HM Revenue & Customs has struck a deal to cut its IT spending with Capgemini by hundreds of millions of pounds over the life of its outsourcing contract with the supplier. The agreement compensates Capgemini with a three-year contract extension worth more than £1bn.
The restructuring of the Revenue's Aspire contract will enable the department to cut its annual IT running costs - which are between £600m and £800m - by 10% by 2010/11. The cuts are needed to meet savings targets under the government's 2007 Comprehensive Spending Review, which maps out spending for three years.
The Revenue declined to release any figures, which it said were commercially confidential, but officials have not denied that the deal could leave Capgemini with more money over the life of the contract than was assured beforehand. The supplier's existing 10-year contract was worth an estimated £8.5bn.
Computer Weekly's assessment of the deal is that the Revenue's IT spend will fall by £50m to £80m a year between now and the end of the original contract, which expires in 2014. This would cut the department's annual spend with Capgemini by at least £300m by 2014.
However, this will be more than offset by the extension of Capgemini's contract to 2017. This will be worth more than £1bn, taking into account cuts in current levels of spending.
A June 2007 Public Accounts Committee report revealed that the costs of the Aspire contract have grown from the original estimates. It said the Revenue spent £539m with Capgemini in 2004/05, compared with an original estimate of £384m. Annual IT spend rose to £767m in 2005/06 and was expected to increase to £840m in 2006/07.
The committee said that if Capgemini's margins remained at 10% to 13%, the overall profit on the contract - before the restructuring - could be £1.1bn, compared with £300m initially envisaged.
Capgemini said the restructuring was a positive development. Group CEO Paul Hermelin said, "The unique nature of our strategic collaboration with HMRC sets the benchmark for all outsourcing partnerships."
Revenue CIO, Deepak Singh, said, "The IT outsourcing relationship between HMRC and Aspire has gone from strength to strength over the past three years as we have seen significant improvements in service quality and delivery capability.
"The restructuring of the Aspire contract balances the need for HMRC to meet its commitments to cost reductions under the 2007 Comprehensive Spending Review without compromising our drive to become a world-class IT function."