How will suppliers cut government IT costs?

The government has told IT suppliers that it wants them to reduce the cost of contracts with government departments, but it could be the government that has to change the most.

The government has told IT suppliers that it wants them to reduce the cost of contracts with government departments, but it could be the government that has to change the most.

Last week cabinet secretary Francis Maude met senior officials at the government's top 19 suppliers (see below), to start the process of reducing the cost of contracts.


The suppliers that met Francis Maude

  • Hewlett Packard
  • British Telecom
  • Capgemini
  • Fujitsu
  • Capita
  • IBM
  • Telereal Trillium
  • Atos Origin
  • CSC
  • Logica
  • Steria
  • Oracle
  • Siemens IS
  • C&W
  • Microsoft
  • Accenture
  • Serco
  • G4S
  • Vodafone


The next phase will see the government meet the chief executives of each company individually.

But red tape needs to be addressed and the government must overcome a lack of trust, if suppliers are to meet government targets without merely cutting costs to the bone or stripping service levels.

One attendee at the meeting said, "The government wants immediate reductions in cost as well as ongoing cuts."

He said no figures were mentioned, but a source told Computer Weekly that the government wants 20% cost reductions.

Another source told Computer Weekly that suppliers will probably be expected to deliver 40% savings over three years.

Reduced profits

The coalition government expects suppliers to reduce their profit margins but is also open to ideas about how the government should change its procurement and consumption of IT services.

Maude said he is laying down the challenge to major government suppliers to ask them what they can do to take costs out of contracts. "Some of this will come out of margins, but we will also invite ideas on how we can structure things differently to reduce complexity and cost."

The fact that the government is open to suggestions about how it could "structure things differently" suggests an opportunity for service innovation and not just suppliers cutting costs by stripping services and offshoring more work.

Labour arbitrage and reduced service levels are options for suppliers to reduce costs without giving away margin. But government flexibility will allow them to fundamentally change how services are delivered.

Suppliers take the lead

Steve Tuppen, consulting director at Compass Management Consulting, said allowing suppliers to show what they can give is common in the private sector. "It is obvious but has not happened before across government departments."

The 19 companies are classed, by the government, as top suppliers because they have significant reach across departments, according to the Home Office. As a result there is space for consolidating multiple services through standardisation and shared services.

Tuppen said meeting government targets will require a transformation in how services are provided and consumed, which will require both supplier and government clients to change. "The suppliers are looking for a commitment from the government for them to supply standardised services across multiple government clients."

Currently each department or organisation will demand different contracts and services when most processes are actually the same. "There is 90% commonality of processes but they have to be delivered in a different way," added Tuppen.

Treacle

He says the government must allow suppliers to determine how they deliver. To do this the government must remove what Tuppen described as "the treacle". This treacle, he said, is the result of public sector structures with slower decision-making and the continuous need for consensus.

He also said the government is too cautious and duplicates things just in case. Even if a service is outsourced it suffers because there is too much assurance and duplication of what the supplier is doing, just in case. "This makes the effort and time greater and is the result of a lack of trust."

Suppliers must be allowed to disregard the contents of the original Office of Government Commerce notices, which are rigid, and offer alternative ways of delivering the services, added Tuppen. "They should be given the opportunity to own their own destiny and have control over their margins."

He said this will inevitably lead to more standardised services which will drive efficiencies through the removal of customisation and duplication. It will also increase competition because the playing field will be level.

Tuppen said a 40% saving over a few years is possible if the government and suppliers both change.

Long-term plan

Whatever the government and suppliers do there must be a long-term plan.

Lee Ayling, UK head at sourcing consultant Equaterra, said big cost savings are achievable in the public sector. For example, he said, offshoring work to low-cost regions is a possible means of driving more cost out of IT projects. Another method could be deploying simpler IT systems that are less customised. But he questioned how sustainable these savings will be.

"In 2000 in the private sector there was lots of strategic cost reduction and what we saw was that if you slash-and-burn you can deliver immediate results, but they are seldom sustainable."

He agreed that if the government wants to make sustainable savings it will have to change how it works and not just expect suppliers to. "I worry that the government will abdicate its responsibility."

The government has made the right start by engaging with suppliers because without them it will not have the information it requires to cut costs, according to Robert Morgan, director at Burnt-Oak Partners. "Consultants may have the ideas but the suppliers have the information."

He said the incumbent suppliers will be able to identify redundant systems and duplication.

Substantial savings

Morgan added that there are certain areas where there will be substantial savings available. He said departments that are "power-users" which demand more than they will ever require, "just in case," can have their services stripped down without their service being affected.

"In the private sector I have seen prices drop 40% because a power-user is happy that the business is stable and will concede some requirements," he said. Public sector power-users might include the Department for Work and Pensions or the Treasury.

Trusting a supplier and being willing to concede service levels can enable flexibility in pricing to suit the economic climate. Morgan said there can be different service guarantees. He described how an oil company linked IT service levels to the price of a barrel of oil. If the oil price was high it would receive - and pay for a - premium service and if the oil price was low it would have a stripped-down service.

But it is not just about the business people doing clever deals, it is also about the IT experts creating innovative services that cut costs and improve service levels.

A recent example in public sector shared services is a deal between Steria and Cleveland Police Authority. It will provide common services to multiple police authorities and promises £50m savings in 10 years (see Box 2) for Cleveland, which is its first customer. Multiply this by 42 police forces and the potential savings are massive. It will, however ,rely on the police authorities working in a different way.

Speaking at the time of the deal being signed John Torrie, CEO at Steria UK, said it is the first of its kind for Steria and is part of a wider public sector push. "We have been in the police sector for over 30 years but police authorities have not outsourced as much as they could." Torrie is a proponent of shared services across government.


Case study: Doing things differently

Steria had built a shared services platform aimed at police authorities.

It allows them to share services such as finance, HR, payroll, commissioning and fleet management which will be hosted in Steria's dedicated datacentres

Cleveland Police Authority has become the first customer and is expected to save £50m over the 10 years of the contract.

If more police forces sign up the savings will become greater but it involves a change in how forces have traditionally done things. This scenario can be applied to most public sector departments.


Cloud computing will also fundamentally change how government departments consume and contract services. But the potential savings through the removal of duplication are massive. Re-use of existing resources, ranging from a massive HR system right down to a fragment of code in a system, is possible through the cloud.

Speaking to Computer Weekly in April, Karl Deacon, CTO at Capgemini who has worked closely with the government on its G-Cloud project, outlined how cloud computing can help the government reduce the budget deficit.

He says in relation to the infrastructure layer the costs related to ICT in government can probably be cut by 20% by moving to the cloud. This will cut costs associated with hardware, power and time for example.

But this is just the tip of the iceberg, he said.

He said in the next cloud layer, the development platform, you can have all fragments of code in a library. The IT department then pieces fragments of code together, in the cloud, to create a service for a specific department. New code would not have to be written 10 times over for new applications.

Then you have the third layer, where the finished applications sit. All departments will have access to the final applications through the cloud. If these applications are owned by the government then the savings are obvious. But even if they are third-party applications an agreement is probably in place and there will be no need to negotiate licences.

IT is a long-term cost cutter, but only if the government is flexible enough to accommodate new ways of working.

Answer to a prayer

When you read the headlines you sometimes think that IT is bad for the government. It is often portrayed as over-priced and not up to the job. But IT and the IT service providers could be the answer to the government's prayers.

However, the government needs to loosen its grip a bit and let the suppliers control their own destiny, because that will mean more effective and efficient systems.

Read more on IT outsourcing

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