Inland Revenue & EDS: Divorce Impossible?

It used to be said that only two things in life are certain: death and taxes. Inland Revenue seems to have made that three, by...

It used to be said that only two things in life are certain: death and taxes. Inland Revenue seems to have made that three, by including EDS. Tony Collins investigates the unlikely prospect of the Revenue's IT contract going to anyone else

When long-married couples are asked by local newspapers to reveal the secret of their enduring relationships, they usually put it down to a bit of give and take. And so it is with Inland Revenue and its main IT partner, Texas-based EDS: Inland Revenue is prepared to admit that its faulty technical design of an online tax filing system allowed the records of up to 47 taxpayers to be viewed by strangers; and EDS agrees to pay a couple of million pounds in penalties for about 100 breaches of service level agreements. It's just a bit of give and take: a marriage made in Plano, Texas.

But the solidity of this eight-year partnership is becoming a serious problem. Nicholas Montagu, chairman of Inland Revenue, says, "Our relationship with EDS, since I joined the Revenue in 1997, has given me no cause for concern." As if that were not bad enough, the department has the same problem with another of its main IT partners, Accenture. "I am more than satisfied with its performance and with the partnership with Accenture," said Montagu in December 2001.

The difficulty for the Revenue is that it gets on so well with EDS and Accenture that it has no compelling excuse to be rid of them; so the current competition to decide the future of the Revenue's contracts with EDS and Accenture is perceived as nothing more than a particularly diligent form of window-dressing.

The contracts expire in 2004 and the Revenue wants to have a new contract in place by December 2003. John Yard, director of business services at the Revenue, describes the retender as "possibly the largest public sector technology procurement over the next few years". The specification for the new contract is about 55,000 pages, too much to print out, so it is available on three CDs.

That is part of the problem: what began as a £1bn tax IT system partnership agreement with EDS in 1994 has so grown in complexity and size, and now includes Accenture's national insurance systems, that the new contract is worth between £3bn and £4bn. EDS and Accenture have insinuated themselves so deeply under the Revenue's IT skin and into the department's business that some see it as impossible to remove them without risking a calamitous break in the continuity of day-to-day service to taxpayers and the Exchequer.

EDS and Accenture support the tax, national insurance and tax credit systems of the UK. A serious lapse in business continuity could plunge the nation's finances into uncertainty: their systems support the collection of more than £100bn a year.

Aware of the risks of an expensive bid which has no prospect of winning, two of the world's biggest IT services suppliers have declined to tender for the new combined tax and national insurance contract. The deadline for bids closed earlier this year without tenders from Computer Sciences (CSC) and IBM.

Tim Leger, director of public sector business at IBM Global Services, says, "The procurement process runs over two years. It would require our best people on a highly competitive project where the odds of winning are not above 50:50. There are lots of opportunities out there with higher chances of winning." A spokeswoman for CSC says, "Having looked at the scope and structure of the deal CSC felt that there was not an opportunity to mount a serious bid against the Inland Revenue's incumbent outsourcing provider."

This leaves three shortlisted candidates: EDS in partnership with Accenture; BT's services division Ignite, in consort with its consulting and systems integration subsidiary Syntegra; and Cap Gemini Ernst & Young.

IT industry analyst Richard Holway, of Ovum Holway, says, "Neither Syntegra or BT Ignite has taken on anything of this magnitude before, and Cap Gemini is not really involved in large-scale outsourcing contracts."

Clearly EDS and Accenture, in their joint bid for the new contract, do not face overwhelming opposition. Yet it is in the interests of the incumbents and the Revenue for the retendering to be a genuinely open competition, and to be seen as such. For EDS, little could be worse than losing the contract, one of the most lucrative in the world; but it would also not wish prospective customers to perceive that it had an unshakable grip on the Revenue. When seeking new business, companies like EDS market the ease with which clients can sign multimillion-pound outsourcing deals and leave when they like.

The Revenue would never admit that it has ever, or could ever, be locked in with one IT supplier. But the department could find in practice that it cannot escape from EDS because the alternative is less palatable: a new supplier taking over responsibility for tax and national insurance systems without any profound understanding of what makes those systems tick.

