IT SMEs losing tens of millions of pounds from government in row over £2.45bn Capita deal

IT SMEs have lost tens of millions of pounds after refusing to sign up to a controversial £2.45bn Cabinet Office agreement with services giant Capita

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SME IT services suppliers have lost tens of millions of pounds in business after refusing to sign up to a controversial £2.45bn Cabinet Office agreement with services giant Capita for the sourcing of temporary staff across the public sector.

Over 20 affected companies have been protesting to the Crown Commercial Service (CCS) – the UK government procurement agency run by the Cabinet Office – for more than a year about contractual conditions that they believe prejudice their businesses and are biased in favour of Capita.

Some of the suppliers accuse CCS of a deliberate attempt to undermine their relationship with government and to pursue a policy to cut them out of the supply chain, in direct contravention of official Whitehall policy to increase the amount of public spending put through small businesses.

The affected suppliers have asked to remain anonymous over fears about losing future deals from CCS and Capita, but several of them have shared details of their concerns with Computer Weekly.

One supplier claims to have lost over £20m in revenue, and to have been forced to lay off 10 staff. Another firm estimated it has lost out on £12m of sales opportunities, and other SMEs are also believed to have missed out on tens of millions of pounds in potential revenue.

One of the companies said it was told that a senior executive at CCS had indirectly warned it not to “rock the boat” or it would risk losing future business with government.

This is not the first time recently that CCS or Capita have been accused of similar behaviour. The Independent newspaper reported last week that a smaller, £250m contract for civil service training, also won by Capita, is under investigation over claims that some suppliers had been forced out of business. Cabinet Office minister France Maude said in the House of Commons that such a situation was “not acceptable”.

Contingent Labour One

The latest controversy centres on a purchasing framework called Contingent Labour One (CL1), which went live in 2013. The aim was to centralise the sourcing of all temporary staff across Whitehall – from clerical and administrative roles through to interim CIOs – under a single arrangement. Three suppliers were appointed, with Capita winning Lot One, which covers higher value, specialist contractors and interim managers, including temporary IT workers. The overall CL1 framework is worth an estimated £3bn over four years, with Capita’s Lot One alone worth £2.45bn.

Right from the start, a number of SMEs that provided temporary staff to government at the time through the NPS (non-professional staff) framework – which was wound-up last year - protested about the new arrangement. Many had already lost out when Capita was brought in to take over a previous framework called Cipher in 2008. At that time, all companies supplying staff through Cipher were forced to transfer their employees and contractors to work for Capita with no compensation for lost business. As recently as 2011, some government departments were still transferring SME business to Capita via Cipher.

Now the SMEs fear that CCS and Capita will eventually force a similar takeover of their resources through CL1, eliminating them from the government contract labour market altogether.

Market dominance

The SMEs also cited concerns over Capita’s dominance of the market and its ability to access sensitive commercial information about rivals, as well as clauses they believe could allow Capita to poach contractors from agencies or employers. Their specific complaints include:

  • A ban on restrictive covenants (RCs) – these are standard employment clauses that prevent staff from going directly to work for competitors for a period of time, to protect existing customer relationships. But suppliers wishing to provide contractors under CL1 have to sign a contract with Capita that prevents RCs being imposed, meaning Capita could at any time bypass the company and deal directly with individual contractors. This is a particular problem for the SMEs, who see that this gives Capita the right to cut them out of the market with no compensation.
  • While the CCS contract with Capita specifically states that Capita does not have exclusive rights and that government is free to sign contracts with other suppliers, Capita imposes anti-compete clauses on sub-contractors that could prevent SMEs from bidding for work that would otherwise fall under CL1. Capita also restricts its sub-contractors from having direct contact with the government customers, in contravention of clauses in the CL1 framework.
  • In order to sign up with Capita, suppliers have to provide sensitive commercial information about their business and their staff, without any contractual protection over how Capita uses that data. The SMEs claim this could allow Capita to build up a database of contract staff that it could subsequently use to bypass them and dominate the market.
  • Capita is allowed to place up to 20% of all CL1 contracts by value with other Capita divisions – but without restriction on the type of deals it wins. Rival suppliers claim this allows Capita to cherry-pick the higher-value, most-profitable contracts leaving only lower-value opportunities for other firms. Capita said it has been awarded 11.4% of all contracts under CL1 - although that gives it a market share more than 40 times greater than the 0.3% average share across all 302 suppliers to CL1, according to estimates by affected firms.

