The UK public sector SITS (software and IT services) market is expected to be worth some £644 million less in 2013 than in 2010.
According to the latest research from analyst house TechMarketView, the market had already declined by two percent to be worth £11.3 billion in 2012.
It expects that over the period 2012 to 2016 the market will struggle to deliver any kind of recovery.
The research suggests that the decline is a direct result of the reforms taking place in central government, where the Cabinet Office is working hard to open up public sector business to SMEs and move away from giving so much work to a handful of large, traditional suppliers that have failed to deliver on projects in the past.
This will only be exacerbated as a number of large Whitehall outsourcing agreements are due to end over the next couple of years, with key technology leaders in the Cabinet Office having confirmed that the agreements won't be renewed in their current structure.
For example, HMRC's £8 billion Aspire contract is already undergoing an extensive restructuring, where Capgemini will no longer be a 'prime' contractor and there are plans to introduce an eco-system of SMEs.
Georgina O'Toole, director at TechMarketView, urged suppliers to react to the changes and to change their delivery models.
"Over the last year, actions to put in place the foundations for further ICT savings have started to have more of a pronounced impact," said O'Toole.
"We expect the acceleration in the pace of change - around use of SMEs, smaller contracts, and increased use of cloud services - to continue, particularly in light of the opportunity represented by the peak in large outsourcing contracts coming to an end between 2014 and 2015."
She added: "Suppliers need to accept the 'new normal' and consider changing their commercial and delivery approaches to suit the new environment."
In related news, it was revealed this week that the government is on the hunt for four new senior IT chiefs, three of which will be responsible for delivering commercial expertise in public sector IT buying and the other in charge of developing an end-to-end procurement service.
The Cabinet Office told Computerworld UK that the advertised opportunities are for roles in the Crown Commercial Service, the evolution of Government Procurement Service, which was announced in July. The Crown Commercial Service plans to centralise spend on common items across government and ensure that government acts as a true single customer.