With the economy in recession, but the Government making noises about maintaining (or increasing) levels of public sector expenditure to help retain jobs, what does 2009 and beyond hold for Public Sector software suppliers?
In short – not a lot of new business from Local Authorities or Central Government. Local Government re-organisation in England in April 2009 offers some prospects for new business – but in many cases those procurements and decisions on systems to be adopted have already been taken. Systemsolve has been tracking tenders in the OJEU, and has seen a big decline in the number of OJEU advertisements for new systems over the past few months, a trend that we expect to continue throughout 2009, despite Central Government statements that it wishes to maintain levels of expenditure.
Areas where business is expected to grow (albeit only modestly) include Education (although yesterday’s Commons Schools Select Committee comments on BSF may suggest otherwise) and possibly Social Services (although I’ve received differing views on this), whilst the Housing area is expected to maintain its current level of new business. Most other areas are expected to see continuing reductions in the levels of new business coming out to tender.
The effect for most Local Authority software suppliers is that there will be harsh competition for any new business that does come out to tender, resulting in tough discounting and reduced margins. Long term, this can be damaging for the market, as it discourages all but the bravest established companies from putting extensive investment into developing new systems. But unfortunately, with the current financial situation and a General Election in 2010 (following which there will inevitably be significant reductions in Public Sector spending, irrespective of who wins), I fear that we will need to keep the hatches battened down for a few years to come.
Thus the focus for suppliers will be on ownership of the customer base, and looking for virgin areas for new applications or bolt-ons to existing applications. Weak suppliers (and even some strong, but smaller ones) are likely to become targets of the larger, more financially secure companies, and we will continue to see further consolidation.
Existing suppliers will continue to maximise revenue from existing customers, both through increased services offerings and new modules & functionality for existing systems. Larger suppliers will attempt to cross-sell between departments within existing customer sites with limited success, although customers will be tempted by the lower cost of procurement. Surprisingly, procurement routes like Catalist will remain under-utilised, despite their likely lower costs and shorter timescales in procurement.
However, the corollary to all this, particularly for the smaller or bolt-on applications, is that we may see the arrival of new, smaller players with new offerings that are significantly cheaper and potentially technically superior to existing suppliers who have not invested enough in their products. (These new suppliers eventually becoming of a sufficient size and market penetration to be acquired by one of the larger suppliers.......).
So 2009 – a tough year for the software suppliers.
The situation may be different for service suppliers - I’ll cover that and the move to Managed Services and SaaS in later posts...