The UK government has been in Microsoft's pocket since the 1980's, with hundreds of millions flowing non-stop from the British tax payer into Microsoft's coffers. Most comments are saying this is a license negotiation tactic, and this is probably true. The decision makers have spent decades paralysed by fear, brainwashed into believing Microsoft is the "safe" option much like in the prior decades people used to say "Nobody ever got fired for buying IBM".
The government needs to clearly define a set of document interchange formats. The ODF format for word-processing is a good start. This makes the software a level playing field for all vendors, closed and open source. Only 100% compatible software gets onto the government buy list.
Until now there is no incentive to anybody to write a decent competitor to Microsoft. It's a huge investment and at the end of the day the government will buy Microsoft anyway even if it squeezes the British public's purse until it bleeds. You cannot even attack markets attached to the government as Microsoft will keep shifting their file format to make any competitors subtly incompatible. With a level playing field suddenly the incentives change. The government is a huge win and a fixed goal means the game is on to try and provide the government with best value for money.
Open Office still has an important part to play as it can set the baseline. GCHQ can vet the source and then make available a version for government employees to download (Microsoft Windows, OS X, Debian, etc). It can come pre-installed on all new government machines. If Microsoft can convince a gov't department to install Microsoft Word alongside it and pay for it, good for them. It must be adding extra value.
Francis Maude is definitely on the right track, if the article is to be believed, but he has a lot of inertia to overcome. Good luck to him.
Phillip.