Will a £300m PFI deal for MoD IT services collapse?

Another multi-million pound PFI-based IT outsourcing deal has reached crisis point amid concerns that it was over-optimistic from...

Another multi-million pound PFI-based IT outsourcing deal has reached crisis point amid concerns that it was over-optimistic from the outset. Tony Collins reports on efforts to rescue it

Never contract out a business undergoing major change, says an IT industry maxim. But ministers have never run their affairs according to pithy sayings; and the Government's £300m contract with Texas-based Electronic Data Systems (EDS) to take over staff and IT systems supporting the Armed Forces Personnel Administration Agency (APFAA) has run into trouble, it emerged this week.

"This initial private finance initiative (PFI) arrangement was not as successful as it might have been," said Malcolm Pledger, the Deputy Chief of Defence Staff (Personnel).

He added that the newly-formed agency had not had time to bed in and establish the means of achieving its mission before it initiated the competition to let a contract for IT services in November 1997. The agency selected EDS for a 12-year partnership, beginning January 1998. "PFI was not properly understood by either party - there was particular naivety on the transfer of risk," said Pledger.

Other major IT-based PFI contracts that have ended up like beached whales include the Immigration and Nationality Directorate's £77m partnership arrangement with Siemens for new caseworking systems, and a £120m contract between the Passport Service and Siemens for the roll-out of systems producing new digital passports.

All of these partnerships tried to achieve three things, each of which was a major challenge: the introduction of major business change; the contracting out of systems and staff; and cost savings. Since these aims are often competing and conflicting it could be argued that they should be undertaken at different times, not linked to one another.

As at the passport and immigration service, three of the main aims of the APFAA were to cut costs, achieve major business changes, and contract out staff and systems.

In 1997 the agency was still seeking to understand the intricacies of its own operations and objectives when it began the search for a company that would take over 90% of its staff - hundreds of people - and administrative systems.

Only nine months after it was created as a tri-service organisation in April 1997, from three single service administrative IT departments, the agency agreed a £300m contract with EDS.

The supplier's brief appeared simple enough: to pay all service personnel - hundreds of thousands of men and women from SAS troops to army chefs.

Awarding the contract to EDS, the then Armed Forces minister John Reid said: "This contract sets the scene for a comprehensive programme of modernisation and redevelopment - a huge improvement for our services.

"Awarding this contact shows this Government's willingness to enter into partnership with the private sector, when it is sensible and cost-effective to do so. "
But the contract's beginning appears to have been its high point.

All three services run different systems which require regular and sometimes major changes to take account of legislation affecting the pay and conditions of various ranks within the services. For example, the pay for overseas assignments and leave differs not only according to rank and length of service but according to whether personnel are in the navy, air force or army - and these arrangements are subject to regular change.

At the outset of the contract EDS gave no impression that it was concerned about the size and complexity of the deal. It promised to deliver "substantial benefits" to the agency. "Working on partnerships on large complex projects is our core business," said an EDS spokeswoman at the time.

Today, more than three years into the contract, the merging of the army, navy and air force's pay and personnel systems onto a common set of systems and processes has yet to occur. Some senior staff say that there has been no radical change since the contract began.

There are also allegations of disagreements between EDS and the agency over the cost of enhancements to the legacy systems.

Speaking in Swindon to an invited audience of military personnel from all three services and senior EDS management, Pledger referred to the "perceived difficulties in delivering change to the satisfaction of customers [in the armed forces]".

However, he avoided apportioning blame for the project's problems. He said: "The perceived obligation to harmonise business processes in support of the drive for delivery over common information systems was neither formalised nor fully accepted. Without harmonisation [integrating the three services] EDS could not generate the efficiencies needed to enable them to deliver to the agreed contract price.

"Hiatus developed. MoD wanted improved services within the original contract price, but EDS needed further funding to deliver the improved information systems. The result - contractual stalemate."

He did not make it clear who was responsible for harmonising business processes.

The agency has now "reconstructed" the contract with EDS, with the "full support of ministers". The revised contract is "focused on delivering our original aspirations". This involved a move away from near-obsolete and increasingly costly legacy systems to "readily updateable" systems, he added.

"As we are witnessing now in the war on terrorism, we no longer go to war in glorious single-service isolation. We must be able to deploy one system and one team to support our personnel."

But the MoD is confident that EDS intends to make the revised contract work, partly due to its openness in revealing details of its anticipated profit margins and commercial goals, and to the personal involvement of Dick Brown, EDS' chief executive.

Although uncertainties lie ahead, the rejuvenated contract puts the partnership arrangement "back on track", he said. The agency hopes to have a single set of systems running by 2006.

Terry Lord, the agency's chief executive, and the EDS account director Paul Kilcoyne said there was now an "improved relationship" between the MoD and the supplier. This is just as well - the contract still has nine years left to run.

In a statement this week to Computer Weekly, EDS said that the parameters of the original contract had changed as part of natural developments in services and delivery. As a result "it was decided to reconstruct the agreement". This, with other changes, would lead to an improved service, EDS said.

Read more on IT legislation and regulation