Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)



Mr Williams

  1. Good afternoon. May I welcome our witnesses and may I assure you it is not normally the ordeal you are led to believe when you are here. You are all new so I hope you will find it an interesting experience for you as well. The subject of our hearing today is the Radiocommunications Agency's joint venture with CMG. Our witnesses are Mr David Hendon, Chief Executive of the Agency, backed by Mr Chris de Grouchy. The CMG witness here is Mr Peter Topp. Capita Business Services Limited is represented by Ms Lyn Davies. Of course we have our usual Treasury colleagues here who we can persecute in the absence of any other source of entertainment. Can we start straight away by asking the obvious question but which we need to get clearly on the record. What made you decide on the joint venture and why did you persist with that decision even when you saw the extent to which the bidders backed away from it? I think that is obviously for you, Mr Hendon.

  (Mr Hendon) Yes, thank you, Mr Williams. I think the main driver for pursuing the joint venture was that we were very concerned to have available to ourselves resources to provide IT systems and to develop new IT systems and resources that we could rely on. We were finding it difficult to make those resources available ourselves by recruiting in the market place and we felt that the mixture of that and the direct use of contractors was not giving us the right sort of forward looking relationship. We preferred the idea of the joint venture. I think perhaps a point to make about that is that we also considered the idea of out-sourcing the provision of our IT services but we were quite concerned that the business critical parts of the IT services—and I would be happy to talk about those in more detail—could not be assured and there was a danger that in out-sourcing the work we would attract bids from companies that were mainly interested and capable of providing the routine desktop services rather than the specialist services that we had. Really why did we persist, simply because we felt we were right to pursue that course and even though it became difficult that still remained our position.

  2. But then when it shrank from 56 down to two, a notable contraction, you then yourselves moved out one of the two, Logica, because of their wish to concentrate, strangely enough, on the new venture on the commercial side. With hindsight are you still satisfied that was the correct decision to make? Might there not have been an advantage in having a second partner focused entirely on the overseas marketing opportunities?
  (Mr Hendon) Clearly we gave that a lot of consideration but this idea of selling our expertise overseas was a new venture for us but also a new venture for the Government. I think it was the first project that pursued the so-called wider markets initiative where the Government was seeking to sell its own intellectual services, so to speak, to other governments. We felt there was a natural synergy between those that were providing systems to us which would be the systems to back up the sort of approaches that we would be trying to persuade other governments to follow, so to speak, so there was a natural synergy between the provision of systems to us and the provision of systems to those that we hoped would be our customers in other countries. I think we felt that if we tried to pursue it separately, firstly it was not quite clear how we would do that, it would be quite a difficult thing to pursue anyway, and there would also be the risk that we could end up with the two companies that we were involved with competing with each other for business, the company supplying us with IT might feel it wanted to compete with the company that was selling our expertise to other countries, and that just seemed to be an unproductive way of proceeding. Whereas if we were to have one company to do the whole lot, we could actually build on the success that we had in terms of what we believe is a world leading position in spectrum management and persuade other countries to do things our way. In practice it turned out to be rather more difficult than perhaps we expected and no doubt we will talk about that.

  3. We want to learn from your experience. It was, as you say, an innovation. In pursuing this innovative course, did you receive much support from Department, Treasury and so on? Were you able to consult freely with them on the development of the proposals?
  (Mr Hendon) Yes. The whole approach was one that was novel in two ways. To have a partnership rather than an out-source was novel and also to seek to sell our own expertise, our own intellectual property, was novel. Frankly this is not something that an Agency like mine does on its own so we took professional advice, as you know, and we also sought the help of our colleagues in Government Departments. Although I have to say it is very much our own decision to proceed in this way, and I am not looking to shield under anybody, I believed it was the right thing to do and I still believe it is the right thing to do.

  4. Fairly central to your considerations was the fact it was not just the venture that was inhibited but your activities and, in such a field, peoples' skills in the intellectual capital. Retaining that in-house intellectual capability was regarded as a relatively high priority, very high priority, and yet it did not really happen, did it? Why was that and how has it affected you?
  (Mr Hendon) It did not happen, I think, because the IT industry has grown hugely, as everyone knows, in the last few years. There is a tremendous shortage of highly skilled people. There are plenty of people who think they know how to make IT systems work but there is really rather fewer of those who can make them work reliably and we had some of those.

  5. You will get many "hear! hears!" from this Committee to that comment. We have spent a substantial part of our time examining those who do exactly as you say, not understanding.
  (Mr Hendon) I am sorry to try to teach you things that you know only too well.

