UK Public sector outsourcing hits £43bn
Public sector IT and business process outsourcing (BPO) will grow by 78 per cent to an annual spend of £6bn by 2006-07, according to researcher Kable.

Sarah Arnott, Computing 02 Jun 2005

 The IT sector represents just under 10 per cent of the government's overall outsourcing spend of £45bn per year across blue- and white-collar services, and is the biggest single area.

By the end of this year the total value of all IT and BPO contracts will be £43.4bn, 22 per cent higher than last year. And the figures will continue to rise, says the report, published last week. By 2007 the total will reach £62.5bn.

The £6bn Connecting for Health programme and the £3.5bn Defence Information Infrastructure (DII) deal are two of the most recent programmes contributing to this growth.

'The annual spend on IT outsourcing in the NHS increased from £132m in 2002-03 to £725m in 2003-04,' says the report.

Future increases will rest on major plans in the pipeline, including the Lorry Road User Charging (LRUC) scheme, the Department for Constitutional Affairs' Disc programme and Home Office proposals for national identity cards, all valued at more than £1bn.

Central government is currently responsible for the biggest share of the spending, with 26 per cent or £11.9?bn annually. Defence is second, with 19 per cent or £8.1bn; then health, with 18 per cent or £7.6bn.

But outsourcing growth in central government is flattening out. Last year it represented 32 per cent of the overall public sector market. And it is set to drop further, from its current level of 26 per cent, to 22 per cent by 2006-07 as other areas continue to grow.

The fastest-growing markets in the coming years will be local government, criminal justice and education. In two years' time criminal justice will overtake defence as the second largest sector, consuming 17 per cent of the total, with local government third, followed by health, predicts Kable.

IT infrastructure dominates public sector spending on outsourcing, with 57 per cent of the total value. In contrast, outsourcing of business processes represents only 21 per cent, telecoms 17 per cent and managed services five per cent.

Kable predicts that BPO could start to catch up by 2007-08, because of major deals such as LRUC and ID cards.

BPO spending is also likely to go up as public sector organisations struggle to meet the Chancellor's efficiency targets to strip £21.5bn out of annual administrative costs by 2007-08.

'The public sector is still much keener on IT infrastructure outsourcing than the private sector, whereas there is more growth in BPO in areas such as financial services,' said Tola Sargeant, analyst at research group Ovum.

'But towards the end of 2008 we will see an increase in the use of BPO, as the efficiency agenda and the move towards more shared services really begin to take off.'

The continuing strong growth in public sector outsourcing spend needs to be matched with a commitment to internal skills development, says Sargeant.

'It is important the government keeps a strong intelligent customer function, including the development of the management skills required to manage the outsourcing relationship effectively,' she said.

'I am relatively confident the government is tackling this because it is talking about improving skills, in particular recruiting people and training them with the necessary project management.

'That experience is one of the reasons we have seen people such as head of egovernment Ian Watmore being recruited in from the private sector.'

Kable's figures also show that the DII deal has allowed supplier EDS to re-assert its dominance of the sector.

EDS' market share has increased to 21 per cent, up from 15 per cent in 2003-04 - but still far below its peak of 32 per cent in 2002-03. The loss of the Inland Revenue Aspire deal, and the company's failure to win any of the Connecting for Health contracts, were key factors in its decline.

Along with EDS, BT ? with 11 per cent ? and Capgemini and Fujitsu - with seven per cent each - account for nearly half the total contract values for public sector outsourcing.

'One or two big deals can make all the difference to a supplier's place in the table, so the big question is to see who will win the big contracts,' said Sargeant.

'I don't expect EDS to be toppled from the number one spot in the short term, not least because of DII; but a lot of that business will be passed to sub-contractors.'