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Avoiding getting locked in by one contractor or technology

Avoiding getting locked in by one contractor or technology . Research Department. Generating lock in is, in same cases, part of the vendor’s strategy . However, this is a rather unexplored issue in Chile´s public procurement. IT Lock-in : when it happens?.

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Avoiding getting locked in by one contractor or technology

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  1. Avoiding getting locked in by one contractor or technology ResearchDepartment

  2. Generatinglock in is, in same cases, part of the vendor’s strategy

  3. However, this is a rather unexplored issue in Chile´s public procurement

  4. IT Lock-in: when it happens? • When switching costs are important. Some are: • Learning costs: When a changing supplier implies to learn a new technology. It may involve adjustments in HHRR. • Transactional cost: When changing supplier implies additional payments to the current supplier or when changing supplier involves additional investments in equipment, infrastructure or others. • Contractual or pecuniary switching costs: Examples include airlines’ “frequent-flyer" programs, and “loyalty contracts" that rebate a fraction of past payments to consumers who continue to patronize the firm. These pecuniary switching costs are a form of quantity discount or bundling. Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  5. IT Lock-in Router´s example Common knowledge tells that switching costs –due to lock-in- play a large role in IT markets competitiveness (Klemperer, 2005). Profitability in these markets appears to be driven by the size of the customer base and customer retention, which is at least partly determined by switching costs. Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  6. Lock-in consequences Klemperer (2005, p 536) Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  7. Measuring lock in in public procurement What kind of purchases reveal in Chile, eventually lock-in? (exemptions to public tender): Categories: IT services, IT and telecommunication's supplies, Software Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  8. Results * Figures are limited to specific types of direct awarding ** Figures are for 2010

  9. Which vendors? (2010) Top vendors contracted through direct contracting

  10. How important is direct contractingto these vendors? Top 5 affects163 institutions Plus in this industry the use of partners is a very common behaiviour Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  11. Top buyers contracting through exemptions(limited categories and exemptions -2010)

  12. Minimizing lock in risk

  13. Through procurement policy • IT neutrality principle • Non discrimination principle through proprietary formats use minimization • Considering interoperability and portability standards Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  14. Working with trade associations Which is the position of Trade Associations? How do trade associations interests relate to this issue? Are they able to help preventing this kind of practice? Which actions do TA take against lock-in? if any Gobierno de Chile | Ministerio de Hacienda | Dirección ChileCompra

  15. The role of anti trust authorities In the TA guide (*) (August 2011) the FNE explicitly considers as a risk: Fixation of technical standards “[…] The settlement of technical standards by an TA can negatively affect competition if it hampers the entrance of new competitors […]” (p. 29). Furthermore, FNE imposes a view in which TA must take a positive action, against non-competitive standards.

  16. Conclusions • The total amount awarded through procedures that may reflect some kind of lock in practices reach up to 14% for IT categories. Moreover, in some subcategories like software, this percentage can go up to 30%. • For some vendors, direct awarding represents a significant proportion of their contracting with the public sector. Oracle (99.9%), ESRI (89.9)%, SYNAPSIS (86.3%), Microsoft (70.2%), EVERIS (57.8%) , ENTEL (52.7%). • In Chile, some actions have been taken from the procurement policy point of view. Recently antitrust authorities have been taking part in the discussion as well. • Trade associations’ interests are unclear, they could have a more active role in this issue.

  17. Diversification seems to a fundamental strategy to reduce any risk associated with this topic

  18. Avoiding getting locked in by one contractor or technology ResearchDepartment

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