The Queen’s Speech this morning has done nothing to allay IT industry fears.
Public sector IT professionals are increasingly worried that vital projects will be canned to meet budget cuts. IT suppliers, who earn annual revenues of £17 billion from public sector contracts, are also expressing serious concerns over the government’s near £3bn cuts in project spending.
Last night, outsourcers’ share prices fell dramatically as investors panicked, making evening newspaper headlines: among the heavy fallers, Capita lost 13.5 pence to 785.5 pence, and Serco lost 5 pence to 601 pence.
Paul Pindar, chief executive at Capita, lambasted the government's new plans. He told the Financial Times: “To go out to suppliers and say, ‘We know we have a contract with you, but by the way we’d just like you to give us some money’: I don’t think that’s going to be a productive conversation.”
He urged the government to reconsider changing service delivery to improve efficiency, rather than cutting IT, echoing comments by industry bodies such as the BCS and Intellect immediately criticised the plans, saying that rather than cutting technology it was more effective to use IT to improve efficiency. Dr John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development, warned of the “detrimental impact” on employment.
Jerry Fishenden, former Microsoft chief technology policy and strategy advisor, and now a visiting senior fellow at the London School of Economics, wrote in a blog that the changes would have a big impact, and were “clearly only part of an emerging new vision for public sector IT”.
“We have yet to see any detail of the rumoured changes to the way public sector IT is going to be led and managed in Whitehall,” he said, noting that the under the former Labour government IT spending “dwarfed” all other European nations, and became “perhaps the most concentrated government IT market in the world” considering the small number of suppliers winning the majority of deals.
As the government attempts to open up the market to smaller IT suppliers, Fishenden said it may be trying to force a “change of mindset” among the larger vendors with “much tighter” controls over costs required and benefits delivered. It would also encourage departmental officials to see IT as part of a wider change, rather than the “naive” idea that it is a solution in itself.
Analysts have also stated that it will not be easy for the government to undo its contracts, as many contain terms and conditions making cancellation costly. But the cuts may still go ahead, according Geogina O'Toole, research director at TechMarketView.
"Suppliers such as HP, CSC, BT, Fujitsu and IBM will have all fingers crossed that the axe won’t fall on their contracts," she said. "However it appears that their coming through this period completely unscathed is highly unlikely."
The future of the largest two projects, the £12.7bn NHS National Programme for IT and the £8bn Ministry of Defence DII communications programme, remained “unclear”, she said, with savings in the Departments of Health, International Development and Defence not included in the £6.2bn cuts.
“Some cuts, particularly those focused on the cancellation, curtailment or scope reduction of well-established IT programmes will be tough to deliver this year,” she said. “As a result, we can expect a far bigger impact in 2012-13.”
Yesterday, chancellor George Osborne said “draconian measures” were being taken to cut the cash from programmes, supplier expenditure and consultancy, and warned that it was only the start of heavy cuts coming over the coming years.
This morning’s Queen’s Speech confirmed the abolition of identity cards, and this is part of databases totalling £7bn in lifetime value that will be dumped. The Queen gave only one bit of good news, a commitment to investment in the UK’s broadband infrastructure.
Up to £1.8 billion of IT spending commitments made by Labour in the lead-up to the election is also set to be reviewed, the chancellor announced yesterday. Future IT projects will be capped at £1 million, and aside from project spending some £95 million will be removed from ongoing operational technology costs.
Gary Bettis at Compass Management Consulting, criticised the £1 million contract cap, and warned that the government also paid up to 40 percent above the market rate for IT services. A recent National Audit Office report on procurement detailed heavy overspending by the government on simple IT products.
“Rather than coming up with blanket figures like the £1 million contract limit, there is greater potential for savings if the public sector understands what is driving its IT costs,” he said. “It is equally possible for the public sector to be paying too much for a £1billion contract as it is for lots of £1 million contracts.”
The Forum of Private Business, however, encouraged smaller suppliers to take advantage of the opening market.
Head of policy Matthew Goodman said that “smaller businesses are expert at doing more with less - many of our members have been put under a huge amount of pressure over the past two years or so, but their dedication and attention to detail ensured that their business survived”. He added: “We believe the public sector can learn some valuable lessons from their experiences.”
Larger providers were critical of the changes. Ferenc Szelenyi, EMEA VP at Dell Services, said that public sector IT chiefs should be turning towards outsourcing, rather than away from it “at a time when improving efficiency and cutting costs is imperative”.
“A successful outsourcing strategy provides a medium to long-term solution, which can not only deliver the necessary cost savings to ease the burden of the current deficit, but also provide access to specialist skills and technology,” he said. “This allows any new or existing government to focus on core activities.”
He added that outsourcers were “better placed” than government departments for projects such as transferring paper to electronic records, because they had “already made the investment in the required technical equipment, training and skills”. These are assets that government departments “simply do not possess”, he said.