Tech: Exploring opportunities in the UK public sector software market
This article explores the growth potential for software vendors focussed on the public sector, as well as considerations for investors looking to acquire within this space.
Software adoption in the UK public sector is driven by the aim of streamlining government processes, complying with complex data security laws and increasing overall operational efficiency.
Areas such as Central Government, Defence, Local Government, Healthcare, Education and Blue Light Services all have their own unique workflows and value chains, as well as some commonalities, presenting ample opportunities for software vendors.
Despite increased spend on larger providers (i.e. AWS, Microsoft Azure and IBM) for public cloud hyperscale services, there are still significant opportunities for small and medium enterprises (SMEs) to secure a share of the public sector budget.
Drivers for growth within the public sector software sector
Procurement dynamics indicates improved accessibility for SMEs
- Increased budget allocation: Technology-related framework budgets have increased over time; this trend is forecasted to continue.
- Shorter procurement cycles: The Labour government has pledged to reform and simplify procurement and funding processes.
- SME spend pledges continue: The new Procurement Act, effective from 28 October 2024, aims to increase SME participation in public contracts beyond the 20% in 2023 (reported by Tussell) by simplifying the procurement process and introducing a central digital platform.
Public sector customers are sticky
- Long-term contracts: Many public sector bodies prefer long-term agreements.
- Inertia to change: Public sector staff often prefer existing systems, reducing the frequency of switching.
- High switching costs: Changing systems requires significant time, effort, and financial resources.
Routes to market and expansion are clear
- Clear market entry: Procurement frameworks are increasingly used for large contracts often have fixed cycles which provide visibility on upcoming opportunities; NAO reported that 72% of large contracts were procured through frameworks in 2021 – 2022, versus 43% in 2018 – 2019.
- New customer acquisition: Becoming a pre-approved supplier often removes the need for complex and lengthy selection processes, reducing barriers to entry into broader government sub-sectors.
- Cross-selling into existing customers: Public sector bodies prefer to consolidate their suppliers, which broadens scope for software vendors to cross-sell adjacent technologies or modules.
The business model is stable and predictable
- Predictable revenue streams: High retention rates and recurring revenue ensure strong visibility and stable margins.
- Low R&D costs: The sector favours “good enough” technology over “cutting edge,” reducing the pressure to conduct extensive and resource intensive R&D, which is otherwise common in the private sector.
Considerations when assessing public sector software vendors
From a commercial due diligence perspective, investors looking to acquire in this space should look at the following key areas:
- The product’s current core addressable market and penetration; this analysis should include identifying key growth drivers, the regulatory environment, pricing, adjacent expansion opportunities and the potential for sustained growth.
- Assessing the competitive landscape; this involves understanding what alternative solutions are available, evaluating the product or services’ unique advantages over these alternatives; and assessing the potential threats from new entrants.
- Connecting with a representative sample of customers to understand how public sector budget constraints affect software demand; identify advocates for software adoption within the public sector and key stakeholders in purchase decisions; and assess stickiness.
- Evaluating the software product to establish whether it is mission-critical or optional; the modernity of its tech stack; the difficulty of implementation and support; the presence of channel partners; R&D investment; and the challenges associated with switching provider.
For those interested in exploring public sector software opportunities and understanding our credentials in this space, please contact:
Anjali Obhrai
aobhrai@armstrong-ts.com
+44 7909 094 604
Ifan Dafydd
idafydd@armstrong-ts.com
+44 7792 158 738
Jack Hibbs
jhibbs@armstrong-ts.com
+44 7883 296 346