CSC struggling to make a profit from Royal Mail outsourcing deal

CSC has stemmed losses in its 10-year outsourcing deal with Royal Mail through job cuts, tax breaks and relief payments, according to accounts

CSC has stemmed losses in its 10-year outsourcing deal with Royal Mail through a combination of job cuts, tax breaks and relief payments, according to an analysis of eight years of published accounts for the venture.

The supplier signed the contract in 2003, and operated the outsourcing through a subsidiary company called CSC Business Systems Limited, into which Royal Mail transferred 1,713 IT staff and £72m of equipment assets.

CSC has sustained the venture to date by cutting 1,082 jobs – 63% of the staff Royal Mail transferred as part of the outsourcing in 2003.

The job cuts allowed CSC to halve the annual wage bill at CSC Business Systems, from £55m to £25m. This helped save an accumulated £160m over the life of the contract.

Yet CSC Business Systems has still made an accumulated operating loss of £12m, on a total turnover of £1.5bn.

Losses would have been higher had the subsidiary not been eligible to claim £61.6m of tax breaks. CSC also buoyed up the outsourcing company with £160m of relief payments – shown in the accounts as "amounts owed by parent and fellow subsidiary undertakings" and "group relief receivable".

CSC said it has delivered significant benefits to Royal Mail.

"CSC believes that Royal Mail has benefited from access to its next-generation solutions and services to manage unprecedented levels of technology change over the past decade," said a CSC spokeswoman.

"Since the beginning of the CSC-Royal Mail partnership in 2003, CSC has delivered £250m of savings, won the National Outsourcing Association's innovation award and been shortlisted for the National Outsourcing Association's IT Outsourcing Project of the Year award," she said.

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Outsourcing challenges

But the analysis of the accounts further highlights the challenges of running a profitable outsourcing deal. 

In other recent examples, Southwest One – a local government shared services operation 75% owned by IBM – has struggled to deliver the benefits it promised and needed a loan from IBM to stem losses.

Cornwall County Council is also reviewing its own £800m outsourcing plan, after its leader and other cabinet members resigned in opposition to the deal.

Colin Walker, Unite union representative for the Royal Mail staff who transferred to CSC, said the supplier had signed a "world sourcing agreement" not to offshore jobs just to cut costs.

"Every time it offshores, we have a discussion about whether it's in the agreement or not. We say it isn't. CSC says it is," said Walker.

Unite does not know what happened to all 1,082 people whose jobs were cut. Walker said not all of them were union members. CSC did not reveal what their fates have been, and some of them may have moved elsewhere in the company.

But Walker said: "Most people who transferred from Royal Mail to CSC, and are still with CSC, are probably still working on the Royal Mail account."

Royal Mail and CSC convinced staff to support the outsourcing in 2003, with directors from both sides selling the idea in a touring roadshow. The deal incorporated BT and Xansa (since acquired by Steria) as subcontractors in what was initially known as the Prism Alliance.

Analysis of accounts for CSC's Royal Mail contract highlights the challenges of running a profitable outsourcing deal

Lifetime profits

CSC Business Systems posted losses for its first five years. Outsourcing contracts are designed to be profitable over their life. It made modest operating profits of between £9m and £13m for the last three years. But these had not brought the subsidiary out of the red by 1 April 2011, the year-end of its last published accounts.

By 2010, Royal Mail was complaining that its IT infrastructure was expensive and suffering years of underinvestment. It renegotiated its contract with CSC to transfer some of its computing to cloud services, and opened a £50m tender for high-level consulting services from a variety of suppliers, to be managed by CSC.

Royal Mail also saw two CIOs quit within 18 months, before former Network Rail CIO Catherine Doran took on the role in September 2011 to transform the postal service's IT as it splits from the Post Office and prepares for privatisation.

Doran has begun recruiting IT staff again to bring expertise back in-house. She gave CSC a short-term contract extension while she decides what to do next, but intends to go back out to market in due course.

CSC Business Systems' next published accounts – due in December – will incorporate some of these changes.

Cutting costs

Richard Sykes, an outsourcing consultant, said the idea behind such outsourcing deals was to take cost out by cutting staff and systems, and automating processes. By the time CSC handed the contract back, it should be cheaper for Royal Mail to handle.

"I'm not at all surprised by the cuts in people because CSC will have been able to automate systems and get a lot of jobs out," he said. "If they were technical jobs they will not have had much difficulty finding other work because the UK is short of good quality people.

"The tax breaks might be a reason to set it up as a separate company. While it is in a loss-making period, it can accumulate tax [rebates]. That's a way for government to fund transformational work in standardising, simplifying and automating. That's not a bad thing, necessarily, from the point of view of the economy," said Sykes.

The wider economic downturn and problems with its £2bn contract to supply patient systems to the NHS have put pressure on CSC in the UK. It cut a further 1,100 jobs from its wider business of about 7,500 people this year and has embarked on its own cost-cutting restructure.

Royal Mail declined to comment on the finances of its outsourcer.

“In 2003, Royal Mail announced it had signed a contract with CSC to outsource its IT support service operations. People who were employed by Royal Mail transferred to CSC and its partners on their existing terms and conditions under Tupe regulations. Royal Mail does not comment on the business performance of suppliers," it said in a statement.

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