The Department for Work and Pensions and its main technology supplier EDS have struck a deal to revise and standardise 150 separate contracts, cutting the department's IT spend by £900m over five years.
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In return the DWP has agreed to give EDS an all but guaranteed £800m over the company's previously stated estimates for the five years between 2005 and 2010. EDS has been promised a further £180m if its performance is exceptional.
A strong incentive for EDS to offer the savings was an implicit threat of losing business to other suppliers. The DWP has created a Unity framework contract which allows it to buy from companies other than EDS. As the 150 contracts with EDS expired the DWP could have placed a large portion of the business elsewhere. Had it lost all of the business under these deals the spend with EDS could have fallen from the present level of more than £700m to an average of about £360m annually over the next five years.
Instead EDS, with an assurance of remaining the DWP's largest supplier, has agreed to supply a better level of service, accept stiffer penalty clauses and cut prices by £180m a year. Between now and 2010 the DWP will spend £520m a year with EDS. Had no deal been reached, the department could have paid up to £700m a year for IT services over the same period, assuming it not been able to negotiate lower prices with other suppliers had they taken on EDS' contracts.
Although the 150 separate contracts with EDS remain, the DWP has agreed to standardise the terms and extend some of the deals so that none expire until 2010. EDS said the assurance of future business allowed it to invest in new technology to standardise services and cut costs.
The extra money is much needed by the DWP as it is trying to cut the department's costs by £1bn as part of Gershon efficiency savings.
It is the largest government department, with 128,000 desktop systems and 35 VME-based mainframes - the largest Fujitsu mainframe customer in the world.
EDS's 150 contracts grew from the DWP's Accord framework contract signed in 1998 under the Private Finance Initiative. Before the latest deal, the contracts had dissimilar service levels and expiry dates.
Explaining the revision of the contracts, DWP chief information officer Joe Harley said, "It is a significant challenge to keep the [IT spend] flat and that is part of the reason we have arrived here: we need to be looking for cost reductions. Most of our spend is outsourced so if we are looking for efficiency savings we have to talk to suppliers about that."