Business

Will IT firms survive the squeeze?

Quangos and consultants are feeling the wrath of government cuts. But IT suppliers seem strangely optimistic - even though they are on the hit list too.

Image caption David Chassels, head of Procession, does not believe his business will lose out

David Chassels does not look like a man whose livelihood is at stake. But he runs a small IT company which is utterly dependent on government contracts. And his biggest customer has just turned nasty.

After years of drastically over-budget and over-schedule IT projects, like the £12bn-and-counting NHS "Connecting for Health" scheme, the government is cracking down on IT spending.

The UK software and IT industry relies on the public sector for nearly a third of its £33bn in revenues. But existing government contracts are being scrapped or renegotiated, and new contracts are being capped at a relatively small £100m.

All of this ought to worry Mr Chassels, but he is still smiling. In fact, he wants the reforms to be as tough as possible. Why? Because he believes they will hurt bigger IT companies, while benefiting his.

"The new government is tired of tax payers being ripped off by big IT suppliers. Now they are going to become an intelligent buyer", he says.

His optimism may seem reasonable. The Cabinet Office's "Draft Structural Reform Plan" does indeed mention "greater use" of small and medium-sized suppliers. And yet the picture is not that simple.

Confidence or complacency?

The surprising thing is that big IT companies seem just as confident about their future as Mr Chassels is about his. And they cannot both be right.

A recent survey showed that 82% of IT suppliers, including some of the biggest players in the UK, said they supported the government's reforms. And why would they support changes that reduce their profits?

Image caption Techmarketview's Georgina O'Toole found most IT companies actually support the reforms

The person behind the survey, Georgina O'Toole from research firm Techmarketview, has one possible answer. She believes that big players are still confident because the government has no choice but to continue doing business with them.

"IT companies cannot just back away from government projects, because they would lose too much business. But government cannot back out either - it will still have to rely on suppliers."

Ms O'Toole thinks the government will have to change its mind about the £100m cap, because it will need big IT projects if it wants to run the country more efficiently. And if one big project is replaced with 10 smaller ones, that will only make things harder for the government to manage.

One large IT company, Atos Origin, acknowledges that government orders have completely dried up - a scary situation when those orders account for 50% of its business. Yet it believes this is only a short-term problem.

"We don't feel we are being punished, either as a company or as industry", says Kevin Saunders, who heads the Atos Origin's public sector projects in the UK.

Far from being against the reforms, Mr Saunders wants them to be implemented as quickly as possible so that business can resume.

"We expect there to be more projects in the long-term - especially online services that allow interaction between the government and the public."

Optimism feigned?

The irony remains that both big and small IT suppliers want the government to stick to its guns, even though at least one of them is in the firing line.

But the big IT companies could well be bluffing. Tellingly, even Ms O'Toole does not fully believe the results of her own survey, because the respondents have good reason to feign optimism.

"If a supplier is not seen to be supporting government tackle the deficit, then they will not be viewed very well in the future" she admits.

In a statement to the BBC, Cabinet Office Minister Francis Maude said: "All successful companies know that tighter control of some things at the centre, like information and communications technology, big projects procurement, and consultancy spend, can help to achieve major savings.

"I'm sure that is why the IT industry backs our approach to cutting out waste and unnecessary costs from central government spend."

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