Market management in public procurement: the official guidance note, explained

The key facts

• Published in May 2021 as part of the Sourcing Playbook family, the guidance applies to central government departments, executive agencies and non-departmental public bodies, with the wider public sector encouraged to follow it.
• It applies to all new procurements that constitute outsourcing and have an expected contract value above the relevant public contract regulation thresholds.
• Buyers must conduct a market health assessment and consider how commercial strategy and contract design can be adapted to address market weaknesses.
• Strategic Outline Business Cases must demonstrate that appropriate market assessment and consideration of options to promote market health has taken place.
• A detailed market assessment is expected where government is a market maker, indicatively around 25 percent or more of market revenues, plus at least one other factor: contracts of 5 or more years, novel or contentious services, high value (indicatively £50m plus per year to a department or £200m plus to government), signals of poor market health, or first generation outsourcing.
• Headline indicators include failed bidding rounds, bids received, market shares and the C3 ratio, win ratios and switching costs, with the HHI as an additional indicator where scores above 1,000 can signal concerning concentration.
• The department with the greatest interest in a market acts as lead department; CCS is accountable for common markets where it holds a framework agreement; the Cabinet Office Markets and Suppliers team and the CMA provide expert support.
• No single indicator is conclusive: a concentrated market can still be intensely competitive if barriers to entry and switching are low.

What the guidance note is and who it applies to

The Market Management Guidance Note, published in May 2021 by the Cabinet Office Sourcing Programme, sets out how government should understand the markets it buys from and design commercial strategies and contracts that promote healthy markets over the short, medium and long term. The core argument is simple: better market management leads to more competitive markets, fewer situations where government is over reliant on one or two suppliers, and improved value for money for taxpayers.

The guidance applies to all central government departments, their executive agencies and non-departmental public bodies, and contracting authorities in the wider public sector are encouraged to apply it too. Its scope covers all new procurements that constitute outsourcing and have an expected contract value exceeding the relevant public contract regulation thresholds. The note responds to well-documented failures: the NAO has reported on unsuccessful attempts to open markets to third sector bidders because of resource intensive bidding processes, and the Public Accounts Committee has questioned whether some suppliers have become too big and too important to government to be allowed to fail.

The policy: assess market health and act on it

The key principle, drawn from the Sourcing Playbook, is to assess the health of the market you will be dealing with and consider how your commercial strategy and contract design can be adapted to address potential limitations. Two rules give this force. First, in scope procurements must conduct a market health assessment. Second, Strategic Outline Business Cases must demonstrate that appropriate market assessment and appropriate consideration of options to promote market health has taken place. Departments are encouraged to seek early sign-off of assessments from the Cabinet Office Markets and Suppliers team to avoid business cases being rejected or delayed.

There is no set template. A flexible, risk-based approach applies, but a detailed assessment is expected where government is a market maker or accounts for a large part of the market, indicatively 25 percent or more of total market revenues, and at least one further criterion applies: contracts of five or more years, novel or contentious services, high value contracts (indicatively £50m plus per annum to a department or £200m plus to government as a whole), past experience or intelligence suggesting poor market health such as a risk of three or fewer credible bids, or first generation outsourcing of a service previously delivered in house. A detailed assessment is appropriate for anything meeting the Sourcing Playbook definition of complex outsourcing.

Market management belongs in the preparation and planning phase of the commercial lifecycle and continues through contract implementation. Assessments should be refreshed as a contract nears its end and updated mid-contract where important developments occur, particularly where levers such as an approaching break clause give government a genuine ability to respond. On roles: each department is accountable for the markets it buys from, the department with the greatest interest acts as lead department for monitoring, and CCS takes accountability and responsibility for common markets where it holds a framework agreement. The Markets and Suppliers team provides advice and data, and the CMA can advise on larger or more complex competition issues.

Running a market assessment: questions and indicators

A market assessment starts with a sensible market definition: the collection of products or services connected by competition in a geographic area, which for government outsourcing usually means the services government wants to buy and the area where suppliers and buyers are based. The assessment then works through four blocks of questions. A market overview covers what government needs, the value and complexity involved, and the drivers and trends affecting the market. Market features cover the supply side (which suppliers are active, their capacity, market shares and concentration, and any risk of anti-competitive behaviour such as bid rigging), the buyer side (whether government has clear objectives, good supplier information and the ability to switch), and contestability (barriers to entry, expansion and exit, and the strength of incumbency advantage). Market outcomes then examine levels and trends in price, quality, innovation and choice, before conclusions and an action plan.

