“Vendor lock-in” is a phenomenon that creates significant problems for entities participating in public procurement, whether as a contracting authority or a tenderer for a public contract. The purpose of this article is to explain what the term “vendor lock-in” actually means, why this situation is undesirable, and to point out a possible solution outlined by the Public Procurement Office itself.
The equivalent of the English term “vendor lock-in” is “customer lock-in” or “proprietary lock-in”, which refers to a situation where a customer, in our case any entity procuring within the meaning of Act No. 343/2015 Coll. on public procurement (hereinafter referred to as “ZVO”), becomes dependent on the provider and must use only its services, products or technical solutions. Lock-in therefore occurs in particular in cases where the subject matter of the contract, or at least part thereof, is the procurement of a specific service or goods that are specifically individualized, often created by the intellectual activity of the author, most often goods or services that are protected by intellectual property rights. Proprietary lock-in is therefore a situation that makes it more or less impossible for the customer, for reasons of copyright protection of the manufacturer or provider, to accept an offer from another supplier who would develop or manage the original product. Logically, vendor lock-in occurs mainly in progressive and innovative areas, especially in IT. This situation is obviously very advantageous for the supplier, but on the other hand, it completely eliminates competition, which has many negative consequences, especially for the purchaser.
In the past, the possibility of “customer lock-in” was not considered in public procurement, even for contracts in the IT sector. Many public procurers have reached a point where their current contract is nearing the end of its term and it is necessary to re-procure services, maintenance, management, or the information technologies themselves, whether various databases, software, or compatible devices. This is where a fundamental problem arises for the public procurer. The services, technologies, software, databases, and other technologies used to date are only compatible with the supplier's technologies, or, due to the copyright of the original supplier, it is not possible to make these technologies available to another supplier. Public contracting authorities often find themselves in this position because, in order to procure a particular item at the lowest price, they have failed to ensure the transfer of the author's property rights from the supplier to the contracting authority. As a result, the contracting authority is obliged to contact the original supplier for any modification of the technology, servicing or maintenance of the product. The contracting authority is therefore forced to procure through direct negotiations, which, given the other circumstances of the case, may expose it to the risk of violating the Public Procurement Act. Such a situation, where there are many suppliers on the market but only one supplier can compete for a public contract due to licensing rights, threatens competition and may result in increased costs for the contracting authority. However, it should be noted that these costs do not reach the level of the potential costs that would arise if the entire product, including related services, were procured again.
Experts in the field of public procurement have been drawing attention to this problem for a long time. The Public Procurement Office (hereinafter referred to as “ÚVO”) has decided to set an example and show how it is possible to break free from “proprietary lock-in”. In 2020, ÚVO, in cooperation with the civic association Slovensko.Digital (hereinafter referred to as “S.D”), published a case study aimed at highlighting possible solutions to the problem. Cooperation between ÚVO and S.D began in April 2018 with the signing of a memorandum, the aim of which was to create a case study, with ÚVO as the contracting authority. The first step in the public procurement procedure was an informative workshop attended by fifteen entities. At the workshop, the ÚVO informed the market about its ideas. The aim was to familiarize the market with the situation and intentions and to obtain feedback from potential suppliers. The ÚVO then organized preparatory market consultations, preceded by publication in the Official Journal, in which it made as much information as possible available to potential suppliers. After publication and a reasonable period of time to familiarize themselves with the background information, the ÚVO organized another information workshop as part of the preparatory market consultations, which was attended by only seven companies. The aim was to provide the relevant information in a more informal manner. The preparatory market consultations lasted two months and the public procurement procedure was launched on June 28, 2019.
However, in order to successfully eliminate the undesirable situation of proprietary lock-in, it was essential to settle with the previous supplier. The former license was structured in such a way that the ÚVO could use the product but could not modify or sublicense it. After tough negotiations, the ÚVO managed to reach an agreement with the original supplier that committed them to broader cooperation and also allowed for a switch to a new service provider in the future. It was important that the new supplier, or the old supplier, depending on the outcome of the public procurement procedure, was obliged to cooperate with other suppliers after the end of the contract and to provide complete documentation and source code. In view of the above, it was possible to publish as much documentation and information as possible in the tender documents, including source codes, which were necessary for the preparation of bids by potential tenderers.
In this context, however, it is necessary to note that there was an increase in the total operating cost compared to the original situation. It also became clear how important it is to consider “vendor lock-in” right at the beginning of the public procurement process. Although the ÚVO ultimately managed to break free from “proprietary lock-in,” the process was more time-consuming and costly than staying with the former supplier.
The question remains as to what options are available to the contracting authority if it is unable to reach an agreement with the existing supplier, as was the case with the ÚVO. In other words, the existing supplier refuses to agree and does not grant access to the licence, thereby refusing to give up its exclusivity. The Supreme Court in Olomouc stated the following in case no. 2 A 3/2002-75 “If the contracting authority itself causes such a situation of exclusivity, it cannot subsequently develop the system by awarding the contract to the original supplier through a negotiated procedure without publication, arguing that no one else can do so for technical or legal reasons.” It follows from this decision that in such cases, contracting authorities should consider procuring a completely new and comprehensive solution, even if it is more costly.
