Examination of Witnesses (Questions 120-139)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
120. I can understand that. If you had a horse race in which you saw perhaps five horses and you knew that four of them were roughly equally swift but one of them was less swift than the rest, you would not tend to bet on the less swift horse. But if you were then told that the slowest horse was going to start 50 per cent of the way down the race track, you might be tempted to think that no horse could run half as fast as all the others and therefore it would probably win the race with that sort of handicap. Is that not precisely the position you got yourselves into in this case? With a £44 million cost which was just about half the expected cost of the extended contract, you were in fact saying that Accenture was starting half way down the track. Yes, there were other horses which could win the race but with a handicap like that
(Sir Nicholas Montagu) I think your analogy breaks down because there is nothing to suggest there were four swifter horses. What there was was a horse which was performing more than adequately, showing itself to be a thoroughbred. You have tempted me on this and my metaphors will get more and more elaborate, so maybe I had better abandon your horse metaphor. Accenture were performing well, the system was robust, what we wanted was the best value for money and the best chance of success to deliver the outcomes required by our ministers.
(Mr Yard) We were very concerned to see whether or not they were starting as far ahead as you suggest. That was why in the model that is reflected in Table 7, the left hand side ignored the break costs in arriving at the comparison we made about value for money. We were then looking to see whether the horse, as you put it, was strong enough to carry on and get to the end and deliver the various things we wanted, which was the technical review, and whether we could actually change some of the mechanisms to get better delivery in the future. We were able to achieve all of those things through the negotiation.
121. Paragraph 3.6 seems to indicate that you thought using EDS rates the costs that another firm might give youwhich just one other firm might give youwas, roughly speaking, the same sort of costs as Accenture proposals, and you knew there were a number of firms which might have bid. Is it not fair to say that if the average rough estimate you got from one firm was pretty comparable to Accenture's costs, there must have been a good chance at least that one of the others would have come in with a much lower bid, just as you were surprised after all that Accenture came in so far below the others for the first NIRS 2 contract?
(Mr Yard) We did look at not only EDS, which is referred to in 3.6, but also at the industry average cost, which was another comparator, which we used in the model. So we did take into account there were other potential suppliers which could do this.
122. The industry average cost is not the one you are going to give it to, is it? The industry average means that somebody is going to come in well below that and somebody else will come in quite a lot above that. The only interesting one to use is the one which comes a lot below that. If Accenture's costs are roughly average, you would expect somebody else to come in with a much lower cost.
(Mr Yard) We took the comparator of an industry average, and I accept the point you make about that, and EDS, who we have some other work with, who we knew had got competitive rates, and looked at both of those to even out that concern that you expressed.
(Sir Nicholas Montagu) I must emphasise again, Mr Rendel, this was not the Inland Revenue acting on whim. As the Report recognises, our procurement exercise followed all the accepted best practice. It was a PFI contract in line with the guidelines and with the McCartney Report and we were advised throughout by PA Consulting. Now that is, if you like, a rival consultant to Accenture who would be well aware of industry rates.
123. I am not surprised to hear you say the decision you took was the cheaper one, given the £44 million extra costs because, of course, that is the critical factor. What I was going on to argue was that if you did not have that £44 million cost the others might well have come in at a cheaper price. Can I ask you this one final question. You said that the Inland Revenue retained the risk of business failure in the system. We talked about this a bit earlier. If the company failed completely, either went into liquidation or failed to produce the system altogether, what would it cost you to produce another programme in time?
(Sir Nicholas Montagu) I have not the first idea, Mr Rendel. Frankly, I have to decide what work and what estimates in themselves would provide good value for money. The scenario that you have described is one of such remote possibility that I really do not think I would be justified in deploying the time of skilled resources and the money that would be involved to reach that calculation. If I might pick up your earlier point. If you look back at figure 7 on page 15 of the report, you will actually see that the results of the financial evaluation without the break costs still show the Accenture proposal to be the best.
124. Against average costs?
(Mr Yard) And the outsourcing rates, the EDS rate.
125. Yes, against one other firm and the average costs?
(Mr Yard) Yes.
(Sir Nicholas Montagu) Yes.
126. So you are not comparing with what may be likely to be the cheapest cost. Is that average going to be an average of a higher cost or a much lower cost or several much lower costs?
(Sir Nicholas Montagu) I stand by the report to which I have signed up, Mr Rendel.
Mr Rendel: I do not deny the report is accurate, in a sense it just misses out half the possible data, that is the point I am making.
127. Ms Astall, I just want to try and pick up a bit of what my colleagues, Gerry Steinberg and Jon Trickett, have been probing with you earlier. You advised Mr Steinberg that although your staff costs were higher, this was justified because your staff were deemed to be more productive, is that right?
