Competition between software suppliers in a number of local government policy areas is not working, with the largest one or two suppliers hogging up to 80 per cent of the market, according to a new report by the Office for Fair Trading.

The OFT today released its report on the supply of ICT to the public sector, which called on the new Competition and Markets Authority to “give careful consideration to prioritising an investigation into any evidence of anti-competitive behaviour”.

According to its study, a small number of suppliers have at least 60 per cent of the market in local authority housing, planning and pension administration software, as well as management information systems for schools. It added that these shares have not changed significantly over recent years.

The report said: “Such high and stable shares of supply suggest that competition may not be working as well as it could.

“Suppliers that have been in the market for a long time benefit from incumbency advantages such as in-depth knowledge of their customers’ requirements and business processes, and are in a better position to take advantage of economies of scale.”

It added that these advantages make it more difficult for new entrants to the market to challenge these suppliers’ domination.

The OFT found that the largest five suppliers of both social housing and planning software to local authorities have a combined share of supply of 90 per cent.

It said that similar market domination by a small number of suppliers was found in other software markets relating to office productivity software, virtualization software, relational database management systems,133 and local authority revenues and benefits software.

Lock-in worries

A number of local authorities expressed concerns to the OfT that one supplier of pensions administration software may be acting in ways “which exploit customers who were locked-in to their products”.

But the report said: “Overall, in relation to the concerns raised about pensions administration software, it is not possible to reach any robust conclusions. It seems clear that there has not been ‘customer lock-in’ in the sense that LAs were compelled to transfer to the incumbent’s replacement product (some LAs switched supplier).

“However, it seems equally clear that at least some LAs felt that their ability to switch was constrained.”

The report said that overall, local government is the second largest buyer of ICT products and services in the public sector with 17 per cent of the total market, compared to central government’s 24 per cent share.

Looking at the entire public sector, the report concluded that procurement practices can be time consuming and expensive for suppliers, which can discourage them from bidding for certain contracts.

It also found evidence that suppliers have taken advantage of the information asymmetries which exist between suppliers and buyers.

“For example, aspects of confidentiality clauses may prevent public sector buyers from comparing prices,” it said.

Tacit co-ordination concerns

It also said that although some public sector ICT markets were potentially vulnerable to “tacit coordination” between suppliers to raise prices above what would be expected in a competitive market.

But it added: “Given that unlawful collusion between suppliers is almost invariably carried out in secret (to avoid the significant penalties that may be imposed on businesses and individuals that participate in such collusion), we cannot reach any conclusions about the existence or otherwise of unlawful collusion in this sector from these responses”

Public sector buyers surveyed as part of the study raised concerns about some ICT suppliers used complex pricing that is difficult to understand, making it difficult for buyers to challenge and compare prices.

In its conclusion, the OFT said that public sector suppliers should work with public bodies to make information on bidding, products, services, prices and supplier performance more transparent.

It added that councils should also cooperate to access to specialist advice and support for tendering and managing contracts, as well as standardising services in order to aggregate purchases.

Suppliers, it said, should also consider whether they have adequate compliance programmes in place to guard against the potential for anti-competitive behaviour.

Julian David, chief executive of supplier representative body techUK, welcomed the report’s conclusions on reforming the ICT procurement market.

But he attacked the OFT for including commentary on allegations relating to problems on the supply side and supplier behaviour.

He said: “We are puzzled as to why, along with 11 recommendations backed up by evidence and with appropriate suggestions for improvements – which are urgent and need to be addressed – they have also commented on unsubstantiated allegations of tacit coordination or collusion with a recommendation that because no evidence of this behaviour has been identified by the OFT, another body should have a go at finding some.”