The failure so far of negotiations to terminate Fujitsu's £900m public finance initiative contract with Customs and Excise, and bring it under the umbrella of Capgemini's £3bn Aspire deal with the Inland Revenue, has implications for government plans to cut costs by streamlining IT systems and contracts across Whitehall.
If suppliers demand substantial payments for rationalising their contracts, the compensation could reduce or cancel out savings from merging systems.
The government is merging the Inland Revenue and Customs in part because they share common administrative functions - collecting taxes and enforcing payments. They also share many individual and corporate customers.
But David Varney, chairman of the merged Inland Revenue and Customs, revealed during questioning by MP Richard Bacon at a hearing of the House of Commons Public Accounts Committee last month, that it would be "expensive" to end Fujitsu's contract and that it is "not something we are going to do at this stage". He put the cost at "tens of millions" but less than £100m.
Last October, Varney told the Treasury select committee that he was in talks with Capgemini and Fujitsu over their contracts and was hopeful that by the end of 2004, "We will start the process of bringing them together."
Varney went on to express concern to MPs that Fujitsu could gain from any merger of the contracts. This was because it is both a main IT supplier to Customs and a key subcontractor on the Aspire contract held by Capgemini and the Inland Revenue.
Fujitsu's 10-year deal with Customs has four years to run, and Capgemini's contract with the Revenue has more than nine years to run.
The Inland Revenue initially refused to comment on its talks with Fujitsu "because of confidentiality". But after Fujitsu was presented with the facts and asked to comment, the Revenue made a statement.
It said the Revenue's Aspire deal with Capgemini, and Fujitsu's Infrastructure Services Agreement with Customs, are large and complex contracts and both have very different approaches. Fujitsu's agreement is a public finance initiative, whereas Aspire is based on "service level agreements and consumption."
Despite the plan to bring the two contracts together, the statement acknowledged that this might not happen now. "The outcome may be a single contract, or it may be two separate contracts, ensuring that the services provided are much more common. This will depend on which option provides best value for money."
The statement claimed that the negotiations are progressing well and according to timetable. "All parties are working co-operatively to ensure the best outcome is achieved."
Merging the contracts would streamline the management at the merged government agency. It would also bring a PFI contract, which the government now believes is an unsuitable method of funding public sector IT projects, under the Aspire contract, which is regarded by Whitehall as a model contract.