Examination of Witnesses (Questions 40-59)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
40. Why do they not bear all the risks? Why do you take part of the risks?
(Sir Nicholas Montagu) Because the principle of a Private Finance Initiative, PFI, type contract has always been that the risk should be borne by the party best able to do so. In that context it makes sense for the business risk to be borne by the Inland Revenue and the risks relating to operation and availability by Accenture. You will see from Table 9 that most development risks are shared and from paragraph 3.22 that the provisions for risk correspond closely to the Treasury Taskforce principle of PFI contract risk management and the recommendations of the McCartney Report.
41. If Accenture, who are making a lot of money out of this, do not take the full risk, my view is that the taxpayer again is dipped out. Why should the taxpayer take any risk whatsoever on the basis they own the equipment, they pay a huge amount of money to run that equipment, yet the taxpayer at the end of the day has to bear some sort of risk?
(Sir Nicholas Montagu) I think, Mr Steinberg, you have to be commercial about this. It is a fact of any public private partnership that there is a sharing of risks. It is also a fact, and this is not just true of Inland Revenue business, it is true right across Government, that any commercial organisation is going to price for risk. To the extent that you increase the risks undertaken by the private sector partner, you are going to have to pay more for it. Any contract is a matter of commercial negotiation and balance, and this Report vindicates the commercial decision and also vindicates the allocation of risk.
42. May I start off by taking up where Mr Steinberg left off in paragraph 3.23 on page 19. It says, "The Inland Revenue continue to bear the business risk of non-delivery of NIRS 2 functionality." Can you just explain to my simple mind what the business risks are as opposed to the other kind of risks like the operation risks which are referred to in the next paragraph?
(Mr Yard) I think the key business risk is that if the IT system does not work then the business cannot operate because if you have not got access to a terminal you cannot access the data that you need and process the transactions.
43. The business being the Contributions Agency?
(Mr Yard) That is right, getting the contributions that individuals have paid credited to their accounts.
44. This pursues the point Mr Steinberg was making. Paragraph 3.24 says that Accenture continue to own and run the system but if it does not work you bear the risk. Non delivery of NIRS 2 functionality basically means the risk that it does not work, does it not?
(Mr Yard) Yes. We bear the business risk, the consequences of not being able to do the job they want to do.
45. Even though they own it.
(Mr Yard) They own the financial risk if they cannot operate the system because then the penalties and the reward they would expect would not be paid.
46. Yes. I think I see that. I am not sure I would have gone that way about it. Sir Nick, you mentioned flexibility early on. You said there was a trade off obviously between flexibility and price and so on and that you did not want to have to pay for complete flexibility on the basis that there was an off chance that ministers might change their minds. Is not a guiding assumption of your job that there is a very high chance that ministers will change their minds?
(Sir Nicholas Montagu) It depends on the ministers, obviously, Mr Bacon.
47. It is a certainty they will change. Should you not build in a very high risk factor?
(Sir Nicholas Montagu) I have to avoid any political remarks in a hearing like this, of course.
48. I would not dream of inviting you to make any political remarks.
(Sir Nicholas Montagu) Since you tempt me, I have detected a wonderful degree of consistency among my present ministers. I have nothing to complain about whatsoever. There is a serious point here. Of course, there is a chance that policy will change or develop. In some cases systems can accommodate a small change of policy, in some cases they can accommodate a large one. If ministers are contemplating a change, as I have indicated, one of the key things that we would discuss with them is what the implications are in terms of systems changes required, associated risks of non delivery and also of timing. You know, I could point to instances where we have said to a minister "Yes, we can do this, but if you want us to bring in this change by such and such a date there is a significant risk. We can be pretty confident by six months later", and they have listened to that advice.
49. Ms Astall, perhaps I can ask you a question about this. My question is how flexible is the system now? I have a particular reason for asking. It has been mooted in the papers and in various academic articles and it has been the position in policy papers of think tanks for ten or 12 years now that one way to improve the funding of student finance would be for it to be tagged on to the National Insurance system so that the students if they took out a loan would repay it over their working life through the National Insurance. Is the present system which we have now flexible enough if ministers decide they want to do that, that you could just give everybody an extra code and bang, you would be off to the races?
(Ms Astall) I think the PA Consulting report confirms that NIRS 2 is a very robust and reliable platform. The system is very flexible. You will see from figure 1, right at the beginning, there is a wide range of costs that we could actually fulfill but I could not comment on the specific item.
50. Treat that as an analogy or other analogous changes to the use of the National Insurance system. It is now a system which is flexible so you can peg things on to it?
(Ms Astall) Yes.
(Sir Nicholas Montagu) I think the point is this, Mr Bacon. We do have robust and very well established feasibility arrangements which allow us to analyse options for delivering ministers' objectives. Also, perhaps an important point to flag up, as we move closer and closer to the Department for Work and Pensions, we would take account in our advice to ministers of costs and dependencies between our own and other Departments' delivery programmes. This is an intrinsic part of our business processes.
51. A previous report of this Committee referred to the fact that there did not appear to be a shared understanding of what was meant by the delivery of the NIRS system. I would be grateful if you could both comment on this. Presumably it is in the interests of both you, Sir Nick, as client and you, Ms Astall, as consultant provider, to have a shared understanding? Plainly there was not one. What steps have you taken since to ensure that situation could not possibly arise again?
