IBM bails out struggling South West One venture with £10m loan

IBM has bailed out troubled Somerset shared services firm South West One with a £10m loan as the local authority venture starts bidding for work as an IT services company.

IBM has bailed out troubled Somerset shared services firm South West One with a £10m loan as the local authority venture starts bidding for work as an IT services company.

The supplier extended a mortgage to cover its 75% interest in South West One (SW1) after managers tore up the troubled public-private partnership's original business plan to avert its collapse.

Three public authorities formed the joint venture with IBM in 2007 but are renegotiating their terms half-way through a 10-year agreement after admitting it had failed.

The outcome of talks that have left the fate of SW1 hanging will be addressed by Ken Maddock, leader of Somerset County Council, in his annual budget speech to councillors on Wednesday 15 February.

South West One disclosed the IBM loan in a company filing on 30 January. Directors filed its 2010 accounts four months late on 19 January, two days after they secured the IBM loan.

The accounts said South West One directors had calculated it would not be able to recover its losses before the end of its contract with part-owners Somerset County Council, Taunton Deane District Council and Avon and Somerset Police Authority, in 2017.

SW1 has also been unable to cover its start-up costs of £17m. It accumulated an operating loss of £31m and a trade debt with IBM of £45m. It had nevertheless in three years bought £107m of goods and services from IBM, according to accounts for the period 2008 to 2010.

Notes to the late-filed 2010 accounts said: "Forecasts have indicated that losses would be sustained."

It added: "The board...concluded, based on the forecast to end of life, that they will not be recoverable.”

Company directors reported this was due to "the extended transformation timeline, the impact of market conditions and the impairment of the deferred transition costs asset".

The company cancelled plans to amortise its costs over the 10-year life of its agreement and off-loaded its losses in the 2010 books, refinanced with IBM and revised its business plan. Directors hope after renegotiating contracts with parent public authorities to have a clean sheet in 2012. This would however depend on a favourable conclusion of renegotiations.

Having launched with the expectation of extending its joint venture to up to 36 named authorities across south-west England, SW1 failed to deliver the £192m of savings it promised when just three authorities took shares in 2007.

SW1 pioneered the outsourced shared services business model. But despite declaring the original plan a failure, its directors said they had started bidding for tenders from local authorities in south-west England in competition with IT providers such as its parent, IBM.

"It is now clear the original business model for the company will not be achieved," said the director's report on 19 January. They concluded after a review of the business model to redirect the business.

However, they said: "It remains the company's ambition to expand the current framework and allow other interested public sector authorities to join the venture.”

The report added: "The establishment of a single shared services structure and the experience of dealing with the inevitable change management issues apparent in a collaboration of this nature will reduce the cost and make it easier to incorporate new partners to the joint venture in the future.”

Directors said they had approved the business as a going concern after establishing IBM's security against further losses.

Bob Little, a Somerset County Council councillor who has been on the SW1 board since 2009, refused to comment.

Tony McMahon, SW1 board member for a year until 20 May 2011, said he still retains an interest in the company as Conservative councillor of Taunton Deane Borough Council but refused to comment.

IBM, SW1 and Avon & Somerset Police Authority were unavailable for comment.

David Orr, who worked as an IT analyst at Somerset and SW1, and has campaigned for further disclosure of public expenditure in the venture, said he was sceptical of its accounts.

"It's very easy for IBM to move losses into South West One by charging huge amounts for consultancy. I'm hugely sceptical of large company accounts these days. The accounts don't really reflect what is going on," he said. "Somerset paid £50m to IBM so I struggle to see how it's not profitable.”

IBM originally told participating authorities it would deliver £192m savings on £585m turnover in 10 years. But Somerset Council found that by 2011 the venture had delivered just £3.3m savings. The leader of Taunton Deane told Computer Weekly the downturn and cuts in central government funding had led local authorities to spend less money with SW1.

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