In accordance with ÚVO Decision No. 4316-6000/2019-OD/3, the contracting authority should first objectively assess the circumstances under which the “vendor lock-in” arose before taking such a “drastic” step, which in certain cases may mean an increase in costs of hundreds of thousands to millions of euros. In the aforementioned decision, the ÚVO states: "An expert opinion has proven that no entity other than XXX has the necessary special know-how, tools or means and interoperability requirements in the European Economic Area, and that technical support and development services for AIS DP cannot be provided by other entities under the existing circumstances, as the time necessary for another market entity to acquire the minimum level of technological know-how would not be less than 1.93 years, i.e. almost two years, and in order to acquire the know-how, an entity other than XXX would have to invest EUR 6,975,020 excluding VAT. The use of direct negotiation in the award of this contract is justified by a situation of objective exclusivity which was not created by the contracting authority itself through its past conduct or in the present when setting the parameters of this public procurement. The situation of exclusivity or lack of competition is not the result of an artificial narrowing of the parameters of this public procurement or of the public procurement process that preceded the creation of the AIS DP. The situation of exclusivity arose as a result of the existence of the above-specified objective technical reasons for which there is no reasonable alternative or substitute solution that would make it possible to ensure the same or similar result by another service through another economic operator in such a way as to avoid disproportionate difficulties and ensure that all requirements imposed on the AIS DP are met. The above facts confirm that it was not possible to use any of the open procedures provided for in the Act when awarding this contract."
Following on from the above decision, we also refer to the reasoning of the Czech Supreme Administrative Court in case no. 5 Afs 42/2012-64, according to which: “Not every case of vendor lock-in effect caused by the contracting authority is considered culpable; sometimes it is considered merely ”clumsy", in which case further development of the system through a negotiated procedure without publication is permissible. This occurs in cases where the performance was complex, the contracting authority could not predict the need for system development at the outset (at a specific level; a general vague idea of future development is apparently not an obstacle), no purposeful conduct can be found in its initial approach, the copyright of the supplier of the work arose naturally on the basis of copyright law (and no disadvantageous licensing agreements were concluded from the outset stating that all copyright belongs to the supplier and no one else may develop the system) and the need to develop the system subsequently arose due to objective circumstances beyond the control of the contracting authority (variability of the contracting authority's tasks, management decisions of superior bodies, changes in legislation). The original public contracts were awarded by the contracting authority without it being aware that it would need to award the public contracts in question in the future.
It follows from the above decisions that contracting authorities should carefully consider their approach, bearing in mind that it is not only a matter of economic considerations, but also of fair and proper competition, and if the contracting authority proceeded with direct award in the belief that the conditions set out in the above-mentioned decisions were met, when in fact this was not the case, it would be acting in breach of the Public Procurement Act, which could result in heavy penalties for the contracting authority.
When procuring information technology, public contracting authorities within the meaning of the Public Procurement Act should also take into account Act No. 95/2019 Coll. on information technology in public administration and amending certain laws, which states in Section 15(2)(d) that "the administrator is obliged, in the preparation and procurement phase of the project, to accept contractual terms and conditions according to which:
- the source code created during the project will be open in accordance with the license terms of the European Union's public software license under a separate regulation, to the extent that the disclosure of this code cannot be misused for activities aimed at disrupting or destroying the public administration information system,
- it is the sole and exclusive owner of all information collected or obtained during the project and the operation of the solution created by the project, including its changes and servicing, and
- in the event of a change of supplier, the original supplier shall provide the administrator with full cooperation in the transition to the new supplier, in particular in the area of architecture and integration of information systems.
A public procurer who is also an administrator within the meaning of the cited law is obliged to conclude with the supplier only such a contract on the basis of which the supplier will provide full cooperation in the transition to a new supplier. Otherwise, the administrator may commit an administrative offense within the meaning of the Act on Information Technology in Public Administration.
The problem of “vendor lock-in” is, by its very nature, a very complex and problematic situation, with many contracting authorities taking a relatively alibi-like approach to the issue and choosing the path of least resistance despite the risk of sanctions. This situation is also problematic in the case of persons under Section 8 of the Public Procurement Act who draw funds from various grants, all the more so because, if they proceed in accordance with the methodological interpretations and instructions of the central coordinating body, the so-called CKO, it is not even possible to proceed with direct award of a contract as in the case of the Public Procurement Act, and it is precisely these, mostly private companies, that are the most vulnerable to the risk of sanctions. Vendor lock-in essentially prevents them from doing so. Vendor lock-in essentially prevents them from doing so.
If you have not yet encountered the problem of “customer lock-in” in public procurement, whether as a contracting authority or an interested party/tenderer, we can only offer you one piece of general advice for the future. If you want to avoid such problems, always consider the risk of “lock-in” and consult experts in the field of law and public procurement in advance.