(Sir Nicholas Montagu) I think probably the answer is the structure, again as the report notes, of much stronger and more robust partnership arrangements. It is not just the sort of shared incentives that John mentioned but we do have robust partnership arrangements. Where appropriate. We have joint meetings with EDS. There is absolutely no doubt at all that the service level agreements now reflect a joint understanding, and Accenture are performing well in excess of that requirement. You have noticed the heading for paragraph 3.25 in Sir John's report, "The Inland Revenue have taken steps to ensure that issues which arose on the original contract do not recur".
52. Ms Astall, from your point of view?
(Ms Astall) I would agree with everything that Sir Nick has said. To give you a specific example. There was a lack of clarity about the testing responsibility and that is now very clearly delineated between us and we understand that. The specific things that we had confusion over, we have both worked very hard to make sure they are clear.
53. There were a couple of points at the beginning which I would like to come back to but in case I run out of time I would like to first ask about intellectual property rights. Ms Astall, could you first comment on your views of the current guidelines, the S-CAT guidelines on intellectual property rights for supplying services to Government?
(Ms Astall) I cannot comment on those particular guidelines but I can give you the background to NIRS 2, certainly. At the original letting of the contract, the PFI guidance at the time and what was deemed to be best value for money with the Department was that we would develop that system at our own cost and then own the intellectual property rights to it. So we fell in line with that as part of that original competition and it has just been carried through since then.
54. We have been told that the consulting industry have been complaining that the Government buyers of your services and those of your competitors, while the guidelines may be adequatein fact Mr Barrett told this Committee on 24th October that the Government was not complying at the moment with its own best practice guidelines. I understand the Office of Government Commerce is looking at guidelines for intellectual property and who owns what. It says in our brief, in quoting one of the earlier reports, the 31st report, that one of the key reasons why your bid was one of the best was because of the commercial value of the intellectual property rights. Clearly this is a very important issue. Do you not have a view on where negotiations over the future ownership of intellectual property rights are going?
(Ms Astall) No, I do not have a particular view on that. I think it depends on each contract. The OGC report says that each department should decide where they are going to get best value for money. I think definitely you have got best value for money in this particular instance. The original report Sir John wrote in 1997, I think it was, said it did represent strikingly good value for taxpayers' money and I do think it has done.
55. Sir Nick, could you say whether the fact that Accenture has the intellectual property rights has caused you any difficulty?
(Sir Nicholas Montagu) No difficulty at all, Mr Bacon. Again, if I might echo what Lis has said, the Office for Government Commerce has basically said that the intellectual property rights should rest with whichever party provides best value for money in the case of that particular contract. As the Committee knows, in the case of EDS we own the intellectual property rights. In the case of Accenture, they do. As I have mentioned, we have what we regard as a very good deal at the conclusion of the contract to buy a licence to use the intellectual property in perpetuity for £14 million. Again, I can only echo what Lis said about Sir John's earlier findings.
56. How do you evaluate whether in any particular case value for money is best achieved by intellectual property rights resting with one party rather than another?
(Sir Nicholas Montagu) Again, it is a part of the overall negotiation on any contract. If we bought the intellectual property rights then it would cost correspondingly more. On the other hand, do we lose disproportionately? There is no hard and fast rule, which I think is why the Office of Government Commerce reached the conclusion that it did. That is why we would always, in a procurement of this sort, make sure that we have specialist outside advice, as we did in this case.
57. If I can turn to page six, paragraph 18b. It says "The Department of Social Security did not assess the aggregate impact of the proposed policy changes and their timing on NIRS 2 development capacity." This is page six.
(Sir Nicholas Montagu) Yes, indeed.
58. Assessing the aggregate impact of a proposed policy change or, indeed, a number of proposed policy changes seems to be a very sensible and, indeed, obvious thing to do. What procedures do you have in place now to ensure that if there are further policy changes this sort of mistake will not occur again, that an aggregate overview of the effects will be taken?
(Sir Nicholas Montagu) It is normal for us to discuss policy options with Treasury ministers and then we look with our operational policy group at the options for supporting these policies. That group would specifically commission work to understand the impact both for IT and the effect on our operational network. So as ministers select options we work the implications up in more detail, making sure they are aware of them. As I have indicated, we would give them the best possible advice on feasibility. We would do this in the round and, very importantly, we have an enormous programme of change on as the Committee knows. A key bit of our machinery in this is the Departmental Management Committee which would include all my Board, including the Director General for Revenue Policy and one of his directors, and all the key operational directors, so in overseeing the project management of the totality of our work we would be able to make sure we put the best possible advice in the round.
59. Ms Astall, can I direct your attention to paragraph 3.12 on page 16. It talks about how the original contract did not do a number of things, including that it did not define clearly which types of smaller and regular enhancements were included in the basic contract price, which led to contractual disputes. For the future, how will you distinguish between smaller and regular enhancements included in the basic contract price and larger ones? What rule of thumb will you use to distinguish between what is and what is not a major enhancement?
(Ms Astall) We have a very clear set of procedures now. It goes through the steering committee on which I am represented and on which Mr Yard's team are represented, and they go through and examine and say which ones are changes and which ones fall into each criteria. That meets on a weekly basis, sometimes more frequently if it needs to, but there have been no disputes around that area for a long time.
2 Note by the National Audit Office: The C&AG's Report (HC 12, Session 1997-98, p 3) stated that: "Provided Andersen Consulting are able to deliver the service contracted for, the contract represents strikingly good value for money . . ." Back