In a move that appears to be contradictory to government SME policy, government departments are cancelling freelance IT contractors supplied via SMEs and handing their interim staff business to Capita - under orders from the Cabinet Office's Efficiency and Reform Group (ERG).

The Ministry of Justice cancelled all such SME contracts and moved them to Capita's £123m Cipher contract on 31 March, just one day after the publication of an ICT strategy promising to end the "ICT oligopoly" – of which Capita is a substantial part – and do more business with SMEs.

Martin Tucker, managing partner of interim executive agency Gatenby Sanderson, said: "The majority of government departments have signed up to Cipher and that means Capita manage the hiring of interims."

"IT in particular is hit by this," said an IT SME, who requested not to be named. "It might save some money in the short term but it will cost a lot more in the long term because you are just reducing competition. When you create a monopoly supply situation, service goes down and cost goes up; simple as that."