DWP wins outsourcing contracts at MoD, bad news for Capita, Logica, NorthgateArinso and Liberata?

I had an interesting conversation last week with Robert Morgan who is a director at sourcing broker Burnt-Oak Partners.

I called him to get his views on a meeting next week of an All Party Group that will be looking at how the government can become a better customer of outsourcing.

The conversation got interesting when he told me that the Ministry of Defence had recently outsourced HR and Payroll to the Department of Work and Pensions. Could this be a sign that the government is tired of the big suppliers?

If the DWP wins enough HR and Payroll contracts within government the suppliers might find it hard to compete.

Below is a copy of a blog post from Robert, which originally appeared in the Burnt-Oak blog.


The Trick for Government Shared Services

By Robert Morgan

“In anticipation of the meeting of the All Party Outsourcing and Shared Services Group on the 22nd of August we would like to say that Government has finally started to make in-roads to using the principle of outsourcing (consolidation, standardisation and scale) to secure deep departmental savings through Shared Services.

There is however a significant difference in how they have gone about this, and ample evidence that this will continue. Take the case of the Department for Work and Pensions (DWP) who have recently won HR services and payroll business from two parts of the MoD. Logically this makes huge sense – utilising DWP’s core strengths to undertake similar work for other sections of government. Currently DWP’s IT and business services are being underpinned by commercial outsourcing contracts with suppliers like Fujitsu, HP and CapGemini. But will they really need them if government business continues coming DWP’s way?

The trick for Joe Harley, Director General and CIO for DWP and also the lead player in determining and driving IT policy for government in outsourcing and shared services, is can he secure enough volume and expertise to ensure the right blend of professional and dependable services, scale for service provider economics and staff retention levels to rival the private sector. We believe he can.

What would success bring?

By virtue of the huge volumes of back office services involved, Government has in its hands the ability to rival and beat the world’s largest service providers such as IBM, CSC and HP, for many simple but critical back office functions. This could be particular bad news for Capita, Logica, NorthgateArinso and Liberata who thrive on such additive business without necessarily attempting to reform or re-platform the applications, merely run them into the ground.

At a recent briefing Jane Platt, CEO of National Savings Investments (NSI), stated that they were “open for shared services business” having recently won two significant deals, firstly with Courts Funding Office, and secondly with Equitable Life Payment Scheme. Even East London Boroughs are clubbing together to reinvent themselves by providing common or shared services through a single centralised powerhouse.

So, with or without a utilising the financial and service strength of professional outsourcers, government HAS firmly entered the shared services market. More importantly they have the ability to dominate the market and build a significant asset that could be privatised at a later stage.

In today’s market this is a unique example of building up the “family silver” for another generation of politicians to squander away.”

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Why would the government want to dominate the shared services market?

Shared services don't save much money and are likely to drive waste and failure into other parts of the system.

All of the arguments made for sharing come from within the shared services industry (IT companies, consultants, or think tanks funded by companies selling shared services). All of the so-called evidence is based upon estimates, projections and surveys. No real data.

Professor John Seddon, an expert in service organizations with extensive experience in public sector systems says that there are two arguments for sharing services. The ‘less of a common resource' argument and the ‘efficiency through industrialisation' argument.

The former argument is ‘obvious': if you have fewer managers, IT systems, buildings etc; if you use less of some resource, it will reduce costs. But the reductions are often minor and one-off.

The second argument is ‘efficiency through industrialisation’. This argument assumes that efficiencies follow from specialisation and standardisation – resulting in the creation of ‘front' and ‘back' offices. The typical method is to simplify, standardise and then centralise, using an IT ‘solution' as the means.

The problem with the industrial design is simple - it doesn't absorb variety in demand. Because of this, costs soar as the IT system has to be modified and customers ring back again and again because they can't get what they want.

The evidence of this flawed theory can be found everywhere. In HMRC or South West One shared services which predicted savings of £176 million over 7 years and actually recorded a pre-tax loss over its three financial years. Duplicate payments sitting at £772,000 and a struggle to manage £12.9m in outstanding debts.??

This week Western Australia followed Queensland in ending its shared services. It was claimed that it would save $58 million a year and instead cost $444 million dollars (no savings). It is estimated that it will cost taxpayers between $1 - $2 billion dollars to rectify.

Shared service anyone?