The public sector has been the lifebuoy of the UK software and IT services industries for the past decade, with public sector IT contracts exceeding £10.9 billion in 2009. But with cuts expected, the public sector IT boom is at an end.

Our latest research report, UK Public Sector SITS Market Trends & Forecasts 2010, looks at two specific scenarios dependent on the outcome of the next general election, and predicts that compound annual growth for the UK public sector could range between 2.9% and 0.8% between 2009-2013. The former prediction (2.9%) being the base scenario which assumes a continuation of the status quo with a Labour Government. The latter, more likely scenario, assumes a Conservative Government wins the 2010 election and that tougher spending cuts are put in place after the general election.

2011/12 will begin to see the effect of more significant budget cuts as well as some uptick in outsourcing. By 2012/13, growth in outsourcing – notably in local government – will offset spending cuts in other areas such as consulting, systems integration and software, particularly in defence and central government.

Health is forecast to be the strongest growing sector in both scenarios, followed by Education and Local Government. Central Government, the Police and Defence sectors will experience the lowest, or negative, growth. Budgets in these sectors are less protected than in health and education, which will still require some investment in IT even if large programmes such as the National Programme for IT in the NHS (NPfIT) and Building Schools for the Future (BSF) are scaled back. In Local Government, growth in outsourcing is expected to be particularly strong, which will disguise the effect of budget cuts on other areas of the local and regional government software and IT services market.

When looking at the horizontal verticals within public sector IT, we predict that outsourcing will replace project services as the largest horizontal segment by 2013, with 58% of the market (up from 48% in 2009). Project services are set to decline to just 24% of the total public sector market by 2013 (down from a high of 30% in 2009).

Cuts to IT spending could have a significant impact on the delivery of public services in some areas. The £12 billion National Programme for IT in the NHS (NPfIT) is a good example. The controversial programme is widely expected to be curtailed or reduced in scope whichever party wins the next election in a bid to reduce public spending. If this is not done sensibly then it will be patients and tax payers that suffer most. Patients, because IT systems can have real benefits in terms of improved efficiency, reduced waiting times, reduced clinical risk and an improved patient experience. And tax payers because renegotiating contracts with existing suppliers and procuring alternative systems could be a very expensive and lengthy business.

However it’s not all doom and gloom. There will be opportunities for SITS suppliers, particularly those in the outsourcing business, which will be responsible for practically all the growth in the UK public sector over the next few years.

Fundamentally, measures to cut costs and control spending, or make savings by improving efficiency, will be at the top of public sector agendas for the foreseeable future. CxOs will only be persuaded to invest in SITS if there is a demonstrable, and quick, return on investment. But there will still be demand across the public sector for products and services that have a proven ability to reduce costs or deliver savings through improved efficiency.

Outsourcing – both of IT and business processes – will continue to grow strongly in all areas of the public sector as government organisations look for ways to reduce their total costs by bringing in private sector partners with more efficient processes and the ability to tap into economies of scale. The local government outsourcing market is expected to be especially buoyant with a number of large deals already out to tender.

Shared services are also set for continued growth across the public sector driven by the need to improve efficiency and reduce costs through de-duplication, collaboration and standardisation as outlined in the Government’s ICT Strategy. Initially, we expect to see growth in the sharing of back office processes such as finance & accounting, HR and payroll as well as ICT services such as desktop support.

The gradual trend towards greater use of offshore resources to deliver SITS services to UK public sector organisations will also continue as pressure to reduce costs mounts and things that were ‘unthinkable’ just a few years ago become a possibility.

Numerous high-profile data leaks within the public sector in recent years and the government’s commitment to make government ICT carbon neutral by 2012 will also make data security and sustainability key priorities over the next few years.

In conclusion, whether a Conservative or Labour Government comes to power at the next General Election, one thing is clear – public sector IT spending in the near term will see budget cuts, especially in areas such as consulting, systems integration and software. However, this is likely to be off-set in part by growth in outsourcing, particularly in local government.  

This article is based on the latest predictions by TechMarketView, the leading analyst firm focused on the UK software and IT services market, in the first report of their newly-launched public sector research programme: UK Public Sector SITS Market Trends & Forecasts 2010.