The guidance supplies practical indicators. Headline indicators, which should generally be used, are failed bidding rounds, the trend in bids received, market shares and the C3 ratio (the combined share of the three largest suppliers, with 90 to 100 percent a potential concern), win ratios and switching costs. The Herfindahl-Hirschman Index is an additional indicator for deeper assessments, with scores above 1,000 signalling concentration that could be a cause for concern. Crucially, no single indicator is conclusive: high and rising market shares are a prompt to look closely, but if outcomes are good and entry barriers are low, a small number of firms may still be competing intensely.

Promoting healthy markets: the levers

The guidance warns against false economies. Offering fewer, larger contracts can reduce upfront procurement costs but lead to fewer bids, weaker competition and entrenched incumbents in later rounds. Early in commercial strategy development, departments should consider and document the steps they will take to promote healthy markets, building on the weaknesses the assessment identified.

The recommended steps fall into three themes. To address barriers to entry: streamline burdensome processes, consider SME participation in large joint procurements, encourage joint ventures between SMEs, use market engagement to understand and tackle barriers, disaggregate contracts and limit durations where economies of scale are absent, keep risk allocation proportionate so a range of suppliers can compete, design frameworks that let new suppliers join if they meet the same objective criteria, and scrutinise bids against Should Cost Models rather than accepting unsustainably low prices. To address barriers to switching: consider keeping certain assets and expertise in house, contractually require incumbents to facilitate switching at expiry, and manage intellectual property rights so government can move to other suppliers. To create aligned incentives: keep continuity of supply requirements proportionate, divide contracts to maintain competitive tension, use rating systems and outcome-based contracts, allocate growing volumes to high performers, improve performance monitoring information and use interim milestones where KPIs take time to crystallise.

Why it matters and where to start

Market management turns a vague aspiration, healthy markets, into specific obligations with a business case gateway attached. For commercial teams the practical starting point is coverage: identify which upcoming procurements meet the criteria for a detailed assessment, agree lead department arrangements for cross-government markets, and get assessments drafted early enough to shape the commercial strategy rather than justify it after the fact.

The indicator set is deliberately buildable from data buyers already hold: bids received, contract awards, spend by supplier and KPI performance. Teams that maintain this data continuously, rather than reconstructing it every time a contract expires, will find assessments faster to produce and far more persuasive at approval gates.

How eSourcing Data helps

Most of the evidence a market assessment needs is generated inside the procurement process itself: how many bids each tender attracted, who won, at what value, and how incumbents performed. eSourcing Data captures this systematically. Every exercise run through the platform builds a structured record of participation, outcomes and pricing that commercial teams can draw on to calculate bids received trends, market shares and win ratios without a manual data reconstruction exercise.

The platform also supports the remedial levers the guidance recommends. Lotting and disaggregation can be handled cleanly within a single procurement, market engagement exercises can be run and documented before strategy is fixed, and structured evaluation with full audit trails keeps the playing field demonstrably level for new entrants and SMEs. Reporting across contracts gives category leads the ongoing market monitoring view the policy expects between procurements, not just at retender time.

What to do about it

1. 1Screen your pipeline against the criteria in the guidance to identify which procurements need a detailed market assessment.
2. 2Produce market assessments early in commercial strategy development and seek Cabinet Office Markets and Suppliers team sign-off before the Strategic Outline Case.
3. 3Build and maintain the headline indicators, failed rounds, bids received, market shares, win ratios and switching costs, from your own award and spend data.
4. 4Review whether aggregation and long durations in your strategy are creating entry barriers, and disaggregate where economies of scale do not justify them.
5. 5Compare bids against Should Cost Models and resist accepting unsustainably low prices.
6. 6Design frameworks so new suppliers can join mid-term if they meet the same objective criteria as existing suppliers.
7. 7Refresh market assessments mid-contract when break clauses approach or important market developments occur.