Examination of Witnesses (Questions 1-19)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
1. Good afternoon and welcome to the Committee of Public Accounts. Today we are considering the Comptroller and Auditor General's Report into the extension of the NIRS 2 contract. We welcome once again Sir Nicholas and Ms Astall. May I start off with a few questions to introduce the subject and then my colleagues will take it up in more detail in a moment. This contract extension was awarded without competition, and the value may exceed that of the original contract. How can you be sure that the extra cost of the work is fully justified? We are talking about a very large sum of money here, perhaps £100 million.
(Sir Nicholas Montagu) We are indeed, Chairman. Essentially as part of the evaluation process, we commissioned a financial model which compared the industry rate for the services with the rates being offered by Accenture. PA Consulting and an independent adviser at the time validated this, and the National Audit Office subsequently checked this as part of this audit.
2. But you were over a barrel really, were you not? You had no choice?
(Sir Nicholas Montagu) We did have a choice, Chairman, it is just that the alternatives, as Sir John's Report recognises, were less attractive. They were less good in business terms, and they were less good in terms of value for money.
3. Let us deal very briefly with the changes in new legislative requirements. How do you take account of the difficulties and costs of changing systems? This whole NIRS 2 saga is a very sorry one because it seems that when ministers originally designed it they did not work out in their own minds that subsequent ministers might make huge changes to legislative systems and load vast new costs. So how are we going to cope with that in the future?
(Sir Nicholas Montagu) We have, I think, a more robust project planning process. Whenever we are commissioning work we will have the benefit of independent advice and the advice of our in-house expert. The issue, I think, was not perhaps quite as chaotic as you suggest. At the time when the original contract was signed by the Contributions Agency, the scope of it covered everything which could reasonably be foreseen. It was only with the advent of a new Government and the consequent considerable expansion in legislative requirements that the need for the extension became apparent.
4. So if we are looking at new changes which might come out, perhaps new tax credits, you reckon, do you, that we have learnt the lessons of the past? That this technology is sufficiently robust to take account of the changing decisions of ministers in the future?
(Sir Nicholas Montagu) I think what one has to do at any given time is to analyse the options for change, delivering ministers' objectives. That is an integral part of the advice we give ministers. When it comes to implementing them, yes, essentially what we are after is specifying what will be the key outcomes in order to make a reality of the policies on which ministers have decided. Obviously, depending on the particular policy, we may need to build in more or less flexibility to allow for possible changes. Equally, it would clearly be bad value for money to allow for infinite flexibility just on the off-chance that some future generation of ministers might change their minds.
5. This is a very flexible area, how can you ensure that the knowledge of middle ranking officials and their doubts about the cost of any legislative changes are conveyed to ministers? This is very difficult advice to give to ministers but as the Accounting Officer you are ultimately responsible, are you not?
(Sir Nicholas Montagu) Yes.
6. The decisions which ministers take do have a cost and you have to make sure these technical doubts are conveyed right up to the top.
(Sir Nicholas Montagu) Absolutely. That is why we have, I think, very successful integrated internal arrangements, by which I mean that my policy people and the people working for John Yard, who is our Director of Business Services, and our operational people in charge of the manpower delivery would all discuss the implications of change. They would also do so with Accenture where relevant and with EDS. The practical consequences of any proposed policy, including reasonable timescales, would be reflected in our advice to ministers.
7. Let us move on to paragraphs 3.5 and 3.8. This is the question about the extent to which you were locked into Accenture. To what extent were you effectively locked into a contract with Accenture despite their poor performance in delivering the NIRS 2 system?
(Sir Nicholas Montagu) I think there are two points there. The first is, of course, there were initial problems, which I have already discussed with this Committee, with NIRS 2. But, at the point where we signed the extension of the contract, those problems had been cleared up, the contract had been put on a stable basis, the results were beginning to show through, and those problems were a thing of the past. So far as being locked in is concerned, what Sir John's Report shows is that there were indeed alternative options but none of them represented such good value for money as extending the contract with Accenture. I may say also in terms of business risk, all of them would have been less desirable than extending the contract with Accenture. We did, of course, have the benefit of technical advice from independent advisers. Sir John's Report notes the role of PA Consulting. I think our decision to extend the contract has been itself vindicated by Sir John's conclusions.
8. The truth of the matter is that the competitors simply could not compete with Accenture because of the cost of breaking the contract.
