shared services and IT-driven transformation is finally kick-started by this latest round of cuts.

A further £6 billion will be sought by improving public sector procurement. This might mean a reduction in the time taken to procure major projects, which is something that S/ITS suppliers have been seeking for a while, but it will also mean that the public sector will be using its muscle to seek greatly reduced unit costs for goods and services.

A step change is required for any real impact

It is difficult to avoid comparing the OEP with Sir Peter Gershon’s 2004 Efficiency Review. To date, some of the more forward-thinking public bodies (mainly in central government) have bought into the ‘transformational government’ vision, but the majority have not, so most developments have been small-scale or piecemeal. It doesn’t help that the government has hailed the 2004/05 to 2006/07 Efficiency Programme as a great success, pointing to the fact that it achieved savings of £26.5 million (20% over target). It is difficult to avoid the conclusion that this was largely a numbers exercise. The drive to reduce the number of health authorities and local authorities indicates that some in government believe that more drastic measures are required.

The language, numbers and expedients proposed in this latest report go over familiar ground, but the economic and political context has changed. This increases the urgency that the government will attach to achieving the goals of the OEP, but authorities in local government will take a more pragmatic view. They don’t need to be told that their financial situation is dire. They are already adept at maintaining front-line services despite the pressure on resources without seeking radical expedients. What must happen now is for the Treasury to convincingly win the argument for shared services and IT-driven transformation. 

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