News Analysis

Whitehall in Faustian pact with IT suppliers

Some public sector IT executives are entering a "Faustian pact" with suppliers to acquire technology and services without lengthy and complex open competitive tenders.

The result is that departments and agencies obtain good initial prices for outsourcing contracts, then order further systems and services without open competitive tenders, giving suppliers profit margins nearly four times the rate in the initial contract.

These are among the claims by Compass, a management consultancy which has an insider's view of government IT operations, since its customers include several Whitehall departments.

Colin Craig of Compass Management Consulting says his company's analysis of contracts and costs shows that "over half of all government IT spending is never put to public ­tender as suppliers and government departments co-operate to avoid costly and over-complex procurement routines".

The exhaustive initial tender on large outsourcing contracts creates costs that are clawed back later in the contract term.

Craig says, "Suppliers have become adept at achieving that claw back and government departments have no interest in going through the time-consuming procurement process for every extra service"

His claims are reinforced by weaknesses in buying practices which have been picked out in "procurement capability reviews" run by the Office of Government Commerce (OGC).

Nigel Smith, chief executive of the OGC, says the reviews have identified some "great work" in central departments. The buying of IT at Defra is singled out for praise. But the OGC's reviews also identified:

● A shortfall in highly capable commercial people

● A shortfall in contract management skills and resources

● A paucity of management information

● Lack of consistent measuring of performance.

All of which may make it unsurprising that departments and agencies can end up paying more than necessary on IT contracts.

Craig says the overly complex public tender process "bears no relation to best practice in the private sector". He says that complexity leads to departments, agencies and suppliers "avoiding the need to tender competitively for ongoing work". Instead they use the terms of a standing "framework" agreement to buy ­additional services.

The Compass findings ring true. There is much evidence of suppliers winning highly profitable new business without new open competitive tenders because they are a department or agency's main IT supplier.

An outsourcing contract with Fujitsu to handle IT work for Customs & Excise nearly doubled, from £500m to £929m. This was due partly to a rise in the volume of Customs' work since the contract was signed in 1999 and partly to new requirements. The new work was not put a new competitive tender.

Capgemini won the Aspire contract to run systems for the Revenue and Customs with a bid price of £2.83bn. Later, the estimated cost of Aspire more than doubled to become worth about £8bn over 10 years.

This was largely because of extra demand for IT services and projects. Again, there was no open competitive tender for the extra work.

Accenture won a contract to supply a replacement National Insurance Recording System - Nirs2 - with a bid price of about £76m. Without any open competitive tender, the value of its contract doubled. It was given a contract extension worth an additional £70m to £144m.

Compass suggests that one reason departments and agencies are paying too much is that after the initial tender process, they have no accurate information on competitive pricing for the bundle of services they are buying.

This lack of information, says Compass, leads to the "overall margin on deals growing to 40% or more as systems integration and consultancy work get added to low margin operational deals". It adds, "This 40% figure is well beyond the headline rate of 12% for the publicly tendered component."

Compass says there are opportunities for government departments to achieve savings through standardisation of their IT requirements and the bundles of services they buy.

Craig says, "Each government department thinks it is unique and that it has a unique set of requirements for IT services. Suppliers play to this and charge high margins for customised services to public sector clients who are unable to scrutinise proposals to ensure they are competitive or consider a more standardised approach to IT buying in order to achieve ­savings."

Read more on Tony Collins' IT Projects blog >>





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