This is a fuller version of an article on ComputerWeekly.com
Some public sector IT executives are entering a “Faustian pact” with suppliers to acquire technology and services without lengthy and complex open competitive tenders.
The result is that departments and agencies obtain good initial prices for outsourcing contracts, then order further systems and services without open competitive tenders, at profit margins for suppliers of nearly four times the rate in the initial contract.
These are among the claims by Compass, a management consultancy which has an insider’s view of government IT operations since its customers include several Whitehall departments.
Colin Craig, Regional Consulting Director at Compass Management Consulting, said his firm’s analysis of contracts and costs shows that “over half of all government IT spending is never put to public tender as suppliers and government departments co-operate to avoid costly and over-complex procurement routines”.
The exhaustive initial tender on large outsourcing contracts creates costs that are clawed back later in the contract term.
Craig said: “Suppliers have become adept at achieving that claw back and government departments have no interest in going through the time-consuming procurement process for every extra service … “
His claims are reinforced by weaknesses in buying practices which have been picked out in “procurement capability reviews” run by the Office of Government Commerce.
Nigel Smith, Chief Executive of the OGC, said the reviews had identified some “great work” in central departments. The buying of IT at DEFRA is singled out for praise. But the OGC’s reviews also identified:
– a shortfall in highly capable commercial people
– a shortfall in contract management skills and resources
– a paucity of management information and a
– “lack of consistent measuring of performance”.
All of which may make it unsurprising that departments and agencies can end up paying more than necessary on IT contracts, in part because they opt for the easiest option of simply handing new work to the existing outsourcing supplier.
Craig said the overly complex public tender process “bears no relation to best practice in the private sector”. He said that complexity leads to departments, agencies and suppliers “avoiding the need to tender competitively for ongoing work”. Instead they use the terms of a standing “framework” agreement to buy additional services.
The Compass findings ring true. There is much evidence of suppliers winning highly profitable new business without new open competitive tenders because they are a department or agency’s main IT supplier.
On 22 June 2004, the Public Accounts Committee, based on a report of the National Audit Office, found that the cost of an outsourcing contract with Fujitsu to handle IT work for Customs nearly doubled, from £500m to £929m. This was due partly to a rise in the volume of Customs’ work since the contract was signed in 1999 and partly to new requirements.
The committee said that re-tendering the contract would have “given better assurance on the value for money of the revised contract”. But the department said a re-tender would have “put at risk existing revenue and the expected benefits” of the revised contract.
The committee concluded: “Whether Customs struck the right balance in making this judgement is hard to determine while many of the expected benefits remain to be demonstrated.”
On 14 May 2007, the Public Accounts Committee reported that CapGemini had won the “ASPIRE” contract to run systems for the Revenue and Customs with a bid price of £2.83bn. Later, the estimated cost of ASPIRE more than doubled to become worth about £8bn over 10 years.
This was largely because of extra demand for IT services and projects. Again, there was no open competitive tender for the £5bn worth of extra work.
In 2001 the National Audit Office found that Accenture won a contract to supply a replacement National Insurance Recording System – NIRS2 – with a bid price of about £76m. Without any open competitive tender the value of its contract doubled.
Accenture was given a contract extension worth an additional £70m to £144m. The NAO said: “The estimated £44m cost of breaking the contract effectively ruled out the option of using alternative suppliers for the development work.”
Compass suggests that one reason departments and agencies are paying too much is that after the initial tender process, they have no accurate information on competitive pricing for the bundle of services they are buying.
This lack of information, says Compass, leads to the “overall margin on deals growing to 40% or more as systems integration and consultancy work get added to low margin operational deals”. It adds: “This 40% figure is well beyond the headline rate of 12% for the publicly tendered component.”
Compass says that there are opportunities for government departments to achieve savings through standardisation of their IT requirements and the bundles of services they buy.
Craig said: “Each government department thinks it is unique and that it has a unique set of requirements for IT services. Suppliers play to this and charge high margins for customised services to public sector clients who are unable to scrutinise proposals to ensure they are competitive or consider a more standardised approach to IT buying in order to achieve savings.”
