UK public sector IT market distorted by mega deals

Although a small number of "mega deals" fuelled strong percentage growth in the UK public sector software and IT services market during 2005, most IT suppliers actually suffered "tough times", according to recent research.

Ovum analyst Georgina O'Toole, who led the research, said that the suppliers struggling to gain market share are those that failed to win the handful of super contracts awarded by the UK government over the past few years.

"The growth in the market was driven almost entirely by these deals. Discounting the impact of deals valued at £1bn plus, the market grew by a far more modest three per cent," she said.

"And discounting the impact of deals valued at £100m plus, the market was essentially flat year-on-year."

Government investment in major ICT programmes, such as the NHS National Programme for IT and the Defence Information Infrastructure programme, along with the outsourcing of large departmental IT functions (e.g. Inland Revenue), benefited those companies willing to take a prime or major subcontractor roles on the deals.

However, O'Toole believes that the number of companies willing to take on the high level of risk associated with such contracts is decreasing. "Among other traits, risk bearers need deep pockets and a tough skin," she said.

For suppliers unwilling to take such risks, Ovum believes that the market is "a very difficult place to compete".

Without a significant slice of the 'mega' deals, those companies chasing small-to-mid size deals, for example in systems integration or application outsourcing, are working in a fairly low growth market.

"If you compare the underlying growth in the UK public sector with the UK private sector, it is actually the poorer performing market," said O'Toole.

"The answer for suppliers focused on winning smaller scale work is to position for the sort of underlying growth that we are currently experiencing.

"This will mean placing a greater emphasis on understanding the changing priorities and dynamics of the public sector market and on establishing and building strong relationships with existing customers."

However, O'Toole also has a cautionary message for those currently riding the mega deal wave. "In the short-term the winning or losing of one mega deal can dramatically affect a company's prospects," she said.

"But more importantly, looking towards the end of the decade we expect a tail-off in government spending so it's no time to get complacent about the current level of growth."