Competitive public sector outsourcing model praised

Head-to-head competition between Siemens and EDS for £635m National Savings deal praised by NAO

Head-to-head competition between Siemens and EDS for £635m National Savings deal praised by NAO

Mike Simons

At a time when government IT outsourcing has been met with much criticism, the National Audit Office is holding up the £635m National Savings outsourcing contract with Siemens Business Services (SBS) as a model public private partnership.

Sir John Bourn, head of the NAO said, "Government departments could learn a number of lessons from this partnership, particularly how National Savings procured the deal and the framework established to manage the partnership with SBS."

In fact, the NAO report is of far wider interest than just to Government departments. It offers a blow-by-blow account of a second generation PFI contract being negotiated, and also a rare public airing of the different bids offered by two major Government IT outsourcers.

On 1 April 1999 SBS took over processing transactions and developing products for National Savings' 30 million customers, taking on 4,000 National Savings staff based in Blackpool, Durham and Glasgow.

It beat EDS, the Texas-based outsourcer on price, risk transfer and a list of other key items including open book accounting and benchmarking.

The heart of the NAO report details National Savings' innovative approach to the PFI contract, in particular its systematic evaluation of the costs, benefits and risks of each bid.

The NAO found there was competition at each stage of the bid. Some 90 companies responded to the initial advertisement in March 1997. National Savings sent a questionnaire to 35 companies to evaluate their suitability.

Six respondents were interviewed and four were issued with an information memorandum outlining the project in greater depth. The memorandum allowed the potential bidders considerable freedom to devise innovative solutions and a shortlist of two was drawn up.

National Savings thought this represented the best balance between maintaining competitive tension in the final bidding stage and reducing costs for both sides.

The NAO found National Savings was able to maintain competitive pressure on the two final bidders, SBS and EDS by negotiating a draft contract with each before choosing its preferred bidder.

Neither bidder met all the requirements of the invitation to tender in their initial bids in July 1998 and both were asked to modify their proposals.

Improved bids were received in October and final bids in November.

EDS did not reduce its bid in October, but in November took £68.5m off the price of its tender.

The reduction was based on a fall in forecast redundancy costs, savings on postage, a reduced profit margin and lower charges for dealing with manual transactions if the Post Office Counters Automation project was delayed.

SBS reduced its bid between July and October through a substantial reduction in central services costs and projected profit margins.

However, this was partly offset by cost increases as a result of clarification of National Savings' business requirements and a mistake in the calculation of the accommodation element of the bid. The price rise in November was the result of further errors in SBS's assumptions.

The NAO praised National Savings for its systematic evaluation of the bids at each stage against four predetermined criteria:

  • Service delivery experience

  • Organisational capability and cultural fit

  • Financial and service capability

  • Commitment to National Savings objectives for the project.

    The NAO concluded that this approach allowed National Savings to select the best bid, both on price and on risk transfer, with Siemens offering to accept more risk than EDS.

    There were other significant differences between Siemens' final bid and that of EDS, the largest supplier of outsourced services to the Government.

    Siemens was prepared to offer unfettered open book accounting, whereas EDS offered a list of reports compiled by its own auditors. On benchmarking, Siemens offered comparison against industry best practice, while EDS offered benchmarking to average market service levels.

    The National Audit Office acknowledges that the contract is in its early days and that problems may ensue, but it has rarely produced such an optimistic report.

  • Public-Private Partnership with Siemens Business Services, National Audit Office

    Some significant differences between the final bids from SBS and EDS

    Area SBS EDS
    Open book accounting Unfettered access A comprehensive list of reports available for
        National Savings' scrutiny by EDS's auditors
    Benchmarking Regular benchmarking on both service levels Periodic future benchmarking of the service
      and its underlying cost base against best but related to average market service levels as
      practice. Reductions in costs would go directly opposed to best practice. Any reductions in
      to the unitary charge cost would be shared through the profit-
        sharing mechanism
    Telephone call centre Capacity : Two million Capacity : Two million
      Additional calls : 80p each Additional calls : £1.80
    New products Cap of £600,000 for each product Cost of additional new products not capped
    Fundamentally different Accepted National Savings' definition Proposed a more restrictive definition
    Accomodation SBS has taken leases on the whole estate and EDS proposed to transfer purchased
      will pay market rent of £4.1m a year, recovered properties to another company and lease
      in the unitary charge, leaving National Savings them. It also proposed to sell the Durham site
      with a saleable asset. SBS will keep a within two years of contract commencement.
      presence at each of the three locations for at EDS proposals required National Savings to
      least five years underwrite a 10 year lease on required
    Limits on liability £250m with a cap of £120m for any two contract £50m. Excludes banking losses, value added
      year period. Include banking losses, value losses and customer compensation
      added losses, customer compensation and  
      customer overpayments  
    Fraud Accepted responsibility for all internal fraud Accepted responsibility for all internal fraud but
      and any customer fraud in excess of £250,000 not for customer fraud
      in any one year  
    Post Office Counters No additional charge if the project was not Additional charge of £60m if this project was
    Automation project implemented not implemented during the life of the contact
    Millennium compliance Took the risk on all systems Would not accept the financial risk of failure of
        legacy system

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