Several SME suppliers met with the Cabinet Office as long ago as February 2014 to outline their concerns about CL1. But despite numerous further meetings and correspondence, including with CCS chief executive Sally Collier and the Crown Representative for SMEs, Stephen Allott, they have still not received a response to allay their concerns.

Capita refutes wrong-doing

A spokeswoman for Capita said that CL1 was being run in the manner required by government.

"Capita has an excellent track record of working with and engaging SMEs. We refute any suggestions of wrong-doing regarding this recruitment framework," said Capita in a statement.

"More than 60% of the work under CL1 has been awarded to SMEs. Of the 302 suppliers on the framework, 274 are SMEs. The framework has been designed, and is run, in the manner required by government to ensure a level playing field and best value for money. In Capita’s view the removal of restrictive covenants, for example, enables contractors to move more easily between government departments at the end of specific assignments."

Capita also said that the final decision on all contracts is made by its government clients without knowing the identity of the supplier chosen: "The client hiring manager, who does not know the identity of the supplier, makes the final selection decision for all contracts, regardless of their value. To give all suppliers an equal and fair chance, they have access to the same information about an opportunity. In some cases Capita even hosts conference calls between all suppliers and the hiring manager, to provide additional context and answer questions that any supplier may have."

Capita said it is only aware of three companies that have refused to sign up to CL1, although suppliers said its representatives have been present at meetings where up to 20 have complained about the arangements. 

The Cabinet Office defended its policy towards SMEs and said it is looking into the issues raised around the CL1 deal.

"Since 2010 this government has introduced a radical programme of commercial reform as part of our long-term economic plan. Our reforms helped contribute to savings of £14.3bn last year alone, while dramatically increasing the proportion of business won by SMEs. However we know there's more to do. We always take concerns from suppliers very seriously and are looking at the issues highlighted," said a spokesman. 

Grow SME spending

The UK government has an objective to put 25% of all spending through SMEs – and 50% of IT spending. Suppliers affected by CL1 say the Capita agreement means CCS is acting in direct contravention of this policy.

In order to get around the problems, some suppliers had suggested that Whitehall buyers use Lot 4 of the G-Cloud framework designed for procuring cloud services, but CCS subsequently blocked that route by imposing a cap on non-cloud specific IT consultancy services and banning the supply of contingent labour through G-Cloud.

CCS could make changes to the CL1 agreement in response to the SMEs’ concerns - it set a precedent for making amendments to the contract with Capita, after it emerged last year that the original framework was not conformant to IR35 rules which govern the tax status of individual contract workers.

The Recruitment and Employment Confederation (REC), which represents recruitment agencies and has members involved with CL1, has attended meetings with CCS to discuss supplier concerns. REC director of policy and professional services Tom Hadley said that government could also suffer as a result of the problems.

“Some of our affected members say they are getting plenty of private sector business so there may be no need to supply the public sector if it is not commercially viable for them. In addition to the challenges for suppliers, the concern here is that employers in the public sector may not be able to access the skilled workers they need,” he said.

Contractor relationships

Hadley said that some of the problems arise from trying to treat high-value, specialist skills in the same way as commodity services such as clerical staff, and a failure to recognise that agencies need to protect the relationship with the contractors they provide.

“The biggest single learning for us is the difficulty of having one contractual platform to cater for high-volume roles and highly specialised services like IT management. In addition, suppliers need to be able to protect their legitimate business assets - which in the case of specialist recruitment providers are the skilled workers on their books,” he said.

But Hadley believes that progress is being made with CCS. “We are more upbeat about the situation than we were a few months ago. Discussions have been more progressive recently and the concerns of suppliers have been taken on board. We are hopeful that some important changes can be made to the current CL1 contract and that lessons can be learned for CL2 whenever that comes out,” he said.

SME suppliers in others areas have also been critical of CCS. Several firms that offer agile software development services have complained about the Digital Services Framework deal set up by CCS to source staff to work on digital projects, claiming it restricts their ability to successfully bid for work.

And former government IT chief Chris Chant, who first set up the G-Cloud programme, last week told a conference in London that CCS should be scrapped, calling it “dysfunctional” and claimed it is undermining attempts to introduce more SMEs into government IT in favour of established large suppliers.

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