Monday, 9 March 2009

Capita/IBS – Northgate notes published

In my last post on the Competition Commission’s progress on investigation of Capita’s acquisition of IBS, I noted that the CC had yet to publish the summary of its hearings with Northgate. It would appear that the parties have agreed the editing of the summary notes of those hearings, and the hearing summary is now available for download from the CC web site.

The summary mentions the Social Housing (SH) market, but tends to focus on the Revenues & Benefits (R&B) market where the reduction in the number of suppliers brought about by the acquisition is significant.

I believe that the significant comment in the summary is that “Northgate did not consider that a merged Capita/IBS could dominate the R&B or SH markets, although it would be a very competent competitor to Northgate”. This, combined with comments about the threat of LA’s outsourcing IT procurement and management in their entirety not being seen as a major threat, suggests that Northgate has not strenuously objected to the acquisition (perhaps because Northgate may also benefit from the removal of IBS as a competitor?).

The one area where Northgate appears to have expressed concern is in the creation of shared service operations where Northgate “would be at a disadvantage bidding for shared services arrangements where it was not the incumbent supplier for at least one of the partners” - Capita’s acquisition of the IBS customer base clearly increasing the chances of this happening in the future.

According to Northgate, “the R&B market could sustain three competitors although it could decline to a point where it could only sustain two players” – but (unless their comments have been edited out) don’t appear to be saying whether that point has been reached yet or not (I would argue that it has – particularly when Northgate predicts that “there would be about six tender opportunities a year for R&B software”).

Confirming recent comments on Civica’s involvement in the R&B market, Northgate appears to have said “that Civica was no longer a serious contender in the R&B market, and that Civica had not been actively bidding.” And that “although 3i’s investment made it possible that Civica might re-emerge as a stronger competitor in R&B, the recent economic downturn made this less likely.”

Looking at the chances of a new entrant into the R&B market, Northgate notes that "significant technological or legislative changes requiring large-scale re-writes of R&B software would create opportunities for new suppliers to enter the market". However, later highlights that “the level of upfront investment needed to enter the market, and the time required, as further barriers to entry” (however, Northgate’s apparent estimates of cost and time for development have been edited out). 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 and take over two years to first delivery (and significantly longer to get to a stage of having three live reference sites).

In summary, therefore, unless some significant comments have been edited out, it would appear that Northgate comments have confirmed many of the points already raised in other hearings and documents. I’m sure that the hearings with Northgate have enabled the CC members to get a much better view of the overall R&B market, but I suspect they’ve not helped the CC to any decision other than the acquisition has reduced competition.

My own
opinion remains that 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.

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