Select Committee on Public Accounts Minutes of Evidence



Examination of Witnesses (Questions 20-39)

SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL

MONDAY 3 DECEMBER 2001

  20. I know.
  (Ms Astall) There is a deliberate reason. We actually go out, we recruit and we retain the best people. We spend a lot of money on recruitment and invest a lot of money in their training and what we believe that allows us to do is actually offer good value for money to the client and higher productivity. If you go to paragraph 3.6 it will actually say if you take these staff costs and multiply them by the productivity rates, we were lower cost than any other supplier. 3.6 tells you that and figure 7 shows you that. The staff costs are higher but if you multiply them by those productivity levels that is where we show value for money and that is a deliberate policy.

  21. Are you saying that the comparators that they made the comparators against, are you saying that they would not have done those things? Is that not the concern, they did not train their staff?
  (Ms Astall) No, no, they would have trained their staff but each of you takes your staff costs and multiplies them by the productivity level that you believe you can achieve for that system. NIRS 2, as you know, is very complex and we are familiar with the system and we can achieve a higher productivity rate. So, we were committed to doing seven and a half man days as our base line that we were multiplying by.

  22. That is what the report is based on. I still find it quite remarkable a company running a system, knows the system very well, cannot undercut the comparators significantly because they had to start from scratch.
  (Sir Nicholas Montagu) Again, Mr Steinberg, I come back to the fact we have essentially had at least two lots of independent vindications, Sir John's report and the clearance by PA Consulting. I think the answers Lis gave you are the definitive ones because you said earlier they racked their costs up, but they did not. We recognise Accenture staff costs are higher than those of their competitors, in return you get greater productivity, and that I think is one of the key reasons for the conclusion of the report that Accenture proposal offered better value for money than transferring to another supplier.

  23. I am probably not going to make much more progress than that but it seems to me they were in the driving seat, very much in the driving seat, and what should have been an exploitation by yourselves to get the best deal possible turned into them getting a better deal for themselves.
  (Sir Nicholas Montagu) That is not what the Report says, Mr Steinberg. It says we got a good deal.

  24. What I am saying is that it seems to me a better deal could have been got even than the deal which was actually achieved.
  (Sir Nicholas Montagu) I have to say, with the greatest respect, I do not see you have any evidence for that assertion from Sir John's Report. These were tough negotiations. They were validated by PA Consulting and the outcome has been validated by the Comptroller and Auditor General.

  25. Somewhere in this Report, and I cannot remember where it is but I jotted it down when I was reading it, it says that bringing in another supplier would have cost an extra 31 million. Is that right?
  (Mr Yard) An extra 44 million.
  (Sir Nicholas Montagu) I think you are looking at Figure 6 on page 14 of the Report which breaks down the additional cost of breaking the contract with Accenture. Would that be right?

  26. No, I do not think it is actually. I have the figure of 31 million and I do not think I would have made a mistake.
  (Ms Astall) That is paragraph 3.5.

  27. Actually I do apologise because it is in our briefing. What basically it says is that there would have been another 31 million added to the operating charges reflecting the new supplier's unfamiliarity with running the system. What I am saying is, and this is the last time I am going to push it because obviously we are going down a dead end, if it was going to cost an extra 31 million to bring in another company, surely to goodness the savings that Accenture should have been able to make should have reflected that and it does not appear to have done that?
  (Sir Nicholas Montagu) I do not think that is quite the position. Perhaps I can ask John Yard to explain it.
  (Mr Yard) The point about the 31 million was to make sure in Table 7, which is on page 15, each of those lines was done on the basis of a like-for-like comparison. This was why it was necessary to reflect the operating cost of running the system, which had been taken into account in the bid we got from Accenture, but we needed to make sure the industry average and the outsourcing average were on the same basis. When it came to the evaluation itself, we had set targets which we believed would represent good value for money before we entered into the negotiation with Accenture, so that we were protecting the value for money aspect of this.

  28. I am sorry but I am not convinced. I think they had you by the short and curlies and frankly the taxpayer is dipped out at the end of the day, regardless of what the NAO says.
  (Sir Nicholas Montagu) I can only be thankful, in that case, Mr Steinberg, that our auditor, the Comptroller and Auditor General, does not share your view.

  29. The taxpayer can expect to benefit if productivity targets are achieved and profits are made. What is the present situation on that?
  (Mr Yard) On the productivity levels, we are hitting the productivity targets we were aiming at, and the way in which the deal is structured incentivises productivity improvements on the part of Accenture.

  30. Can you explain that a little more fully?
  (Mr Yard) One of the difficult things in any software development activity is that there needs to be a close collaboration between the users of the system, which is the Inland Revenue in this case, and the supplier, Accenture. One of the dangers is that if things are simply thrown over the wall without a collaborative approach to the development, then things can often go wrong. What we wanted to do here was to make sure that the terms of the contract incentivised Accenture to hit those productivity levels and rewarded them if they exceeded those levels.

  31. Are they doing that now?
  (Mr Yard) They have improved on that productivity level of 7Ö—

  32. What does that mean in terms of benefits to the taxpayer?
  (Mr Yard) The effect of it is to reduce the cost.

  33. By how much?
  (Mr Yard) I have not got the precise figures with me.

  34. Can you let us have those figures?
  (Mr Yard) Yes, we can let you have those figures.[1]

  35. I would have thought you would have assumed that was one of the questions we would ask. On page 18, Figure 9 refers to the penalties in the contract if Accenture do not deliver. Explain this more fully for us, can you? You told us what will happen if productivity is achieved and profits are made, tell us what will happen if that does not happen.
  (Mr Yard) We have something called liquidated damages which we charge Accenture if they do not deliver a project on time. This is a fixed amount they have to pay for a period of three months and it is equivalent to 1Ö per cent of the project manpower cost so there will be a penalty in effect.

  36. What will that penalty be?
  (Mr Yard) 1Ö per cent of their costs, so depending on the project—

  37. How much?
  (Mr Yard) However much they have spent on a particular project. If a project cost 100,000, it would be 1Ö per cent each month of 100,000. If it went on, then we would have a claim for actual damages. There is a cap on that which is equal to 150 per cent of the costs. So if there is a severe delay we can recover in effect the cost through penalties.

  38. At the present time we are not in that situation, we are in a profit situation?
  (Mr Yard) Yes, they have been delivering successfully as the Report points out.

  39. Paragraph 3.23 tells us the Inland Revenue continue to bear the business risks of non-delivery of the scheme. Then we are told in paragraph 3.24 that Accenture owned and ran the system and bear certain risks.
  (Sir Nicholas Montagu) Yes.

 


1   Ev 23, Appendix 1. Back

 
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