Cap set for £500m defence e-bonanza

Memo reveals French supplier expects £400m extra from MoD deal

A French IT services company that is set to supply a huge e-business system to the Ministry of Defence (MoD) has secretly told staff it expects the contract to yield a further four times the initial "book" price of about £100m.

The disclosure comes at an awkward time for the MoD which is under renewed pressure from the chancellor Gordon Brown to cut costs.

It is also the first time news has leaked out, in advance of a contract with the Government being signed, that a major IT supplier anticipates a large increase in the deal's value during the lifetime of the relationship.

In an internal memo, Cap Gemini public sector director David Galloway told some staff the company has "beaten off EDS for the e-commerce prize" at the Ministry of Defence.

This referred to an expected MoD decision to award preferred supplier status to Cap Gemini for a 10-year contract, under Labour's Private Public Partnership, to supply and maintain the Defence Electronic Commerce Service (Decs).

Earlier this year, Armed Forces Minister John Spellar, said Decs will handle logistics transactions worth billions of pounds and could revolutionise the way the MoD buys goods and services.

It will enable MoD users to buy anything from spare parts for vehicles to office stationery. Decs will have an electronic messaging system that automatically informs suppliers of MoD order requirements and will be linked to online catalogues of suppliers' products.

"This is likely to be the biggest and most significant e-business system in government and possibly in the UK, once it is up and running," said Spellar earlier this year.

The Cap Gemini memo expressed satisfaction at having "beaten off" EDS, which is currently one of the largest IT contractors to the MoD, in a 15-month battle.

The contract falls under the auspices of the Defence Logistics Organisation, which is the largest single organisation in the MoD with an annual budget of £4.7bn - 20% of the MoD's total budget. One of the organisation's aims is to cut costs using Decs.

The memo goes on to say the deal is "likely to be booked at about £100m over 10 years, with a further £400m or so of sell/bill". It is unclear in the memo whether Cap Gemini expects the growth in contract value to come from new work.

Large IT systems that are supplied to government often yield more than the original contract value because of further business awarded to the supplier once the partnership has been established.

However, an anticipated yield of five times the original contract value is said by some outsourcing experts to be an unusually high projection.

The Lib Dems plan to table questions on the memo.

On Tuesday the MoD announced, officially, the contract will be worth only "£50m". Cap Gemini declined to comment.

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