House of Commons - Public Accounts

Select Committee on Public Accounts Tenth Report

1 On negotiating the Memoranda

1. In May 2001, Microsoft announced new licensing arrangements to operate worldwide from August 2002, which OGC, departments and local authorities estimated would cost an additional £40 million to £60 million per year. In response OGC started negotiations with Microsoft to secure more favourable terms.[2] Initially the company was unwilling to negotiate with OGC and it took five months to conclude a Memorandum of Understanding. Fundamental to achieving a deal was the willingness of the wider public sector, including local authorities and the devolved administrations, to co-operate with OGC during negotiations.[3]

2. OGC subsequently secured similar agreements with Sun Microsystems, Lotus/IBM, Corel and Oracle. OGC estimated that if the public sector took advantage of these Memoranda, there would be a total saving of some £100 million in the three years from March 2002 through a combination of direct price reductions, productivity improvements and efficiency gains and that most of the saving would be generated by the deal with Microsoft. By January 2003 the Memoranda had already saved £31 million in direct price reductions mainly from Microsoft.[4] OGC estimated the direct price savings achieved as £49 million at the end of September 2003 (Figure 2). The initial estimate of the savings of £100 million was low because there was no precedent in the public sector of such a deal. Given the fast moving nature of the software market, OGC believed there was a basis for looking at the Memoranda again. OGC have opened up discussions with Microsoft to see whether they can obtain further improvements in the Memorandum.[5]Figure 2: OGC's estimates of direct price reductions

Date Direct price reductions

OGC's estimate of the savings to be achieved for the public sector as a whole March 2002- March 2005 £36 million

OGC's estimate of the savings achieved for the public sector as a whole By January 2003 £31 million

OGC's estimate of the savings achieved for the public sector as a whole By September 2003 £49 million

Source: Office of Government Commerce

3. Microsoft requires its customers not to reveal to third parties the level of discount they receive. Purchasers are therefore unable to determine whether the price being offered is better than those for other customers.[6] OGC obtains market intelligence from a number of sources to assess the worth of the Memoranda, but considered it difficult to compare them with other agreements offered to large corporations who could commit upfront to the purchase of large volumes of software. The Memoranda, by contrast, offer no guarantees about purchase volumes, since these would depend on the procurement decisions of individual departments.[7]



© Parliamentary copyright 2004	Prepared 26 February 2004