The total cost of HM Revenue & Customs' 10-year ASPIRE IT outsourcing contract has more than doubled since the contract was awarded in 2004, and Capgemini's profits are likely to quadruple, according to a Commons Public Accounts Committee report. John Stokdyk reports.
The PAC followed up last week's analysis of government IT projects with a report looking at how the Inland Revenue conducted the tendering and transition from the previous supplier, EDS, to the new Capgemini consortium.
While couched in remarkably restrained language, the amounts involved in the project tell their own story. The original bid from the Capgemini Ernst & Young consortium was £2.83 billion, based on the department's 2003 estimate of its needs. The department's current forecast for the 10-year contract has risen to £8.5 billion.
"Before concluding the deal, the department should have evaluated bids against a range of demands for IT services," the PAC report suggested.
The reason for the forecast spending increase is HMRC's increased reliance on IT, ironically driven by demands for cost-cutting and efficiency improvements. The Chancellor has allocated a "modernisation fund" of £300 million to help the department achieve 5% annual spending cuts between 2008-09 and 2010-11.
The committee noted that while Capgemini’s overall profits are rising, the margins have not reached the thresholds which would trigger a profit-sharing agreement with the client. If margins remain at the current level of 10-13%, the overall profit on the contract as a whole could be £1.1 billion compared to the £300 million initially envisaged.
"In agreeing future prices, the department will need to undertake rigorous benchmarking of prices and margins, and should aim to get them discounted to reflect the increased volume of work," the report noted.
HMRC's 10-year ASPIRE project (Acquiring Strategic Partners for the Inland Revenue) started as a re-tender for contracts the Inland Revenue had with EDS for its main IT services and Accenture for the NIRS2 National Insurance reporting system. Following the Revenue-Customs merger in 2005, Customs' contract with Fujitsu was incorporated within ASPIRE in April 2006.
To prevent EDS enjoying an advantage as the incumbent supplier, the Revenue underwrote rival bidders' costs to the tune of £8.6 million and completed the transition for £27.5 million - a small savings on the £29.6 million originally budgeted.
Capgemini took on 2,800 staff from EDS and brought in a further 1,000 people, including additional project managers. So far the annual running costs have been: £539 million in the first year (40% higher than the Department estimated), £767 million in the second year. The estimate for the third year was £840 million. By late 2006 the Department estimated that the total cost could rise to £8.5 billion. The main reasons for the increase are the inclusion of the Fujitsu contract (£900 million) and additional projects and services relating to the HMRC merger and transformation programme.
According to the report, Capgemini’s performance on the contract has been satisfactory so far and is improving. It is achieving more than 90% of its 500 performance targets, most of which are related to system availablility and successful batch processing. According to the report, the contractor has had over £4 million deducted from its payments for not meeting a small number of targets.
The HMRC's overall performance target is 75, which is "not rigorous and does not impose sufficient discipline", according to the PAC. "The department should set more challenging performance targets which reflect the demands it faces in improving its business operations, distinguishing as necessary between mission critical projects and other projects."
Members of the PAC were also concerned about the role consultants played in the procurement and transition process. The Revenue spent £11.9 million on consultants, but did not evaluate their performance and quality of advice. Officials told the committee they believed the department had got reasonable value and considered that a formal evaluation would not have been a sensible use of resources.
"As a general principle, departments should evaluate the performance of consultants and lessons learned from their use, not only for their own benefit but for that of other departments," the PAC concluded.
Bidding and transition costs
The MPs were also criticised the Revenue for spending £8.6 million to underwrite the costs of bidders. The department then failed to agree the unique costs of the transition with Capgemini until after the contract was signed and ultimately agreed to pay a profit margin of 15.5% on this work.
By undertaking to pay the bid and transition costs to encourage competition for the ASPIRE contract, the department incurred a premium of £51.9 million, the PAC calculated.
"The department accepted that with hindsight it might have done things differently, so as to obtain better value. The lessons from ASPIRE are that if departments agree to pay transition costs, they should be negotiated before concluding the deal to take advantage of the competitive tension, and they should not include a profit margin," the report concluded.
PAC chairman Edward Leigh MP called the transition "successful but very costly".
He continued: "It is hard to find a justification for the Department’s paying so much,nearly £52 million, towards bidders’ costs to encourage competition. Any department doing this in future must show there is no other cost-effective way of securing competition."
Leigh added: "The department should have foreseen that its demand for IT services could vary significantly and determined how this might affect its contractor’s prices and profit margins. These will have to be rigorously benchmarked in future to make sure the prices fairly reflect the actual volume of work being carried out."
Liberal Democrat shadow chancellor, Vince Cable MP commented that the PAC report painted a "worrying picture" of failure and incompetence, with IT projects running behind schedule with big cost overruns.
"It is disgraceful that only four years after this project was tendered for, costs are spiralling out of control. The contractor appears to be running rings round the government at the expense of the taxpayer," Cable said.
Cable referred to Whitehall's recent attempts to shred gateway reports that were critical of government IT projects and added that the HMRC experience would make it "utterly foolish" to proceed with the government's latest controversial IT project to introduce identity cards.