Select Committee on Public Accounts Twelfth Report


Performance in the provision of IT services

25. The Agency concluded that the joint venture would deliver improved services at a lower cost. The cost savings were expected to come mainly from the replacement of contract staff with a cheaper and more efficient alternative. As all other potential partners had dropped out at an earlier stage, the Agency and CMG agreed prices without competition. The 7-year contract with CMG cost some £51 million in 1998 prices, an estimated saving of between £4.9 million and £8.0 million compared to the Agency carrying on with their existing arrangements.[27]

26. Improvements in the delivery of services are difficult to measure as there is a lack of information on the levels of service before the partnership came into effect. A benefit of the partnership is that it has led to service standards being set and changes over time can now be measured.[28]

27. The Agency said, when asked whether the expected value for money benefits had been achieved, that they had asked Capita, their financial adviser, to make an assessment nine months into the contract. Capita advised that, although there were changed circumstances, they were still able to reach the same value for money conclusions in the original business case. This had given the Agency the confidence to undertake further investment. Both parties affirmed that the partnership was working well and that contract provisions were primarily a safeguard.[29]

28. The Agency have sought to retain commercial pressures on Radio Spectrum International by exercising their right under the contract to go out to tender for certain IT services, including modifications to existing service and the development of new systems.[30] The Agency said that they had done so in one case and had acquired software from another firm, which Radio Spectrum International had then integrated into the Agency's systems. This allowed the Agency to get better value for money but also encouraged the partnership to ensure the technical result was a good one.[31]

29. Radio Spectrum International and the Agency realised shortly after the start of the partnership that the charging structure for providing computer services at the desktop was too rigid to accommodate the rapid technological advances to computer hardware and software. Radio Spectrum International were able to levy a flat-rate charge for technology improvements under the contract which, in many cases, was greater than the cost of supplying and maintaining the enhancement. Where this was so Radio Spectrum International, with CMG's agreement, waived the flat rate charge and agreed to recover actual cost only, resulting in expected savings to the Agency of about £1 million a year.[32]

30. The Agency agreed that some of the timescales laid down in the contract had not been met by CMG, but considered that they had gained more than they had lost in financial terms by not sticking rigidly to the contract. The substantial reduction in desktop pricing which CMG had volunteered was a worthwhile improvement, outside the scope of the original contract. CMG said that the Agency would have been able to secure price reductions because the contract permitted the Agency to market-test the services provided by the joint venture company. The Agency and CMG said that both parties had gained: the Agency from lower charges, and the joint venture company in terms of extra time to prepare a service improvement plan and to delay delivery of certain services.[33]

Performance of the international business

31. In its first 18 months of operation the international business, set up to market the Agency's systems and expertise, made a loss of some £150,000. CMG bear any losses on the international business. Witnesses explained that the main cost was in marketing and producing proposals and that projects were unlikely to produce revenue earning work for up to 12 months afterwards. They said that when the business was set up it was expected to make money from selling licences for the Agency's systems rather than from consultancy work. International business had now been refocused on consultancy work, and it had been profitable in recent months.[34]

32. CMG explained that the joint venture company was operating in a difficult and fragmented market. The Agency's statutory duties differed from those of equivalent organisations in other countries, making it difficult to sell the Agency's IT systems. CMG said that they were still as optimistic as when they entered into the project. At the beginning there were a lot of unknowns and some of the potential had not materialised. On the other hand they had now identified other avenues which looked very promising.[35]

The management of risk by the Agency

33. Some of the Agency's IT systems which had been transferred to Radio Spectrum International were crucial to the Agency's ability to meet business objectives. In the Agency's opinion the risk of non-performance could be minimised if the partners related well to each other, with a relationship founded on mutual trust.[36] Trust took time to develop and they had therefore placed the partnership within a contractual framework to protect their interests.[37]

34. The Agency made it a contractual condition that Radio Spectrum International retains an open book accounting regime for IT services, giving the Agency full access to the company's records. CMG have also agreed to grant the Secretary of State the right to audit compliance with the relevant contractual terms.[38]

35. A key risk for the Agency was whether they would have sufficient technical expertise to manage their interest in the contract. The Agency said that although they had not been able to retain as much in-house IT expertise as they had envisaged, they had retained enough to be an intelligent customer of the joint venture company and to negotiate significant savings in the cost of new projects. If the new joint venture had failed to work, their in-house staff could have been deployed into managing either a direct IT operation or a relationship with another supplier. Their good relationship with CMG meant, however, that they were now comfortable with having less in-house IT expertise.[39]

36. CMG said that they had been keen for some of the Agency's in-house staff to transfer to the new company because they had valuable knowledge of the Agency's systems. They were surprised when only a few staff transferred. They had retained the right to fill on secondment up to 16 designated posts in Radio Spectrum International if they wished to do so. In the light of the positive development of the joint venture, they had decided that their staff should fill only four of these 16 designated posts. If confidence in the partnership were to deteriorate they could fill more of them.[40]


37. The Agency believe that there are robust legal agreements in place giving them adequate control over the business. Partnerships require a will to cooperate and a community of interest if they are to work well. But they should still be underpinned by sound legal arrangements to protect the public interest in the event that the interests of the parties should no longer be aligned.

38. The international business is now beginning to realise a profit, with the focus of commercial activity moving away from the sale of the Agency's IT systems to the marketing of consultancy services. The original focus had been agreed without a structured assessment of the market potential. Departments promoting commercial ventures need to undertake such assessments, to keep the market under review, and to be ready to reposition the business in the light of market evidence.

39. The Agency believe that they have retained sufficient in-house IT expertise to enable them to act as an intelligent customer. It is important that departments should be able to maintain the capability throughout any partnerships with the private sector, taking into account career development and skill enhancement requirements and the need to replace losses of key staff.

27   C&AG's Report, para 17 Back

28   ibid, para 18 Back

29   Qs 20, 61-62, 65, 67 Back

30   C&AG's Report, paras 3.34, 4.18 Back

31   Q63 Back

32   C&AG's Report, paras 3.27-3.28; Evidence Qs 9, 20 Back

33   Qs 15, 19-20 Back

34   Qs 12, 56, 58 Back

35   Qs 57, 59 Back

36   C&AG's Report, para 3.12 Back

37   ibid, para 3.14; Q23 Back

38   ibid, para 3.13 Back

39   C&AG's Report, para 3.31; Evidence, Qs 4, 6, 13 Back

40   Q14 Back

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