Public providers

The past year has been an eventful time in the technology outsourcing sector. Alistair Maughan gives the lowdown

These are busy times for those involved in outsourcing. In deal terms, we have seen the Inland Revenue’s successful conclusion of the largest ‘second generation’ outsourcing retender and the conclusion of a series of projects designed to transform the NHS’s technology service delivery. From a policy perspective, there have been changes in the way that HM Treasury and the Office of Government Commerce look at technology and business processing outsourcing projects. And all this is set against the context of ongoing intense scrutiny of the way that public sector projects are procured and managed.

Big but different

One of the trends in the IT sector is that there are fewer ‘megadeals’ coming through. With a few exceptions – the predicted national identity card project, for example, and the conclusion of the Ministry of Defence’s in-process Defence Information Infrastructure project – that is also likely to be true of the public sector. However, in the past 12 months we have seen two of the biggest transactions ever done in the UK public sector, and just about the only thing these two projects had in common was their size.

The first of the projects was the Inland Revenue’s ‘Aspire’ (acquiring strategic partners for the Inland Revenue) procurement, worth an estimated £4bn. That project was the largest outsourcing in Europe in 2003-04 and was probably the largest and one of the most complex UK Government technology projects ever undertaken. For many years, the Inland Revenue has had two separate outsourcing arrangements, with EDS and Accenture. Both of these were scheduled to expire in 2004 so the Inland Revenue had to set up a competition to retender its entire set of technology services.

Levelling the playing field

Over the course of two years, the Inland Revenue first of all negotiated appropriate ‘stand still’ agreements with its incumbent providers and then set about persuading potential competitors that it was serious about running a competition. From a legal perspective, the key task was to ensure that there was a level playing field between all participants, despite the fact that the two incumbent service providers had joined up as a team and, therefore, represented an extremely strong incumbent bidder. Although a number of the key suppliers initially decided not to bid, the Inland Revenue was successful in maintaining this level playing field throughout the competition.

Ultimately, in December 2003, after a rigorous evaluation process and an intensive period of parallel negotiations with the two remaining bidders, the Inland Revenue eventually announced, to widespread surprise from a sceptical media, that a consortium of Capgemini and Fujitsu had been selected to take over all of the Inland Revenue’s technology services.

The Inland Revenue successfully brought in its project in time and on budget and is now in the process of transitioning the services away from the present incumbents to its new service providers. The first crunch project for the Inland Reveue will be in July 2004, when the first set of services is handed over from EDS to Capgemini.

Second-generation projects

This type of ‘second-generation outsourcing’ – so-called because it takes ‘first generation’ outsourced services and retenders them – is becoming more common. The Driver and Vehicle Licensing Agency (DVLA) went through a similar process in 2002, at the end of its prior arrangement with EDS, which was replaced by PwC Consulting (now IBM Business Consulting).

While any first-generation outsourcing is complicated enough if it is done across the entirety of a complex technology-driven infrastructure, doing a second-generation outsourcing is even harder, as the services, data, key personnel and other basic elements are not in the contracting authority’s possession. Imagine doing an M&A deal when all the crucial components are in the possession and control of a third party who does not want it to happen, and indeed has a positive incentive to try to make the transaction as difficult as possible.

Many of the lessons that the Inland Revenue learnt throughout its project on how to level the playing field and ensure a fair competition in any second-generation outsourcing will certainly become important for many other public sector bodies over the course of the next few years. As the wave of public sector outsourcings that really took off in the mid-1990s now begin to come to an end, second-generation outsourcings will be a much bigger feature of the public sector outsourcing environment.

The NHS treatment

At the same time as the Inland Revenue was finalising and announcing its successful project, the NHS’s £2.3bn national programme for IT was also being implemented. This programme was approached in a very different way from the Inland Revenue transaction.

By contrast to the Inland Revenue project, which was in many ways a traditional public sector procurement, the NHS programme was run very differently, a decision which has certainly paid dividends in terms of the speed of delivery. By breaking the overall programme up into separate clusters that could be procured separately, and by using more project management and legal resource, the programme was completed more quickly than the Inland Revenue’s, although speed is a feature easier to deliver in a first-generation process then in a second-generation project. Richard Granger, the NHS IT chief who delivered the NHS programme, despite predictions to the contrary, is confident that he has delivered a series of robust arrangements for the delivery of systems and services.

But despite the impressive speed and scope of delivery, the NHS programme is not without its detractors. Some high-profile suppliers pulled out of the procurement process, citing a significant degree of one-sidedness in the process, and especially in the contracts that they were being asked to sign. Recent reports of a leaked document from BT concerning its £1bn contract for the London area suggests that material issues have emerged in that project which were not known about at the time of contract signature. And at least one prominent member of the House of Commons Public Accounts Committee – Richard Bacon MP – has publicly expressed concerns over the rush to sign contracts, saying: “The evidence suggests that the time spent in preparation is rarely wasted.”

Only time will tell whether the more considered, collaborative approach adopted by the Inland Revenue, or the more quick-fire, hard-line approach adopted by the NHS, is successful in delivering the ultimate goal of outsourcing: a long-term, stable service-provider relationship.

Policy changes

Bringing some sense of relief for lawyers, the Government has decided that it should no longer be mandatory for public sector outsourcings, at least at the national level, to go through the PFI/public-private partnership (PPP) route. It has long been recognised by many practitioners that the PPP principles that underlie major infrastructure projects, such as hospital, bridge or prison building, are awkward to apply to IT projects. Now, the Government has decided that departments should have more flexibility in designing complex IT projects.

External scrutiny

Public sector outsourcing continues to be an area for considerable scrutiny by Government bodies. The National Audit Office continues to produce regular reports on projects; the Public Accounts Committee and the Treasury Select Committee routinely hold hearings on projects; and the Government continues to refine and change the way in which public sector outsourcing takes place.

The degree of scrutiny at public sector outsourcing projects is, in fact, something of a burden for bodies undergoing an outsourcing. If you were to believe what comes out of all these hearings and what appears in the media, you would think that public sector outsourcing is an unmitigated disaster and that everything goes wrong. That is far from the truth and there is evidence to suggest, as surveys by Gartner and PA Consulting show, that the public sector actually has a better track record in implementing successful outsourcing projects in the private sector. The problem is that the private sector is much better at washing its dirty linen out of the public gaze, whereas authorities find that even minor problems in a public sector outsourcing are escalated by the media and scrutinising bodies.

There are even calls from technology industry journal Computer Weekly to legislate to correct the deficiencies in public sector IT outsourcing. Many lawyers in the sector recoil at the idea. It might make a nice story, but it is generally viewed as impractical and unworkable.

Alistair Maughan is managing partner of Shaw Pittman’s London office