Select Committee on Treasury Minutes of Evidence

Memorandum submitted by British Telecommunications plc


  1.  Since we are moving into the area of delivering "new wave" solution, PFIs and PPPs are becoming increasingly important to us. In common with the rest of industry the rising cost of these is a concern to BT. We believe this is due to the increasing reluctance of government to accept risk, provide guaranteed income and to come up with requirements which are relatively clear to deliver. Early PFIs were easier to address, so income from them could be calculated and banks were happy to lend against the opportunity. They are less willing to do so now and this is more the case with information & communications technology (ICT) projects (which have always been considered more risky) because the return is commercially obvious.

  2.  Furthermore, there is an idea circulating in the public sector that "not for profit" PFIs are desirable. Banks do not share this view, particularly where refinancing deals are seen by public sector buyers as a means of getting their hands on any proven profit stream, even if the department concerned did not want to share in the risk at the outset of the initial project.

  3.  We are unclear if the OGC is doing enough to get the commercial realism of this across, or are they leaving too much to their subcontractors, PUK, to do? Increasingly, PUK have taken on more of what we perceive is OGC policy work, because OGC have not had the people to undertake this task. As PUK become more established as an adviser, is there a danger, that OGC will lose control?

  4.  Working with the OGC on PFIs in the past we have had one major concern. Dealing with OGC on any subject has been fraught with difficulties, unless one had a personal and longstanding relationship with someone within the OGC. Trying to find the right person to talk to if you do not know them is difficult. We understand that other Government departments have a similar problem. Organisation charts issued by the OGC are difficult to interpret. As a very large organisation BT has similar problems, however we have installed systems to simplify the location of the right contacts (eg CCAT for account ownership).

  5.  We commend the OGC for introducing the Gateway Review Process on major projects. We have adopted the principles of this process for complex and risky projects. We understand other government departments have found it useful too.


  6.  The OGC has continued to use the concept of framework supply agreements, developed by the now subsumed CCTA, to reduce the length and cost of procurement of ICT equipment & services. This is compared to using the full EU process of issuing all tenders in OJEC (Official Journal of the European Community) publication. These contracts are let to suppliers who provide the most competitive prices. The agreements for some services only involve one supplier, simplifying the procurement process (and by extension the associated cost), whilst arguably, reducing choice for the departments or Government agency (the users) choosing to use the framework agreement for procurement. Other frameworks have several suppliers for each service or product category, giving the users choice via "mini-competition" tenders amongst approved suppliers.

  7.  Frameworks agreements (eg G.CAT) have been operated for a number of years, however, we not sure what the formal legal status of framework contracts is—we are not aware of any real agreement from the EU about the legality of such an arrangement.

  8.  The current operational model for multi-vendor framework agreements consist of:

    —  A contract between the OGC and a supplier, including pre-agreed terms & conditions

    —  A code of practice agreement between the OGC and users (government departments & other eligible organisations)

    —  Supply or service agreements between the contracting authority (user) and the supplier using pre-agreed terms & conditions.

  This is a well established process. An example of this for the GTC is shown for illustrative purposes:

Cost to suppliers of doing business via Framework agreement

  9.  All OGC framework contracts require the suppliers to track and report sales via the framework agreement to the OGC. This tracking places an additional burden of administration that increases the cost of sales through the framework agreement. Additionally, there is the cost of bidding to be included in the framework contract, as well as bidding for business in mini-competitions. Currently we are assessing the benefit, in terms of additional business gained and reduced costs (eg from standard terms & conditions) against the increased cost of administration and bidding. The current feeling is that the return is closely balanced, though this is not substantiated by fact.

  10.  A management fee, payable to the OGC, is also levied on the sales through the framework contracts. We would like to see a minimum sales threshold below which there will be no management charges. We believe this will ensure that there is an incentive for the OGC to actively promote the use of these frameworks. This will be of particular benefit to smaller organisations that wish to participate in framework contracts.

