Government pays 40% over market rate for outsourcing contracts

Taxpayers are paying up to £6bn a year above the market rate for IT outsourcing services, says Compass, a consultancy that benchmarks the cost of IT in major government departments.

Compass Management Consulting has analysed the cost of IT outsourcing contracts within central government over the past five years. The company regularly compares the costs of running IT in departments and agencies with those of the private sector.

It says it reached the £6bn figure after comparing the prices paid by government departments for their outsourced contracts with the market prices paid by the private sector for a comparable bundle of services.

Gary Bettis, Compass’s UK President, says that the public sector ispaying 40% or more above the market rate for outsourced services. Itcould save £6bn a year without damaging the frontline.

A Treasuryreport last year put the government’s IT costs at between £12.5bnand £18.5bn a year. The estimate is wide ranging because the governmentdoes not collect any audited figures on its annual IT costs.

Compassestimates that most of the IT spend is paid to suppliers of outsourcingservices – about £14bn a year.  Up to £6bn of this is spentunnecessarily, in part because value-for-money initiatives are “far tootimid” says Bettis.

Each department has separate IT systems anddata centres. Bettis says that if radical changes are supported bypermanent secretaries and ministers, the data centres and ITinfrastructures of departments could be brought together.

As anexample of IT-based efficiencies, he cites the Department for Work andPensions where he was involved in a programme that cut IT-related costsby £1.4bn between 2005 and 2010.

The programme reduced five datacentres to two, cut about 1,000 staff and standardized 140,000 desktopsystems across different parts of the DWP.

The DWP alsorenegotiated contracts with IT suppliers to cut costs. At the same timesuppliers had scope to boost efficiencies because constraints on thecontracts were removed: suppliers were allowed to choose what hardware,storage and other devices to use, and were allowed to let their datacentres be used by other clients.

But Bettis says the DWP couldgo further – by merging its IT infrastructure with other departments. 

Althoughevery department has different systems, “most have a 90%-pluscommonality of need from their IT services,” says Bettis.

Headds: “Standardization reduces costs dramatically by allowing serviceproviders to deliver economies of scale as they deliver utility ITservices to a range of clients using the same delivery infrastructure.”

Compassalso argues that poor management of suppliers and contracts leads tolarge extra charges from IT outsourcing companies.

But ministerswho advocate major change to cut IT-related costs could face a battlewith permanent secretaries who may resist a merger with otherdepartments, even an IT merger, because removing the engines of theiradministration could weaken their domains.