English public sector IT spending soars while small cohort of vendors dominate market

With English public sector IT spending continuing to rise, concerns have been raised about the potential of government bodies relying on a select number of vendors.

Recent research from Tussell shows that the share of public sector spending on IT reached £173 billion last year – a 10% rise compared to 2021's figures.

This increase, the report found, means that public sector IT spending has more than doubled in the last five years.

Much of this growth can be attributed to increased spending on IT infrastructure and capabilities during the pandemic. Similarly, IT expenditures increased despite a decline of 4% in overall government spending.

“2022 was a politically and economically turbulent year, in the UK and beyond,” Tussell said in its report. “Despite - or because of - these pressures, public procurement was resilient.”

“In England, the government continued purchasing at record levels, and market opportunities for suppliers remained plentiful.”

Large Vendor reliance

However, while IT spending continues to surge, previous research from Tussell shows that public sector bodies are relying heavily on a comparatively small selection of major IT providers.

The 2022 ‘Tech Titans’ report found that public sector organisations increased IT spending from £11.5 billion to £12.6 billion between 2020 and 2021 – and 89% of funding was split among the biggest 150 IT providers.

The remaining market of around £1.5 billion was split among 5,298 other IT suppliers, Tussell said.

Atos, Capita, Computacenter, Capgemini, and BT were all highlighted as the top core vendors preferred by public sector organisations.

As this trend is expected to continue, Tussell suggested at the time that “£9 in every £10 spent on IT in the public sector will go to one of these 150 companies”.

“Tech Titans dominate the market,” Tussell said. “But they are competing strongly with one another; since 2018, only one company - Capita - has maintained the same position in our ranking.”

Martin Wilson, CEO at OneID, said that public sector bodies should acknowledge the value and agility that smaller SMEs and IT providers can offer.

“The government needs to get more creative than just outsourcing projects to large consulting firms and paying extortionate fees in the process,” he said.

Alex Fishlock, CEO at Catapult.cx said that public sector IT tenders can prove highly inhibitive to smaller suppliers and can, in some instances, fail to deliver true value for organisations.

“Public sector bodies are issuing tenders that are small in value, believing that small software engineering projects delivered for small amounts of money end up with a lower overall cost of an IT department,” he said.

“Small tenders still cost money for the vendors to bid for and win; this cost inhibits smaller vendors from bidding, since the amount of effort to win the bid is disproportionately high against its small value.

“This means that smaller vendors are typically unwilling to take on loss-leading tenders to gain a new customer.”

In addition, current tender frameworks which often benefit larger vendors can result in poorer outcomes for digital transformation projects.

“Multiple projects delivered by multiple vendors builds system and features silos, with little opportunity for reuse and cross-system collaboration. The cost of supporting disparate systems from multiple vendors becomes inefficient as the number of systems scales,” he said.

“Public sector bodies are doing less and less direct award of contracts, so even where a known vendor is preferred, the tender process is usually chosen to ‘box tick’. This risks existing vendors being unwilling to tender again; since the process of tendering is so expensive," Fishlock added.

"The result is a constant vendor churn through repeated tenders. Since a tender favours larger vendors, over time all the small vendors lose business to the larger vendors.”

Smaller vendors are making in-roads

Although larger vendors do account for a significant portion of public sector IT contract awards, Tussell revealed that smaller IT providers and newcomers are making inroads, especially in healthcare.

Among these was data analytics firm Palantir. The US-based firm has secured a number of sizeable contracts with government agencies and public health bodies over the last two years.

Palantir’s Foundry platform, for example, has been used by the NHS to make better use of organisational data. Meanwhile, the company’s software has also been introduced at NHS trusts across England to reduce patient backlogs.

Tussell added that, increasingly, larger providers are also seeking to collaborate with smaller organisations to maximise impact and improve the value of public sector IT contract bids.

“14 out of the 150 Tech Titans are SMEs (9% of the total), but many of the big companies want to partner with SMEs either to leverage best-of-breed solutions or to enhance the social value of their bids,” the firm said in its report.