Public sector set to pull out of IT spending slump

New TechMarketView report points to upturns for policing and healthcare, with Brexit to eventually fuel investments by central government

The public sector’s spending on IT is on course to fall a little this year, but should recover in the period up to 2020, according to a new market assessment by analyst firm TechMarketView.

Its annual PublicSectorViews report, looking at trends and forecasts in software and IT services (SITS) for the sector, places the spend for 2017 at £11.58 billion, down from £11.62 billion in 2016.

For the next three years it forecasts a compound annual growth rate (CAGR) of 1.2%, taking the figure to £11.72 billion for next year, £11.96 billion for 2019 and £12.21 billion for 2020.

Georgina O'TooleGeorgina O’Toole (pictured), chief analyst at TechMarketView, said there has been a “push-pull” effect on the public sector market.

“On one hand there’s a drive to save money, so there’s pricing pressure and the move to cloud, which has deflationary impact. On the other there is a need to drive more efficiency, which needs up-front investment.”

Policing, although one of the smaller markets, provides the strongest area for growth with a CAGR of 7.2%, taking its total from £425 million last year to £560 million in 2020. This was recently attributed to the financial pressures to work differently, an increasing use of body worn video, and approval by the National Police Information Risk Management Team of Microsoft Azure and Amazon Web Services for cloud infrastructure.

The largest sector this year is central government, accounting for 43% of the total spend, followed by local government with £2.2 billion, then defence and healthcare both with 14%. Only marginal growth is expected in the first two sectors, with a modest CAGR of 1.2% for defence and a much stronger 5.3% for healthcare.

Spending in the education sector is on the slide, assessed at £706 million this year and forecast to decline to £675 million in 2020. This has been attributed to tight budgets in schools and long procurement cycles in higher education.

Brexit effect

O’Toole pointed to the UK’s approaching exit from the EU imposing new demands, especially in central government, that will require significant spending on IT systems. But as the negotiations on the terms stutter, nobody has a clear picture of what will be required and this is holding back any relevant spending for the time being.

Brexit could also restrain spending in some local authorities as they will no longer receive the EU funds that have supported their work in some areas, and there is not yet any sign of replacement funds from domestic sources.

She added that the approach of the General Data Protection Regulation, due to come into effect next May, has also had a dampening effect. Public authorities are still trying to understand its implications for their information systems and some fear it will place new restraints on data sharing, all of which having a knock-on effect on investment.

The report points to SMEs building their share of the market, reflecting Government policy and sales through the G-Cloud, but O’Toole expressed concerns that the trend will be hindered over the next couple of years.

Contract problems

“A few have said they are not happy with the model contracts,” O’Toole said. “For example, in not being able to take on unlimited liability

“We’re also getting signs that Whitehall procurement is rolling back a little to the larger systems integrators (SIs). There’s talk of departments speaking to the bigger SIs in relation to Brexit, and there’s quite a risk averse environment at the moment.”

The report says that unless SMEs are well established their opportunities are likely to be in the supply chain, as sub-contractors to larger companies, than in dealing directly with government.