What now for UK Public Sector service suppliers?

Having looked at 2009 from the point of view of the software suppliers, what about the service suppliers?

Firstly, some background - I count the majority of IT suppliers to Central Government as service suppliers, not software suppliers. Most Central Government systems are unique developments or heavily bespoked packages where services form the vast majority of the costs. Local Authorities (and other organisations such as the police) meanwhile tend to purchase software packages (with implementation/maintenance services) from software suppliers (and true services from services suppliers), although this whole area is being muddied by the supply of Managed Services and SaaS (Software as a Service).

LA’s tend to use IT service suppliers for outsourcing part or all of their IT department requirements (but noting that they can also outsource whole business processes, which include some IT elements), and the supply of support and maintenance services.

I’ll cover Health in a later post, but for the rest of central Government I see the current ‘gravy train’ of services work continuing at virtually the current levels – although, at last, I detect that Central Government will be less tolerant to poor performance by its suppliers. However, unless a change in Government brings in a change to the way Central Government procures its IT systems and services, I can’t see any fundamental changes in this market.

Amongst Local Authorities, I detect a move to bring IT back inhouse over the next few years. If I’m right, the impact will not be felt for some considerable time – most existing contracts are for multiple years, capable of early termination on the grounds of default or mutual agreement. But some of the LA’s I’m talking to are saying that they believe they can save significant costs by bringing the IT operation back inhouse and, perhaps more importantly, respond more quickly to the changing requirements of their departmental users.

Specifically, they point at the high fixed annual costs charged for some maintenance elements – where the costs were fixed some time ago when maintenance/support was more labour-intensive than it is now with modern technology. Existing suppliers therefore have the option of reducing their charges (potentially reducing their overall margins) or seeing contracts terminated – either way, I believe we will see service suppliers having an increasingly hard time with, no doubt, some notable terminations and company failures.

Then there is the area of Managed Services and SaaS. To my mind these are effectively ‘bureau’ services that remind me of the time the old Systemsolve ran a bureau, and then we went through an era of convincing those bureau customers of the benefit of owning and running their own systems. Eventually Systemsolve’s bureau closed and the company moved to being a traditional software house.

Now many software companies are trying to persuade customers of the benefits of not owning the software and letting the supplier run the software on the customers’ behalf. For the Public Sector with internal departmental barriers to cross, this can put the procurement control back with the eventual end user departments; and, typically with a much shorter implementation time, I believe that we will see a growth in this area – be it labelled Managed Services, SaaS, Cloud Computing, Aspire or some other new name.

However, the accounting (particularly cashflow) problems for software suppliers are likely to keep this route for software supply limited to those suppliers who have the financial strength to support lack of large upfront fees. This may generate opportunities for service suppliers to act as managed service consolidators, although I think that this will generally be avoided by software suppliers who fear losing control of their customers. (There are other solutions to the financial challenges of SaaS - contact me if you'd like to discuss them).

Shared Services represent a variant of the bureau/managed services solution – and in some cases can extend to a full BPO service. Within local authorities, there is potential for tremendous benefits and cost savings – provided individual authorities are prepared to lose some independence, make compromises and accept changes to historic business processes..... which, of course, many Officers and managers within local authorities would never openly agree to .......

So, Shared Services should be a growth area – but won’t be - my cynicism tells me that it will never gain volume acceptance without significant carrots or sticks wielded by Central Government – something I don’t see before the next General Election (and possibly not afterwards either).

In summary – in Central Government the services ‘gravy train’ will continue with levels largely unchanged. Whilst in Local Government we will start to see a gradual decline as work is taken back inhouse (with a few notable hiccups).