28th PAC Report 2006-07
ASPIRE - the re-competition of outsourced IT services
Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:
“The re-competition of the IT services for the former Inland Revenue ended with the incumbent suppliers, EDS and Accenture, being replaced by Capgemini. The transition was successful but very costly. It is hard to find a justification for the Department’s paying so much, nearly £52 million, towards bidders’ costs to encourage competition. Any department doing this in future must show there is no other cost-effective way of securing competition.
“The Department could also have been sharper in its negotiations. The actual costs of transition were agreed after the contract was awarded and competitive tension had vanished - and the costs even included a profit margin for the successful bidder. In addition, part of the costs of transition related to NIRS2, where the original supplier Accenture carried on as a subcontractor.
“There has been a very steep rise in HMRC’s spending on IT services - the forecast figure is some £8.5 billion over the ten years of the contract compared with the original estimate of nearly £3 billion. If profit margins carry on at the current level, then Capgemini could make £1.1 billion on the contract, nearly four times the amount originally envisaged.
“The Department should have foreseen that its demand for IT services could vary significantly and determined how this might affect its contractor’s prices and profit margins. These will have to be rigorously benchmarked in future to make sure the prices fairly reflect the actual volume of work being carried out. ”
Mr Leigh was speaking as the Committee published its 28th Report of this Session which, on the basis of evidence from HM Revenue & Customs, examined the procurement, transition, and performance of the ASPIRE contract.
ASPIRE (Acquiring Strategic Partners for the Inland Revenue) is HM Revenue & Customs’ contract with Capgemini for the provision of IT services. The contract initially involved only the Inland Revenue and replaced the contracts it had with EDS and Accenture for IT services and NIRS2 respectively. The change from one supplier to another was the first of this scale in the public sector. Following the merger of Inland Revenue and HM Customs & Excise in 2005, the latter’s IT services contract with Fujitsu was incorporated within ASPIRE in April 2006.
The Department was concerned that potential competitors might perceive EDS to be a strong incumbent that could not be easily displaced. To encourage competition the Department contributed £8.6 million towards bidders’ costs, and incurred further costs in IT support to allow bidders to demonstrate their capabilities. It also agreed to pay transition costs to any new supplier and exclude these from the bid evaluation.
The procurement took 21 months at a total cost of £27.5 million, against a budget of £29.6 million. Capgemini’s bid was £2,830 million for a 10 year term-£32 million higher than RPS (EDS and Accenture)-but the Department considered that their bid better met its future IT needs, recognising that these could change significantly over the 10 year term.
As part of the transition process, the Department paid £37.6 million towards Capgemini’s ‘unique transition costs’, i.e. those costs which would not have been incurred if the existing suppliers had remained. It also paid £5.7 million to EDS and Accenture to facilitate the changeover. There was no major disruption to services during the main transition. The National Insurance Recording System (NIRS2) transition, which was run separately, took longer than expected and Accenture was subsequently retained as a sub-contractor. The Department paid £2 million for the delay.
The bid price was based on the Department’s level of demand for IT services in 2003. The forecast cost of the contract has increased as the Department’s need for IT services and projects has increased. Actual costs were £539 million in the first year (40% higher than the Department estimated), and £767 million in the second year. The estimate for the third year was £840 million. By late 2006 the Department estimated that the total cost could rise to £8.5 billion. The main reasons for the increase are the inclusion of the Fujitsu contract (£900 million) and additional projects and services relating to the Departmental merger and transformation programme.
The ASPIRE contract provides wider lessons for the public sector in re-competing major contracts, particularly relating to the payment of transition costs.
Notes for Editors
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