Demise of IT supplier highlights challenges facing government plan to support SMEs

A small IT supplier that became a figurehead for a parliamentary campaign to curtail the power large companies wield over public sector IT has collapsed amid a dispute over an unpaid bill with a large customer.

A small IT supplier that became a figurehead for a parliamentary campaign to curtail the power large companies wield over public sector IT has collapsed amid a dispute over an unpaid bill with a large customer.

The fate of Gateshead-based Remote Operations Ltd, which trades as Erudine, highlighted the challenges faced by other small IT suppliers just as the Cabinet Office this week launched an initiative to support SMEs and clamp down on large companies that pushed their SME suppliers to the limit by not paying their bills on time.


Government procurement

Erudine had been shortlisted from among 350 small companies for support from a Cabinet Office "Dragon's Den" scheme. But it was not among the nine SMEs invited to the launch event at Downing Street on Tuesday. Erudine had been forced to send staff home during the final stages of selection, according to sources close to the company.

Cabinet Office minister Francis Maude used the event to announce a Cabinet Office scheme to monitor large government suppliers and name and shame those who mistreated their SME subcontractors, in the latest attempt to raise the amount of public spending placed with smaller firms.

Martin Rice, managing director of Erudine, was meanwhile trying to avoid questions over the fate of his business, which had made a prolonged and unsuccessful attempt to sell to government departments.

"We are in a sticky situation," he said. "We have a bad debt with a major customer. It's killed the company."

Martin Rice is an outspoken critic of government procurement, telling the Public Administration Select Committee in March that large IT suppliers operated a cartel over the £19bn of public money spent annually on IT. The Cabinet Office subsequently promised to "put an end to the oligopoly of large suppliers that monopolise government ICT provision".


SMEs face unique problems

Rice's testimony led the Public Administration Select Committee (PASC) to hold a secret meeting with SMEs too afraid to speak out about the procurement regime for fear of reprisals. At the time, Rice told Computer Weekly the meeting had been called because government's ICT supply chain was bullying and abusive to small companies.

Rice refused to talk further about Erudine's situation, declining to name the customer and saying he was bound by a non-disclosure agreement. But Computer Weekly understands the dispute that led Erudine's closure was over payment from a large bank. A source close to the company said Erudine is owed roughly £400,000.

Rice did say, however, that Erudine spent two years and about £250,000 to October 2010 trying to sell its technology to government departments. He claimed Erudine was rejected, despite proving its worth, because it harmed the interests of incumbent suppliers.

Rice said Erudine did a proof of concept to replace an old Department of Work and Pensions (DWP) carer's allowance system last year, which was running on ageing ICL VME mainframe technology on which modifications had to be booked 18 months in advance. He said Erudine's proof of concept delivered 80% of the system's functionality and its entire backlog of modifications in just six weeks.


Large suppliers

Erudine was told to pitch for work through prime contractor Accenture. The firm developed a proposal that was rejected at the last minute.

Rice said that James Gardner, then DWP chief technology officer, broke the news in October. "He told us, 'You were faster, you were better, you were cheaper. However, the decision has already been made to use Accenture and Oracle'," Rice said.

But James Gardner told Computer Weekly that Rice's account was incorrect.

"The fact is we were unable to make the business case work from the context of the overall architecture of the department," Gardner said.

"No one system is able to be deployed in such an isolated way. Erudine did marvellous work but, as with all things, you are not in a position in a large organisation like DWP to make point decisions about things. Everything has an impact on everything else and you have to be conscious of that."

Gardner, who left the DWP in January 2011, and blogs about the challenges of innovating in large organisations, praised Erudine's "astounding" technology. But he said Accenture and Oracle had been selected in a fair tendering process.

Accenture and Oracle went on to be used in developing the DWP's £2bn Universal Credit system.

The Universal Credit (UC) system is under great scrutiny, due to questions about the complexity of the old systems on which it must be built. Some have voiced concerns about whether DWP can successfully use agile development techniques like those adopted by companies such as Erudine.


Government stance on SMEs

Erudine's performance in the Cabinet Office Innovation Launchpad, billed as a "Dragon's Den" for innovative SMEs, was due to be revealed this month. Minister Francis Maude, said on launching the scheme: "We are doing everything we can to open up business to SMEs".

The scheme boasted a long list of esteemed mentors, including Jon Moulton, founder and managing director of private equity firm Better Capital, Hermann Hauser, an entrepreneur who founded Acorn Computers, and software entrepreneurs Mike Lynch, of Autonomy, and Stephen Kelly, the Crown Representative for mutualisation of public services. The programme's introduction was overseen by Stephen Allott, appointed in February "to give small suppliers a strong voice at the top table in government".

The DWP has, since rejecting Erudine's proposal, promised to do more work with agile SMEs, but insisted they would have to work through prime contractors.

The DWP said in a written statement it was strongly committed to using more small IT suppliers. In 2009/10 it placed 29.3% of its spending with SMEs, including those who were subcontracted by the department's larger suppliers, but could not say what proportion of its IT spending went through small companies. The Cabinet Office declined to comment.

Graydon Credit Risk Intelligence showed Remote Operations Ltd burned most of its working capital in the last year, reducing from £301,000 to £65,000.

Records at Companies House show Cassidian, the €5.4bn systems integration arm of French defence giant EADS, took a 24% share in Remote Operations in 2006 with an injection of £3m. It acquired sole rights to use Erudine's intellectual property in the defence sector and has two board members listed as Remote Operations directors.

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