The Competition has continued with its investigation into Capita’s completed acquisition of IBS, and has apparently completed its initial collection of information, including meeting with a number of third parties. The CC has also published copies of some of the documents submitted and summaries of some of the hearings held with interested parties (unfortunately, but understandably, the published copies of these documents have had confidential and commercially sensitive information deleted). I also note that, whilst the CC has published summaries of its hearing with Civica, it has not done so, to date, for its hearings with Northgate.
In summary, it is hard to find any organisation other than Capita that doesn’t believe that Capita’s acquisition of IBS will reduce competition for Revenues & Benefits (R&B) systems. Likewise, I think all parties seem to agree that the same does not apply to the Social Housing (SH) market where, even after Capita’s acquisition of IBS there remains a significant number of other suppliers around to ensure an adequate level of competition. Quoting from Doug Forbes' (Barony) response – “there should be a minimum of 3 vendors to maintain adequate competition in this important [R&B] market ..... the only solution seems to be — let Capita have the Housing System and auction the R&B to anyone but Capita and Northgate.”
As noted in my posts last year (see Capita/IBS – OFT’s final text - what next?), based on the criteria used by the Competition Commission, it is likely to have little choice but to conclude that the acquisition has resulted in a reduction in competition for R&B systems. But if you read the documents and summaries carefully, you can see some agreement that the market for new R&B back office systems is now very small – the numbers of open tenders in 2003 and 2004 was round 50 per annum, dropping to 14 in 2005 and 12 in 2006.
With English LA reorganisation we are seeing a continual reduction in overall market size – with 2009 reorganisation expected to see the market reduce by 33 systems, and 2010 likely to be around another 22 systems. There is also a general acceptance that the IBS back office system is more suited to small to medium sized authorities, and therefore is unlikely to be seriously in the running for the new unitary council contracts (although I’m sure IBS would disagree with this). As before the merger, Northgate and Capita are really the only two serious contenders in this market for R&B back office systems for larger authorities. If one views district councils as the target market for IBS’s R&B systems, then, over 2009 and 2010 there will be a c 24% reduction in the size of IBS’s market – potentially a major problem for the IBS R&B business both now and in the future.
With such a small number of potential new business wins per annum, it will be increasingly difficult for any supplier to justify extensive speculative development of new functionality or support for new technology. Indeed, it is highly likely that smaller suppliers like IBS would have had to cut back significantly to retain profitability, and may even had to follow other R&B suppliers into just a “support & maintenance” operation for their R&B software.
Certainly, based on the figures quoted, there is virtually no chance of a new supplier entering the market – the upfront cost and risk is immense – the likely revenue totally insufficient to justify the development expenditure – the time to market too great – and then there is always the chance that, just as the development completes, Central Government introduces local income tax, abolishes Council Tax, and/or introduces a centralised system to manage consolidated benefits and remove the need for LA Housing Benefit systems. (Let alone local authorities’ own aversion to taking new, untried systems – most LA’s wish to see three live reference sites before even short-listing a supplier).
Let me repeat that I believe the likely cost of development and testing of a new suite of back office R&B applications from scratch to be near £10M. I would agree with Capita’s assertion that existing financial systems suppliers have some of the necessary functionality and technology already, but that this would only lower the initial development costs by 10% or less. I would also agree with the comments of several parties that LA’s are unlikely to band together to fund or part-fund the development costs for a new entrant.
So where to from now?
The Competition Commission has published new directions for Capita to increase the formal separation of IBS and its management as a totally independent subsidiary of Capita so as to “preserve the possibility of restoring effective competition in the markets affected by the merger through the separation from Capita of a viable, saleable, competitive IBS business”. So clearly the CC is considering a complete separation of the whole IBS business, (i.e. including Social Housing), even though I would have thought that the SH business could have been retained by Capita (perhaps the SH and R&B systems/staff are more inter-twined than implied by the published texts).
In isolation, I still think this would be wrong. Perhaps Central Government could act in a more joined-up way, with the DWP coming up with a clear strategy (and funding?) for R&B software suppliers to enable increased investment (by both existing suppliers and new entrants) – although I fear this is unlikely, and most probably impossible. Unfortunately, the DWP’s funding of LA’s to purchase R&B systems over the past few years has not resulted in what the DWP would have wished for. Going forward, if it wants more than two real competitors, there must be more money put on the table – but hopefully in a way that delivers what Central Government wants.
Without it, even if the CC forces Capita to divest IBS, I suspect that there is a strong chance that there will still only be two main suppliers – Northgate and Capita – with a strong possibility that existing IBS customers will not have the security, nor negotiating power, that they would have had with IBS as part of Capita.
If the Competition Commission were to let Capita continue to own IBS, it has a great opportunity to put in place protection for the interests of existing & future IBS users, and possibly even some safeguards for other Capita R&B customers. Unfortunately, Central Government is not joined up, and I fear that the CC will have no choice but to act against its own restricted remit, and will be unable to provide the initiatives that this market really requires.