(Ms Astall) Yes.
128. When Mr Trickett probed the basis of that productivity, it was agreed, I think, by Sir Nick and Mr Yard that that was an assumption that was based on the fact that you had experience of the system, is that correct?
(Ms Astall) That was one of the factors which was taken into account, yes.
129. It is a factor which is contained at Section 3.8 of the report, is it not? It was this that justified the increase that Mr Trickett referred to from 7.5 to 11.5 hours per new I cannot say I quite understand what a function point is but it is a unit that you are perfectly well able to calculate. What struck me from that is this. That may well be true, the incumbency factor may give you that advantage, that you can spend less time achieving those function costs but does it actually mean that you pay your staff more than other similar firms pay their staff?
(Ms Astall) I do not know the figures for everybody else but certainly I think if you look at the published figures of staff salaries we will be in the top range, yes.
130. With respect, I take it then that the reason that you pay your staff more, if you do pay your staff more, is because of the factors that you have mentioned to Mr Steinberg, namely that you try and recruit the best staff, you have a policy of retaining those staff and that is a policy that applies all across your company.
(Ms Astall) You remember one of the other factors actually was the investment in training that I talked about. We have a huge investment in training for our staff as well. It is not just going out and recruiting the best, we invest to make sure they remain the best.
131. Indeed, but with respect none of those are factors which are cited as the reason for the productivity difference in the NAO's report at this point, are they? It is not that your staffor at least not according to the report hereare better, it is not that they are better trained, it is actually that they have been on the job and they are used to the system?
(Ms Astall) I would say that is one of the main factors, that they have been on the job. Partly the fact that they have been trained makes them more productive in the first place. The report says that
132. It does not say that. What the report says, let us read it.
(Ms Astall) What paragraph?
133. "Accenture agreed to accept a productivity target of 7.5 staff days a function point for NIRS 2 development work under the contract extension compared with a rate of eight to ten staff days achieved on the base system." You had accepted eight to ten on the base system. "The Inland Revenue's operational researchers estimated that a new supplier, lacking knowledge of the system, would achieve a rate of 11.5 staff days a function point". The difference here is you went with 7.5 and the justification of the differential, which is a differential of four staff days, is that the new supplier would "lack knowledge of the system" which you possessed?
(Ms Astall) Yes, but I think my original point is eight to ten is lower than 11 and a half. I would argue the eight to ten you might get because our staff are better trained in the first place. I am saying it is not the only factor.
134. No. I wonder if that is not a function of it being your system which somebody else might have to learn and, therefore, your staff might be expected at the initial point of the new system, which is yours and designed by them, to find it easier to operate?
(Ms Astall) I think if I accept your flow of logic, what I am saying is eight to ten is the base line that we started with and we moved to seven and a half. I think that is the difference which is our knowledge of the system actually took us down to seven and a half. 11 and a half was the original estimate given by others. So one and a half days, I am saying, is down to training by our staff.
135. Could I ask the NAO if that is what you were intending to say by that paragraph? I do not want to know whether it is reasonable, I want to know what the intention was when you wrote that?
(Mr Gordon) Yes, that is perfectly correct.
136. What is perfectly correct? Is it that the differential between seven and a half and 11 and a half is justified by their experience of the system or is it that the productivity gained from having already been working on it is of the order of one and a half?
(Mr Gordon) Eight to ten is what Accenture achieved for the system and they were designing it. That is more comparable with the 11.5 estimate for a new supplier not being familiar with the system.
137. Right. Can you then elaborate as to whether the price differential in the staffing costs was measured against the differential of productivity of eight to ten to seven and a half or was it measured against a productivity differential of 11 and a half to seven and a half?
(Mr Yard) It was 11 and a half.
138. Ah, that seems to have been at variance with what I have just been told. NAO?
(Mr Gordon) Sorry, which estimate are you talking about? The Accenture costs used in this model are Accenture's actual offer.
139. Yes, but the justification we have just heard from Mr Yard is that what happened was the cost of the differential in staff wages between the competition and Accenture, which were being justified on the basis of the productivity differential between Accenture and the competition, were not done on the same basis according to Mr Yard. Mr Yard has said they were done on the basis of 11.5 to 7.5 which is what I understand Ms Astall and yourself to have just advised the Committee, that in fact they should have been done on the basis of eight to ten to seven and a half.
(Ms Astall) The eight to ten was the original base line we achieved. We said we would offer to do it at seven and a half going forward. The comparator with the other supplier was 11 and a half which I think was the question Mr Yard was answering. 11 and a half is the one used in figure seven. Eight to 10 is irrelevant from that point of view because that is what we achieved at the beginning, but it was not the comparator that was used to create this model. Does that explain it? It is clear to me but it is a very difficult area.