HMRC cuts annual IT costs and gives Capgemini contract extension worth more than £1bn

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HM Revenue and Customs has struck a deal with its IT supplier Capgemini that cuts the annual technology spend by hundreds of millions over the life of the contract. The agreement compensates the company with a contract extension worth more than £1bn.

The “restructuring” of the Revenue’s ASPIRE [Acquiring Strategic Partners for the Inland Revenue] contract will enable the department to cut its annual IT running costs - which are between £600m and £800m a year - by about 10% by 2010/11.

It needs to cut its yearly IT spend because some budgets have been tightened in the 2007 Comprehensive Spending Review which sets the budgets for departments, schools, hospitals and other public services for the next three years.

The department has declined to release any figures which it says are commercially confidential. But officials have not denied that the deal could leave Capgemini with more money over the life of the contract than was assured beforehand. The supplier already had a 10 year contract worth more an estimated £8.5bn.

A Computer Weekly assessment of the deal is that between £50 and £80m a year will be cut from the annual spend between now and the end of the original contract which expires in 2014. This would cut the annual IT spend with Capgemini by at least £300m by 2014.

The three-year extension to Capgemini’s contract will be worth more than £1bn, taking into account cuts in current levels of spending. The new contract will expire in 2017 instead of 2014.

When this was put to the Revenue its spokesman gave a reply that was too vague to have any meaning. He said:

“The value Capgemini gives up in the immediate term evenly balances against the net present value of the extension when considering the committed savings Capgemini will deliver to HMRC.”

The Public Accounts Committee found in a report on the ASPIRE contract in June 2007 that the department has been spending much more on the Aspire contract than it expected. The Revenue spent £539m with Capgemini in 2004, the first year of the deal, compared to an original estimate of £384nm. The annual IT spend rose to £767m in the second year – 2005/2006 - and was expected to increase again to £840m this year.

The committee said that if Capgemini’s margins remained at the level of 10% to 13%, the overall profit on the contract as a whole – before the restructing - could be £1.1bn compared to £300m initially envisaged.

Capgemini announced the restructuring as a positive development. Paul Hermelin, Group CEO, said: “This is a further landmark in Aspire’s successful history. The unique nature of our strategic collaboration with HMRC sets the benchmark for all outsourcing partnerships.”

Deepak Singh HMRC’s Chief Information Officer said: “The restructuring of the Aspire contract balances the need for HMRC to meet its commitments to cost reductions under the 2007 Comprehensive Spending Review without compromising our joint drive to become a world class IT function”.

PAYE tax expert Matt Boyle said the announcement of the restructuring of the Aspire contract raised questions which he had put to HMRC but has not yet obtained answers.

Boyle has sought more information on the department’s claim that the reduced spend will not affect the current and planned improvements to service levels. He said the department has given “no details as to the level of reduction or the areas in which any reduction is to take place”.

HMRC and Aspire suppliers locked into Accenture

The Revenue showed through the award of the Aspire contract to Capgemini and Fujitsu that it was not locked into EDS, its main IT supplier between 1994 and 2004. Capgemini took over the running of the Revenue’s systems from EDS in 2004, and also acquired the Fujitsu-run IT systems at Customs Excise.

But though HMRC was not locked into EDS it found itself tied into Accenture, which is a little-publicised beneficiary of the Aspire contract. Accenture lost a bid to carry on running the NIRS2 National Insurance Recording System. It handed over the running of NIRS2 to Capgemini and Fujitsu under Aspire. But they transferred the work back to Accenture – which retains the intellectual property rights to NIRS.

The Public Accounts Committee said of the switch from Accenture to Fujitsu and back again:

“On NIRS2, the Department paid £28.9 million to put a new contract and supplier in place and upgrade the system, though in the event Capgemini retained Accenture as a subcontractor following difficulties and delays in upgrading the new system. The Department therefore paid for a transition, which in respect of Accenture effectively did not take place. If departments agree to pay transition costs they need to negotiate terms that allow for the abatement of their contribution if transition does not take place as planned.”

Last month, when the government responded to the committee’s findings on the Aspire contract, it seemed to confirm that the department was locked into Accenture. It said that the decision to retain Accenture’s experience and its understanding of particular business areas – mainly NIRS related – was to “ensure that project timescales and quality would not be jeopardised”.

Comment

It's a pity there is no detail on how the annual IT spend will be cut or any evidence on how the services to the public will not be affected. And if it's possible to cut the annual IT spend by about £50m a year without "compromising our joint drive to become a world class IT function” was the budget set too high in the first place?

And by the way, what is a world-class IT function, a phrase used often in the industry? Does it mean anything? Can you buy world-class dog food? Or get a train ticket in world-class? Or have a world-class blog? Perhaps NHS targets could be replaced with a single test of whether trusts are world-class?

Links:

HM Revenue and Customs is locked into Accenture - perhaps indefinitely

HMRC announcement on contract restructuring

HMRC's chief operating officer Steve Lamey - formerly CIO - wins award for the individual who has done the most to promote collaboration within the business software industry
Public Accounts Committee report on the Aspire contract - June 2007

Discrepancies plague 13 million tax records

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