Local government IT spending may be coming out of the doldrums after having been suppressed for the past few years. In doing so it should create opportunities for the reseller channel.
According to figures compiled by the Society of Information Technology Management (SOCITM), which monitors the public sector, local government spending on IT dropped by five per cent to u1,040 million in 1995/1996. A similar decline was recorded in the previous year.
This drop over the last two years has caused some suppliers to pull out of the area. Oracle permitted a management buyout of its local government division in August last year. But Oracle maintains it is still active in the local government arena through its human resources products and Oracle Financials. These are horizontal packages which can easily be used in local government and other fields.
Like many companies Oracle has switched to selling its products into the public sector indirectly. 'Our sales strategy is geared toward working with our partners rather than selling direct,' says Oscar Rook, Oracle public sector marketing manager.
But there are clear signs of renewed interest in the market among hardware manufacturers, software houses and Vars. First Software, which was formed following the Oracle management buyout, has signed a reseller agreement with Sun Microsystems. Sun is a relative newcomer to the market - it only had a four per cent share in 1993 and now has an 11 per cent share in the supply of departmental systems, according to SOCITM.
Sun feels it is in a position to capitalise on local authority markets and that its resellers have an important role to play in the success of the venture. 'If you look at what is happening in local government you will find that councils are looking for specific applications. Resellers and Vars are in an ideal position to provide that. I would say that Sun's resellers are critical to our success,' says Bob Paynter, business development manager for Sun's government sector.
The lion's share of the market has traditionally gone to ICL, which claims to have a 40 per cent stake in the arena. Much of the ICL installed base is a result of the central government policies of the 60s and 70s. Public authorities were forced to pursue a preferential procurement policy which favoured ICL, the UK's only indigenous mainframe manufacturer at the time. In the past most local authority IT work was carried out in-house, but lately there has been a trend towards outsourcing.
In 1991 the Government published a white paper called The Government's Guide to Market Testing, which outlined the rules it expected central government to follow to obtain better value for money. The aim of market testing, which gradually spread to local government, was to discern whether an outside supplier could provide a better and/ or cheaper service than an in-house operation.
The Government also introduced the concept of compulsory competitive tendering (CCT) to local government. CCT dictates that each contract awarded by a local authority must be open to any bidder, including the authority's own internal department. Central government dictated that by the end of 1995, 80 per cent of local authority IT services, formerly provided internally, must be put out to competitive tender. But CCT is not without its critics even though it has opened up opportunities for Vars and resellers in a market they were previously locked out of. But there is no guarantee that a private bid will win over an in-house operation.
In a book published last year, The Truth About Outsourcing, by Brian Rothery and Ian Robertson, the authors make clear that winning local authority contracts has not been made easier by market testing and CCT. Referring to the Government's edict that 80 per cent of all IT contracts must be put out to open tender, the authors say: 'This is not to say that a private tender will succeed. In most cases an in-house bid will be made, either in direct competition with external suppliers, or in a collaborative venture. CCT is time consuming and cost consuming for an authority, and can be divisive.' The authors point out that internal IT departments and external suppliers feel that CCT is weighted against them. The internal team feels it does not have the commercial expertise to operate in a competitive tendering environment, while external suppliers, which do have the expertise, tend to feel the incumbent supplier has the advantage.
In a report published earlier this year, outsourcing company ITnet calculated that at the end of 1995 the value of local government IT outsourcing amounted to u103 million. London boroughs lead the way in outsourcing, but according to the report this is likely to change this year as the reorganisation of local government is completed.
External factors have always played an important role in the purchase of hardware and software in the local authority sector. The change over from the poll tax in the early years of the Thatcher government dictated that systems were written specifically to manage the new taxation system, and many hardware and software manufacturers made handsome profits out of the move. Today's business is driven by local government reorganisation and the advent of unitary authorities.
Unfortunately there is no uniformity about the move toward unitary authorities. In some cases small councils are being merged to form one huge authority while in other cases large councils are being dismembered. One of the major problems, according to Paynter, is that the authorities have to get the right level of kit to carry out the tasks. Many will have to marry incompatible hardware and software systems once the unitary authorities are fully established.
But not everybody is convinced that unitary authorities will lead to a massive upsurge of business in the short term. The prevailing mood in local government is one of uncertainty, according to Dave Dennison, ICL strategy manager for local government. 'There is a general feeling of uncertainty. There won't be a flood of legislation which will dramatically change things. There is a backlash against the high level of spending on IT brought about by the poll tax.' Although unitary authorities are gradually being formed, in most cases the chief executives of these bodies were only appointed last summer and some IT directors have only been in place for a few months, Dennison says.
There are other problems for companies contemplating getting into the local government market. St Albans City Council is currently suing ICL over a system which was late in going live. Although the contract allowed the council to be compensated, the authority claims it lost millions in revenue and has demanded full compensation from ICL. The case will be heard in the Appeal Court later this year. But according to Dennison, even if St Albans wins the case it may not be beneficial to local authorities. 'It could have the reverse effect from what local government would like. It will force the smaller players out of the market and leave the field to the big players,' he says.
This may turn out to be a bigger deterrent than any other factor to reseller organisations entering the local government. The big suppliers would like to carve up the market for themselves and have both the financial and political clout to do so. But whether they can sustain the financial losses which they could incur from actions such as the St Albans/ICL case remains to be seen.
According to some vendors, things could get even worse. The Government-sponsored private finance initiative (PFI), on par with market testing and CCT, is intended to develop a more competitive form of supply to local government. But PFI carries penalties with it, according to Terry Brandon, Data General senior sales executive for local government. PFI dictates that 30 per cent of any contract can be withheld by an authority if the conditions of the contract are not met. But Brandon points out that the 30 per cent which can be withheld is not just a one-off charge as it can be withheld on an annual basis. He believes that PFI will act as a deterrent to smaller companies which are looking to enter the local authority market. 'It won't affect just the smaller companies. We will have to think twice about losing 30 per cent of our revenue too,' he says.
David Gilbert, First Software marketing director, agrees that there is uncertainty about the local government market but believes things are changing. 'There are two things that drive the market: legislative change and technology. 'We have had three revenue collection systems in the past five years which led to a local authority feeding frenzy, but a lot of people opted for the safe option and stayed with their incumbent supplier - usually a proprietary mainframe,' he says.
First Software specialises in the local government sector and until a year ago had the benefit of Oracle's UK development team - and its financial backing - to build products in its three key areas: housing, revenues and benefits. But he offers a word of caution to those Vars which think that entering the market will be easy. He estimates that a #10 million investment went into developing First Software's three core products - not the sort of sum that smaller resellers would find easy to spend.
Within the next year there will be an election. A Labour victory could lead to more changes in local government and changes in local authority IT strategies. There are undoubtedly opportunities in the local authority sector and the market will pick up as unitary authorities establish themselves. But with CCT, PFI and the current prevailing mood of uncertainty looming, it is not a market for the faint-hearted.
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