  11.  We would also like to see some recognition—perhaps in the way of reduced management charges—for marketing activity undertaken by suppliers to promote framework contracts, particularly in the early days of a framework contract. We would expect to see this recognition account for around 50 per cent of the cost to the supplier of such joint activity. This will encourage the supplier(s) to help promote the framework contract and the role of the OGC. The credit will alleviate the cost of this additional promotional work, while maintaining normal sales activity to prevent a dip in sales revenues during the take-up phase of the framework. We would suggest that the special recognition be terminated when a specific sales level is attained or after a period of two years from the award of the contract—whichever occurs first.

  12.  Most of these comments apply primarily to framework contracts covering more complex services eg GTC & S.CAT, particularly if there are multiple suppliers.

Aggregation vs Innovation

  13.  The use of single supplier frameworks (eg GTM for mobility products and services) clearly makes the market significantly less attractive to all potential suppliers other than the incumbent. It is an understandable aim of HMG to gain maximum value by aggregating total spend to reduce tariffs and generate savings. However, aggregation with one supplier, taken to its logical conclusion over time, brings some dangers:

    —  The creation of a single dominant supplier can reduce the propensity to innovate—the route to much greater savings and improvements in efficiency and effectiveness for Government.

    —  The policy is inflexible as it becomes difficult to reverse. The logistical and administrative issues associated with large-scale changes in suppliers make switching to a new supplier a long, costly and time consuming process. It could in itself result in inertia and slower Government response to changing market opportunities.

  14.  The balance between cost reduction and innovation can be illustrated by the following example within mobile services:

    HMG has a concern about the relative high cost of inter-network mobile calls for Government mobile phone users, but it is BT's view that perhaps a more significant cost is office to mobile phone/mobile phone to office traffic. Innovation using fixed/mobile convergence technologies can substantially reduce these costs yet HMG, when compared to the corporate market, has been slow to take up these services. Is the slow take up due to an imbalance between a tariff centred approach and an approach that encourages more creative solutions to reduce costs?

  15.  The extent to which this discourages creative thinking and innovation through reduced dialogue between Government and other suppliers is difficult to estimate but it is a factor and must be considered and balanced against any benefits obtained from aggregating spend and using a single tariff structure from a single supplier.

Effective Mechanisms for Generating Value For Money

  16.  BT recognises the benefits of having a low, Government related tariff structure and flexible billing arrangements. A major barrier to suppliers in attempting to provide these services in the past has been the fragmented procurement policy employed in some areas of Government. Framework contracts address this requirement.

  17.  However, there are some Government departments and organisations, in conjunction with their suppliers which are separately centralising procurement processes in order to improve service, billing and tariff structures. In some instances this has now been stopped, with these departments opting to use the OGC framework contracts. We hope that this trend continues as the cost of bidding for OGC frameworks as well as departmental frameworks represents an additional cost. Both frameworks guarantee a "ticket to play" rather than a real revenue generating sale, thus increasing sales costs as we have to maintain a sales force to sell on the back of the "ticket to play".

Lack of Clarity

  18.  There are several frameworks contracts, that in our opinion, overlap with one another, eg G.CAT2, GTC, GTC2 and S.CAT2. This lack of a clear boundary makes it difficult for users to determine which framework agreement to use. For instance there is some overlap on managed services between GTC & G.CAT2. In addition, we believe the market is unclear why there are two quite different managed services frameworks (GTC & GTC2).

  19.  This problem is exacerbated by the unequal publicity given by the OGC to some contracts (those more established eg G.CAT) over others, especially those which have been more recently launched.

  20.  This lack of clarity will lead to potential users being disinclined to adopt this new method of buying. The lack of clarity is evident from the separate promotional activity undertaken for each of the frameworks, by quite separate managers, none of which position the role of the other OGC contracts.

  21.  Each potential user is also required to sign a separate Code of Practice with the OGC to use each framework. We believe this should be simplified, by one Code of Practice applying to all OGC framework contracts.

  22.  Most of the above problems are an indication of the infancy of the OGC and we believe that a strong central marketing function, driven by user requirements, can reduce this problem.

Summary of Recommendations

  23.  BT makes the following recommendations for Framework Agreements:

    —  Multi-vendor approach to encourage innovation and competition

    —  Clear positioning of the various framework contracts, with reference to products and services covered

    —  Active and equal promotion of all framework contracts by the OGC.

12 November 2001

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