A deal designed to save the public sector tens of millions pounds on Microsoft licensing costs may yield only a fraction of the projected savings because many government departments are reluctant to commit to the initiative.

Brokered by the Office of Government Commerce (OGC), the deal was designed to aggregate the spending power of the public sector to negotiate a significant discount on software licences from Microsoft.

But MPs have been told that the promised savings may not be realised unless more departments come onboard.

"We anticipated a bigger initial surge than we saw," Peter Gershon, chief executive at the OGC, told the Public Accounts Committee.

Gershon admitted that large departments, such as the Inland Revenue, had yet to commit to large-scale upgrades. Others, like the Department for Work and Pensions, had only upgraded on an ad hoc basis.

Under the agreement, the more public sector bodies that move to the new licence terms, the larger the discount.

But both the Ministry of Defence (MoD) and the NHS chose to negotiate their own terms, although the OGC has persuaded Microsoft to include both departments' purchases in calculating the overall discount.

With the NHS yet to commit to Microsoft's new terms, the OGC's targeted savings are under threat. So worried is the OGC, that it has seconded its own staff to the NHS team to help broker an agreement.

"We won't get near the next target threshold unless we get the NHS deal," admitted Gershon.

The fact that so many large public sector bodies have chosen not to adopt Microsoft's controversial terms will be a blow to the software maker.

"Departments are not going to upgrade unless there is a sound business case. Upgrading may also require additional spend on hardware," said Gershon.

While hardware costs account for as little as a fifth of total ownership costs, there is a tendency for IT departments to extend the lifetime of desktop software, according to Tony Lock, chief analyst at Bloor Research.

"A lot of European governments have extended their refresh rates while they look at alternatives such as open source software," he explained.

According to the National Audit Office, public sector spending on software licensing tops £100m per year. Without the agreement, the OGC reckons that Microsoft's new licensing scheme would cost an additional £40m to £60m a year.

But even if the OGS can persuade enough public sector organisations to sign up to the deal, thereby maximising the discounts, it may still be wasting money.

Financial services firm St Paul Insurance has slashed its licensing fees paid to Microsoft by ensuring that it only pays for the software it uses.

"We've saved a huge amount of money by saying we only want Microsoft Word. Our staff were not using Excel, PowerPoint or Access. Now we only pay for what we want," said Matt Barlow, IT manager at St Paul.

Microsoft insisted that a number of large departments, such as the Inland Revenue, would come onboard once they had finalised IT outsourcing arrangements.

"Everybody has benefited from this agreement. But it makes sense to enter into it only when you are looking at a technology refresh," said Graham Harrop, government manager at Microsoft UK.