Revenue IT a costly success

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The £52 million which Revenue and Customs spent to assist bidding for a major IT services contract is hard to justify, according to a government report released yesterday.

The report detailed the costs of the Acquiring Strategic Partners for the Inland Revenue (Aspire) system, by which Revenue and Customs (HMRC) signed a contract with Capgemini for IT services, replacing contracts with EDS and Accenture.

"The transition was successful but very costly," said Edward Leigh, MP and chairman of the Public Accounts Committee. "It is hard to find a justification for the department's paying so much, nearly £52 million, towards bidders' costs to encourage competition."

Believing that the incumbent EDS contract might discourage competitive bidders, HMRC offered £8.6 million to cover bidders' costs and agreed to pay transition costs - keeping that element out of the bid amount for EDS' competitors.

Originally created to open bidding for IT services at Inland Revenue to replace the EDS and Accenture deals, it also included Customs and Excise's Fujitsu contract after the two bodies merged in 2005.

Campgemini's £2.8 billion, 10-year bid was chosen despite being £32 million above the EDS-Accenture contract because it better suited the HMRC's needs, the report said.

But following the changeover, the department paid £37.6 million to Capgemini for "unique transition costs" and £5.7 million to EDS and Accenture for helping with the transition. The money paid out included a 15.5 per cent profit margin for Capgemini on top of the costs.

After £2 million in delays to the National Insurance Recording System (NIRS), Accenture was kept on as a subcontractor by Capgemini, which the report said should have resulted in the cancellation of its payment.

"The department could also have been sharper in its negotiations," said Leigh. "The actual costs of transition were agreed after the contract was awarded and competitive tension had vanished - and the costs even included a profit margin for the successful bidder."

The report also criticised the increase in IT spending. The actual costs in the first year were £539 million, 40 per cent higher than estimated.

"There has been a very steep rise in HMRC's spending on IT services - the forecast figure is some £8.5 billion over the 10 years of the contract compared with the original estimate of nearly £3 billion," said Leigh. "If profit margins carry on at the current level, then Capgemini could make £1.1 billion on the contract, nearly four times the amount originally envisaged."

The jump in profits for Capgemini has not yet crossed the threshold to trigger a profit sharing agreement.

"The department should have foreseen that its demand for IT services could vary significantly and determined how this might affect its contractor's prices and profit margins," said Leigh. "These will have to be rigorously benchmarked in future to make sure the prices fairly reflect the actual volume of work being carried out."

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