It's a problem for the SaaS vendors who are missing out on public sector contracts.

It's a problem for the university if the procurement rules really are that explicit and dumb. I mean, just imagine what you'd get if you need custom work done and had to put the phone down on anybody that has the temerity to try to discuss scope with you. "We had to turn down all these companies with relevant expertise because they wanted to talk to us, but it's OK, we've found a price for this guy on Elance and he's $5 per hour. We're not sure how long he'll take but he's definitely the cheapest option."

If that is the customer mentality, I'm not sure they are missing out. Problematic customers can be death.