(Sir Nicholas Montagu) It is certainly true that
9. So you had no choice.
(Sir Nicholas Montagu) It is certainly true that the cost of breaking the contract was a major element. Equally, the reports of the National Audit Office on the original procurement have been favourable. They have run the rule over it and not found it wanting. It was a consequence of the break costs, which are intrinsic in any contract of that sort, which was a major element. If I may, Chairman, I would draw the Committee's attention to the heading on table 7 "Accenture's proposal offered better value for money than breaking the contract", and Sir John's press notice at the time "Awarding a contract extension to Accenture was the best option and has enabled the Inland Revenue to improve the way the contract is managed". Now I do regard that as a substantial vindication after a rigorous report by external auditors.
10. Okay. Let us look to the future now, to 2004. New suppliers will, again, presumably face very high entry costs. So once again Accenture will have competitive advantage. How will you ensure that you get good value for money?
(Sir Nicholas Montagu) The situation in 2004 is going to be different from the option of breaking the Accenture contract in mid stream. The Accenture contract will have come to an end in 2004, as will the contract with EDS. The costs there to a potential bidder will be transition costs and bidder costs, which are very different from those which an alternative bidder would have encountered in this situation. We are concerned, and I have discussed this already at previous hearings, that this should be a tough and real competition. We have already taken steps to ensure that it is so, what we call market making, by seeking to interest alternative suppliers and, although it is very early days yet, the indications are that a number will be interested.
11. Could I ask you about intellectual property rights. There has been some interest in the Committee in this in the past.
(Sir Nicholas Montagu) Yes, indeed.
12. Are you still allowing Accenture to retain intellectual property rights to the system?
(Sir Nicholas Montagu) Yes, because that was a part of the original contract and was judged at the time to be the best value for money. The break costs of transferring intellectual property would have been quite considerable, but when the contract comes to an end we get a licence to use the intellectual property in perpetuity for, if my memory serves me right, £13 million.
(Mr Yard) £14 million.
(Sir Nicholas Montagu) £14 million.
13. Okay. Can I just ask one final question to Lis Astall. Now the history of NIRS 2 is thatto cut a long story shortyou got this contract originally by undercutting your competitors by tens of millions of pounds. You made heavy losses. The public underwent enormous anguish in terms of not knowing what their pension would be and all the rest. How confident can we be that under the new arrangements you will perform better than you have in the past?
(Ms Astall) I think if you look at the track record of the last few releases that will probably indicate that it is getting a lot better. We have a target which is on service level availability which is a 98 per cent target and over the last two years that has been at 99.6 per cent. In the last few releases, which have delivered major changes, there have been much lower levels of post-go live incidents when the system is actually in than we have ever experienced before. I think we are confident that we can deliver and, as the report points out, I think the relationship is a lot more productive so we are confident we can do that.
Chairman: I am sure others may want to question you further on that.
14. Good afternoon, Sir Nick. In paragraph 3.03 basically we are told, are we not, that because of new legislation, the old system was basically no good and new developments were needed. Having read the report I think obviously the decision which was made was the right decision, there is no doubt about that, clearly it was.
(Sir Nicholas Montagu) Yes.
15. This allowed Accenture to take advantage of the situation, did it not?
(Sir Nicholas Montagu) No, I do not think it did really, Mr Steinberg. As you say, with new legislation we needed a contract which provided for more than the original contract did. As the report notes, we looked at the alternatives, we had rigorous professional advice from PA Consulting and on the basis of that we concluded that the deal with Accenture represented the best one. As you say, the report bears that out.
16. It is okay saying that. I can appreciate what you are saying but in effect they were in a monopoly situation, were they not, and they knew that?
(Sir Nicholas Montagu) No, they were not in a monopoly situation. Again, the report notes that there was the option of taking on another supplier with associated risks, and as it turned out greater costs, but equally I think it is important to recognise that even with the contract extension not all of the work rests with Accenture. Registration for stakeholder pensions has gone to EDS and there are other areas of work for the Department for Work and Pensions, which has been undertaken jointly by Accenture and EDS. I think we have a pragmatic business solution.
17. Okay. That is fair comment, but at the end of the day Accenture knew they were going to get the contract because basically it was common sense that you could not go down the other two alternatives. They knew they were going to get the contract. In terms of the industry's comparisons they came out as expensive in their staff costs, in fact more expensive in their staff costs, and it was a thought that where you would gain would be in the productivity. The point I am trying to make here, I am not making it very clear, what I am saying is their staff costs were higher than other comparators.
(Sir Nicholas Montagu) Yes.
18. That makes me think they knew they were going to get it anyway so they could afford to increase their costs on the basis that they knew they were going to get the contact anyway.
(Sir Nicholas Montagu) I do not think that is right, Mr Steinberg.
19. Why is that cost so high?
(Ms Astall) Our staff costs are high and the report points that out.