Will things improve?
It’s possible gradual improvements will happen, thanks largely to capability reviews being carried out. Breaking with the tradition of not publishing reports which criticise departments and agencies, the government has put capability reviews on the OGC website.
They name departments and point out specific problems. For example a report on the Department of Transport published last month said it had achieved some impressive savings but had only a “limited grip” on spending.
In the area of systems and processes reviewers recommended more diligent capturing of lessons learned on recent projects, and the identification of ‘go to’ individuals who have specific skills.
But changes are likely to happen slowly. It’s hard to imagine that, in the foreseeable future, all departments and agencies will give up the right to pay over the odds to existing suppliers rather than go through lengthy, complex and costly new competitive tenders.
Compass statement in full
OVER COMPLEX PROCUREMENT PROCESSES
LEAD TO PUBLIC SECTOR PAYING OVER THE ODDS FOR IT
Cumbersome Treasury procurement processes intended to save money are actually increasing the price paid by the public sector for information technology (IT) and other outsourced services.
In comparative studies of 250 public and private sector contracts over two years, Compass Management Consulting has seen public sector clients paying up to 200% above the market rate for computer services such as storage, 65% above market rate for servers and 20% for desktop services.
Compass claims that the over complex public tender process bears no relation to best practice in the private sector. This complexity leads to public sector clients and service providers avoiding the need to tender competitively for ongoing work using the terms of a framework agreement to buy additional services.
According to Compass, once a contract has been awarded, there is rarely any provision for ongoing governance and market comparison. The result is that, while the headline profit rates for government work are running at 12%, the addition of services which do not go out to tender means that the blended profit rate can be 40% or more over the five to seven years of a typical contract.
“Compass analysis of contracts and costs shows that over half of all government IT spending is never put to public tender as suppliers and government departments co-operate to avoid costly and over-complex procurement routines,” said Colin Craig of Compass Management Consulting.
“The command and control procurement culture in the public sector was introduced for political reasons to give the impression that value for money is being delivered as a result of recent public sector spending increases.
In reality the exhaustive initial tender creates costs that have to be clawed back later in the contract term. Suppliers have become adept at achieving that claw back and government departments have no interest in going through the time-consuming procurement process for every extra service they require,” said Colin Craig.
Compass claims that public sector managers and suppliers are entering into a “Faustian pact” to avoid lengthy and complex procurement processes in order to get their jobs done and buy the services they need in a timely way.
“The unintended consequence of the Treasury and Office of Government Commerce’s tightening on procurement targets is that less spend actually gets tendered. The result is higher overall costs to the public purse. We see public sector outsourcing contracts costing anything from 20-200% above what the private sector is paying for a comparative bundle of services – and the government is now the largest buyer of IT services,” said Colin Craig.
Compass suggests that one reason for the over pricing is that after the initial tender process, government departments have no meaningful information on competitive pricing for the bundle of services they are buying to back up on going contract governance. This leads to the overall margin on deals growing to 40% or more as systems integration and consultancy work get added to low margin operational deals. This 40% figure is well beyond the headline rate of 12% for the publicly tendered component.
In addition, Compass says that there are additional opportunities for government departments to achieve savings through standardisation of their IT requirements and the bundles of services they buy.
“Each government department thinks it is unique and that it has a unique set of requirements for IT services. Suppliers play to this and charge high margins for customised services to public sector clients who are unable to scrutinise proposals to ensure they are competitive or consider a more standardised approach to IT buying in order to achieve savings,” said Colin Craig.
Compass claims that comparisons with other European Union countries confirms that the UK is paying more for its IT than other nations. As a component of overall public spending, the UK is paying 20% per person for IT services than in Germany, the company claims.
Did CSC win £2bn worth of work from Department of Health without any specific new competitive tender, following Accenture’s departure from the NHS’s National Programme for IT? – Computer Weekly article
Closed tendering – Computer Weekly article dated 2000
NIRS2 contract extension – National Audit Office report
ASPIRE contract’s rising costs – Public Accounts Committee report
Compass – its website
OGC Procurement Capability Reviews – OGC website