Why did EDS cough up £25m to HMRC?

Officials at HM Revenue and Customs are grateful to services company EDS for settling a three-year legal dispute with compensation worth more than £70m.

Officials at HM Revenue and Customs are grateful to services company EDS for settling a three-year legal dispute. EDS's final payment brings the total amount of compensation to more than £70m..

But would such a legally-experienced supplier have settled if not for the recession and, especially, its takeover by Hewlett-Packard last year?

EDS was not forced into a corner - it did not have to settle.

The dispute has its origins in 2003 when EDS and HMRC introduced flawed systems to support tax credits. Some benefit claimants received too much money, but HMRC found it difficult to recover the overpayments.

Under pressure from MPs to sue EDS, HMRC made threats of legal action, and in November 2005 reached an extraordinary deal with the supplier.

HMRC announced that it had won £71.25m compensation from EDS. It looked from HMRC's public announcement that the compensation was assured. HMRC even announced that the settlement represented the most any UK government department had won in compensation from an IT supplier. But the deal was extraordinary because it did not guarantee that EDS would pay-up.

Secrets

The terms of the deal were to be kept secret: HMRC did not want it known that much of the settlement would not have to be paid in cash: it would comprise a medley of things such as a tax refund and EDS's foregoing some profit-sharing on its £2bn outsourcing deal with Inland Revenue.

We were not supposed to know either that more than £26m of the compensation was subject to EDS's winning future UK government contracts. In fact, EDS did not win as much business as it had expected and its payments to HMRC trickled in.

The problem for officials was not so much that EDS had not paid all of the compensation two years after it had been announced perhaps HMRC could have put that debt to the back of its corporate mind if nobody had noticed it.

Dogged MP

But nearly every time HMRC's officials came before Parliament's Public Accounts Committee on other matters, a particularly dogged member of the committee, Conservative MP Richard Bacon, kept asking questions about how much EDS had paid in compensation.

So officials kept threatening legal action against EDS - but the last thing HMRC wanted to do was take EDS to court, where cross examination might have exposed its lack of oversight of the supplier and its lack of understanding of the tax credits IT project .

Yet, as 2008 drew to a close, Computer Weekly reported that EDS could be about to make a large payment to HMRC. Last week HMRC announced that the £71.25m has been paid in full "as a result of EDS's decision to make a lump sum payment to HMRC".

We understand that the lump sum was about £25m. But why did EDS settle when it did not appear to have won enough government work to justify paying that sum?

One reason could be that HP did not want to acquire EDS with the baggage of a wearying legal dispute with one of the government's largest departments. In a recession suppliers need to court customers more assiduously than ever, rather than end up in court with them.

No stranger to litigation

EDS is not a stranger to litigation. It is awaiting judgment on the UK IT industry's biggest and most costly court case. BSkyB is suing EDS for about £700m. In 2002 the supplier went to court against National Air Traffic Services and EDS has faced a writ for £250m from Airtours after the collapse of an outsourcing deal.

The company has legal nous: it does not go to court without being convinced of its arguments and it was impressive and justified in winning against National Air Traffic Services. In these examples, EDS could argue that it had no choice but to engage the legal process.

But are such big court battles over IT projects likely to cease? Apart from HP’s takeover of EDS, the recession means that organisations will find it difficult to set aside money for legal disputes.

Read more on the IT Projects blog >>

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