What's £3.5bn between friends?


Some newspapers have followed up Computer Weekly’s article on the escalating cost of the “Aspire” contract between HM Revenue and Customs and its main IT supplier Capgemini. The Daily Mail – “Computer firm in Labour’s tax credit fiasco gets extra £3.5bn” – is here, The Independent – “Cost of Revenue computer system soars to £8bn” – here, and “IT Cost Soars” in The Times here.

In a defensive response to The Independent, HM Revenue and Customs said that the cost of running the enlarged department’s IT systems over the next three years is about £100m lower than if the systems had been run separately, that is if the IT contracts at Customs and Excise and Inland Revenue had not been amalgamated after the departments merged in 2005.

This departmental response is odd.

This is because it answers a question that was not asked. The issue was not the £100m saving from merging the IT contracts of the two departments; it was escalating cost of the IT contracts overall. What’s a £100m saving when the overall IT costs increase by 35 times this amount?

The cost of the department’s IT contracts seems habitually to escalate, which sends the right signals to potential suppliers.

Inland Revenue’s main IT contract between 1994 and 2004, before the merger with Customs and Excise, was with EDS. It began in 1994 at a cost of £1bn and was £2.5bn by early 2004. By the time Capgemini had taken over the same contract in the summer of 2004, the cost of running the department’s systems over the next ten years from 2004 to 2014 was estimated to be £3.5bn.

Then in 2005 Inland Revenue and Customs and Excise were merged. As a result Fujitsu’s £1bn contract with Customs and Excise was merged into the Revenue’s £3.5bn “Aspire” deal with Capgemini. That made the Aspire contract worth about £4.5bn.

That has now risen by an estimated £3.5bn to a total of about £8bn over 10 years – and HM Revenue and Customs has provided no detailed breakdown to account for the extra spending. The Public Accounts Committee has not been given a detailed breakdown. Neither has the public spending watchdog the National Audit Office.

The audit office was not sure where the extra money would come from. A National Audit Office report on the Aspire contract, published last July said there were questions about “how the Department will fund the additional spending on IT under the new contract”. That was before the audit office expected the total to be as much as £8bn.

It has also emerged that Capgemini’s profit margins on the hugely expanded contract are about 10 per cent – around the same percentage as the profit margins on the lower figure of £4.5bn.

This does not sound like tough negotiating on the part of HM Revenue and Customs.

Clever officials can argue that the profit margin is not quite up to the level where Capgemini would have to give some of it back to the department. But profit margins aren’t everything. It’s the actual profit that counts – and for Capgemini the profit is likely to be around double the amount initially expected.

And it’s unclear what Capgemini is bringing to the department that EDS didn’t.

We are also concerned that the Revenue is able to spend £3.5bn extra on an IT services contract without having to account to anyone outside the department for how it is going to be spent. We have to trust it will be spent wisely.

The money aside, the Aspire contract was unusual because it was the first significant re-tendering of a large public sector IT contract. EDS was expected to win but didn’t. The department showed that it was possible to replace an ostensibly entrenched supplier.

But it was expected that when the departments merged there would be economies of scale and the cost of IT systems would fall. Indeed the National Audit Office reported in 2006 that HM Revenue and Customs wanted to reduce the IT costs to less than 20% of the total budget.

And £8bn may not be the final figure. The EDS outsourcing contract rose by two and half times the original £1bn. If Aspire also increases in cost by two and a half times, it will cost about £10bn – which would be a good deal for Capgemini. Its original bid for Aspire was just £2.9bn.

Accountability in the eyes of HM Revenue and Customs is providing the Public Accounts Committee with a list of headings under which the extra money is being spent. These headings are vague: “Operational Services charges, service credits, business application development and enhancements, integration, desktop applications and rate-based services”. No sub-headings are provided.

The department is willing to say that there is a “continuing high demand for IT services”. But this does not explain how the money is being spent.

It is encouraging in some ways that HM Revenue and Customs is investing heavily in IT to address the shortcomings highlighted by the Chief Information Officer Steve Lamey in his speech in 2005. Lamey said that some of the technology at Inland Revenue would not look out of place in an museum of IT. If well spent, the extra money could cut the overall costs at the Revenue and could improve the reliability and breadth of the services to the public.

But there is no evidence this is happening. In the US politicians would require a line-by-line breakdown of an increased spend of $7bn. In the UK the public are not entitled to know how the department spends public money.

So we will not know whether the money represents a wise investment in IT to save money overall and improve the service, or whether it is being thrown into fighting crisis after crisis, and perhaps not even then successfully.

The National Audit Office audits the books of HM Revenue and Customs but a very British convention requires the factual content of the audit report to be agreed with the department before publication.

Much of the wording of the auditor’s reports is therefore in civil service code – reverent and gentlemanly. The auditors will pass by a smelly mess with calm forbearance on the promise it will be cleared up shortly: no NAO auditor would go as far as to say that HM Revenue and Customs had lost control of its costs. Were this the case the wording would be along these lines: “The Department needs to provide more evidence of its cost controls.”

Meanwhile HM Revenue and Customs repeatedly issues statements about how it’s on top of its affairs, providing no evidence to prove it.

One test of a good comedian is that you laugh at him before he opens his mouth. One test of a successful department is that you know you’re likely to believe what it says before it issues a statement. HM Revenue and Customs has a long way to go before it comes close to commanding this degree of credibility.

It says it is becoming more open and accountable. The evidence isn’t there yet.

This blog entry is a fuller version of an analysis that has been published in Computer Weekly – here.