For the Revenue the biggest problem of being locked into EDS is, therefore, one of perception: it could impugn the reputation, in the eyes of Parliament, the media and the IT industry, of "strategic outsourcing", the term given to contracting out an entire business function, as opposed to tactical outsourcing, which is contracting out a chunk of operations, such as finance.

For the Government, strategic outsourcing, particularly in the form of a public private partnership (PPP) and private finance initiatives, is central to political policy; and the Revenue's contract is the first and biggest strategic outsourcing deal of its kind to come up for recompetition. So the reletting of the contract, pioneering in complexity as well as size, will be a key test of whether strategic outsourcing and supplier lock-in are seen as natural bedfellows. Indeed the contract is being tendered as a PPP.

Political sensitivities could help to explain why the Revenue appears anxious, almost desperate, to demonstrate that the retendering exercise is a genuine, open competition. Montagu wrote, in a letter to The Times last month, "The competition is far from being open and shut. We recognised early on that EDS and Accenture potentially have an advantage of incumbency. So we have throughout made a concerted effort to ensure that potential suppliers fully understand that we are serious about competition and will change strategic partners if that is what it takes to ensure we gain access to the right skills in the marketplace."

In an attempt to achieve what it says is a level playing field, the Revenue has announced that it will remove the cost of changing suppliers from its evaluation of bids. "Of particular concern to bidders is the cost of transition to a new partner," says Yard. The Government has decided to meet the unique costs of transition, which "will not form any part of the evaluation of bids", he adds.

But Computer Weekly understands that the Revenue is prepared to pay, from the taxpayer's purse, only about £4m for transition costs. Some specialists believe that the costs will be closer to £9m. Any supplier must be able to manage, individually, the transfer of up to 3,000 staff from EDS and Accenture; and co-ordinate a massive due diligence exercise to gain an understanding of Revenue's networks, which involve tens of thousands of PCs, servers and mainframes, and software that is being written, bedding down or may date back decades. This is not a cost faced by EDS or Accenture.

Another problem for BT and Cap Gemini is that, however much the Revenue takes as read the knowledge that would transfer from EDS to any winning bidder, the department faces real, perhaps insuperable risks of a PPP failure, or even financial chaos, if this does not happen in practice.

"Among those managing the EDS partnership, critical knowledge is held by relatively few individuals," said the National Audit Office (NAO) in 2001.

Within EDS, about 85 people have a knowledge that is deemed vital for the operation of the partnership. They possess a critical knowledge of the labyrinthine complexity of the system-level inter-relationships between the Revenue's business operations and the dozens of major systems. Some executives have acquired this knowledge only after eight years of managing the systems, and resolving sometimes major problems along the way. None of them can be forced to impart what they know to any new supplier - and indeed they may quit for other jobs.

One measure of the complexity of the Revenue's operations is the number of major business systems. Costing nearly £200m and dealing with the returns of about nine million taxpayers, self-assessment is only one of the Revenue's 127 systems. Another is PAYE, which handles income tax for about 29 million people. EDS is currently building a huge new system for new tax credits which are due to be introduced in April 2003.

The Revenue insists that it could, if EDS lost, acquire for up to 12 months the services of the supplier's staff who did not transfer - and the department could, undoubtedly, contractually acquire peoples' job titles - but it could not forcibly second the individuals. So, if EDS and Accenture lost the contract, none of their 3,000 or so employees currently working on the partnerships, or the 85 executives with an overview of operations, could be forced to transfer to a new supplier.

In the next 15 months, before the new contract is due to be awarded, there is seemingly ample time for BT and Cap Gemini to grow more familiar with the Revenue's systems and operations. But in this time, the complexities could also become more profoundly impenetrable to the newcomers.

An NAO report said in 2000 that the "increasing move towards integrating the department's systems and the development of single software modules for common procedures, such as the handling of receipts and payments mean that proposals [for new IT schemes] are becoming more complex, in the sense that dependencies between projects are increasing".

Bringing back the service in-house would be as impracticable as severing ties with EDS and Accenture. An NAO report on the relationship between the Revenue and EDS said in March 1995, "It could take up to five years to reconstitute the in-house organisation." And this was written when the contract was about a third of its current size.

