The ICT Project Moratorium, and the Law of Unintended Consequences

As part of its drive to find £6Bn in savings in this financial year, the Cabinet Office has introduced a moratorium on all new ICT contracts above £1M in value, and initiated a review of all ongoing projects to identify opportunities to cut, rescope or reduce the cost.  It has also stated its intention to renegotiate existing large ICT contracts to reduce costs, and extend the involvement of smaller companies in the provision of ICT services.  Between them, the top 9 ICT providers to the public sector received nearly 60% of all public sector IT spend in 2006.  Tens of thousands of small and medium sized enterprises (SMEs) pick up the remainder.

Sounds great.  As a very small enterprise, I should be rubbing my hands with glee at the new opportunities that will be opened up as a result.

I'm not, though.  The law of unintended consequence applies to pretty much every government initiative, and this one is no exception.  The main casualties of this process will be small to medium sized ICT providers, and the main beneficiaries will be larger firms that are its target.  Here's why.

For the next 3 to 9 months, pretty much no new ICT contracts will be signed (beyond those where the contract is required to support a critical public service).  Across the board, public sector ICT suppliers are already seeing their sales pipelines collapse, and cashflow reducing.  At the same time, public sector customers are knocking on the door demanding price cuts of 30% as a starting point for negotiation, on the (usually mistaken) assumption that they have been ripped off for years, and now its payback time.  Tesco's treatment of its suppliers will be nothing compared to this.

For smaller ICT providers, this combination has the potential to be fatal.  A major cashflow hit is difficult to bear if your turnover is modest, and they lack the negotiating power to resist arbitrary price cuts from their biggest customer. 

Larger providers are in a much better position, even if it doesn't feel like it.  Their contracts are usually long term, with high termination costs, and they will generally have the financial strength  to survive a short cashflow problem.  They also tend to be delivering the most critical services - the ones that, for all the bluster, public sector customers simply cannot afford to put at risk.

So, when the negotiations start, it will be the smaller firms that are forced to accept blanket price cuts, reductions in scope and long delays before new orders are placed.  The main effect of the moratorium will be to drive SME's away from the public sector, or out of business altogether. 

Larger providers will sit out the storm, knowing that this time next year many of their smaller, more nimble competitors will no longer be there.