Last year, Liberal Democrat shadow chancellor Matthew Taylor wrote to Dawn Primarolo, the minister responsible for Inland Revenue, pointing out that the risks to continuity of service of replacing EDS when its 10-year contract with the Revenue expires in 2004, could make any competition a money-wasting pretence.

Primarolo replied that there had been several successful transfers of IT operations to new suppliers after a second competition. But the contracts she cited were tiny in comparison. She mentioned that Fujitsu and PriceWaterhouseCoopers have taken over Home Office IT systems from Sema. But this involved a transfer of only about 100 staff.

She also referred to a defence contract, Domis, passing from Fujitsu to services supplier Integris, which was worth about £50m; and a deal in which IT services supplier Capita was due to acquire 1,500 (mostly non-IT) staff from Consignia since it lost a BBC contract to manage the television licensing scheme, worth only £500m.

Last year, Montagu was asked by the Public Accounts Committee for his thoughts on the odds of another operator taking over the Revenue's business in 2004. His cautious reply was up to the best of Sir Humphrey's Yes Minister responses. "If the competition is truly open you would not expect me to state odds. It will be a truly open competition," he said.

On its Web site the Revenue has devoted a section to the recompetition including frequently asked questions and answers, one of which is, "Surely the Inland Revenue's technology services are locked in to EDS?" Conspicuously missing from the answer is a simple "no". Instead, a long response speculates on how the Revenue's contract with EDS provides for a new supplier to take over without fuss. The Revenue considers the risk of lock-in to be "manageable", the Web site says.

The key question is whether senior officials will take the chance of destabilising the nation's tax collection system, by putting that "manageable risk" to the test. A realist would say it seems unlikely, indeed inconceivable, that they would. The Revenue's reply to that question is less than direct. "The contracts with our current partners cover the transition arrangements to a new contract to ensure continuity and co-operation from all sides," it says.

That's all right then.

Inland Revenue's tax and national insurance systems contract at a glance
  • EDS and Accenture's contracts to manage national insurance contributions, tax and tax credits expire in 2004

  • Under those contracts they collect more than £100bn a year for the Treasury

  • Inland Revenue wants the replacement contract in place by December 2003

  • IBM and CSC did not tender in part because they felt the cost of preparing a bid was disproportionate to the chance of winning

  • The remaining competitors to EDS and Accenture - BT Ignite and Syntegra; and Cap Gemini Ernst & Young - have little experience of outsourcing contracts of this size

  • Critical knowledge of the existing 127 systems rests with about 85 key EDS personnel who cannot be forced to transfer to the new supplier

  • Costs inherent in changing to a new supplier will not be taken into account when considering a bid

  • Bids will be assessed more on the basis of a supplier's capability to provide a continuous service than the risks of failing to do so.

How the Revenue will evaluate the bids
Details of how the Revenue will "score" bids for its new contract - the idea being that the highest scoring bid wins the competition - have been leaked to Computer Weekly. About one-third of the points will be on IT service capability, for example managing the service as it exists in April 2004. The risk of any collapse in the service during transition may be excluded from the evaluation, as it will be assumed that if EDS loses, it will transfer its knowledge of keeping the systems running smoothly to the winning bidder.

A further third of the points will be awarded on the supplier's ability to manage business change capability and innovation. Again, it will be assumed that EDS, if it loses, will pass its knowledge to the winning bidder of how the network of existing systems interact with planned new ones.

The remaining third will be split equally between a supplier's strength in partnering and its "ability" to manage a transition: for example, whether the bidder can assimilate into its organisation up to 3,000 people who may transfer from EDS and Accenture.

Inland Revenue replies
In response, Inland Revenue says, "We are confident that all three short-listed bidders have both the experience and capability to successfully manage a transition on this scale. We also believe that any incoming supplier will be able to bring in their own expertise and effect the necessary transfer of skills and knowledge of the Inland Revenue environment.

"Continuity of service will be a key part of the assessment of transition and that is why the Inland Revenue is strengthening its own Intelligent Customer function so we can work with whoever wins the competition to manage the transition."

Read more on IT outsourcing