  6. No, no.
  (Mr Hendon) We have retained more of that expertise inhouse than may immediately be apparent because what we did do was set up a fairly powerful intelligent customer function, what we call the Information Systems Unit. This unit is there to act as the intelligent customer in the Agency, to engage in a debate with the supplier at a fully detailed level so we can challenge their solutions, we can understand their proposals, we can debate with them in an informed way about how the costs that they are proposing for development work can be reduced and so on. That expertise, if things were different, we could redeploy into, for example, managing a direct operation or to manage the relationship with another supplier if something went wrong like that. That is important, I think. Although we do not have so many direct IT services people in the RSI business, it would be perhaps wrong to ignore the users who are embedded within the Agency, some of whom are very expert in IT systems and their role now is not to second guess the supplier but to make sure that the user requirement is spelt out in a way that is meaningful to the supplier and is robust and is not going to be altered more than it has to be.

  7. Has the loss of personnel left you fully capable of fulfilling both of those objectives, the original one and the newer objective?
  (Mr Hendon) I believe so, but I have to say that is partly because the relationship with the supplier has worked well. If it had not worked well then I would have moved heaven and earth to strengthen my inhouse team. These are not things that normally happen overnight either way. I am comfortable with how things are at the moment.

  8. The 19 month time lag between the time that you expected to spend in the preparation and the time you had to spend, did that exacerbate the problem of loss of personnel or was there a feeling of a stalling on progress within the organisation?
  (Mr Hendon) I do not believe there was any stalling on progress. In fact, we actually got on with some projects, for example the Rules Project, which was designed to provide the computer back-up to the introduction of spectrum pricing which was something that was enabled through legislation in 1998, the 1998 Wireless Telegraphy Act. That project we started some time before the contract with RSI was signed. We had to proceed with that because we recognised that we had a timetable to meet to meet the requirements of the legislation. Moving ahead of us, we also had the rather uncertain and frightening prospect of the year 2000 problem and that could not be ignored either. I do not believe there were hold-ups in general on development, although it is true that we soft pedalled a bit on expenditure on desktop computers, the computers people have on their desks, because we were trying to freeze things to hand over. I would not deny there was a certain aggravation, let us say, for the user community in having equipment that they began to see was ageing. I do not believe that we lost any people because of that.

  9. Mr Topp, I do not want you falling asleep at the end and toppling off the end of the table. You entered into a contract and then you made a very, very philanthropic gesture, you gave the Agency a £1 million a year saving after the contract was signed. What motivated this gesture of goodwill?
  (Mr Topp) We saw the deal all along as a long-term deal. Within the contract there are all sorts of protections for the Agency, so we were aware that if we insisted on the letter of the contract the Agency would do likewise and we would be continually negotiating bits of the contract and we would have a lose-lose situation then and not a win-win. In fact, in this desktop area, which is where these savings arose, the mix of services that the Agency in practice wished to have was very different from the mix that was assumed when all the costings were done. That was why we were able to offer the reduction in that way and out of that the benefit to us is the long-term partnership, the continuation of that.

  10. This will be my final question before I throw it open to the rest of the Committee. When you were originally discussing it you were talking of a 50/50 partnership and then it became 30/70. What was the causal factor in switching from 50/50 to 30/70? Perhaps I should put it initially to Mr Hendon.
  (Mr Hendon) Yes, thank you. I think, Mr Williams, that was our decision in the end and really what we were trying to do was to give ourselves a sufficient percentage of the whole company so that we had proper control over what happened. We did not want, for example, to find CMG reforming the company behind our backs, so we needed to have more than 25 per cent for that reason. We were clear, also, that we had to keep well below 50 per cent because of the need to avoid the partnership being seen as a public body, because there were all manner of restrictions and controls over the way that public bodies do business which were incompatible with what we were looking for here, which was a company that could move fast in the marketplace in the UK and do whatever commercially it felt it needed to do to meet our demands as customers and could move fast in the market abroad to win business overseas. Although in theory it might look as if one could take, say, 49 per cent and it would not be controlling the company, in practice the advice we had was as we were such an essential customer for the business and we would have two seats on the board and the expectation was that, as indeed it turned out, one of us, indeed me, chaired the board, all of this would amount to de facto control and there was a risk that we would find ourselves unexpectedly being forced to regard ourselves as a public body, or being regarded as a public body.

  11. Other than the managerial rights and balance of power and so on, has there been any financial consequence of this decision?
  (Mr Hendon) At really what is quite a trivial level the profit of the company is shared between the shareholders in proportion to their shareholdings, so we receive 30 per cent rather than whatever other percentage we would have owned. To put this in context, the profit, for example, last year was just under a quarter of a million pounds and we received 30 per cent of that. Even if we had received 50 per cent of that, that would have been relatively small compared with the business that the whole project was carrying out. The important thing to me was to see a business which was going to meet the needs that I had as a customer. As the Agency Chief Executive I have two functions, it seems to me. One is to look after the sorts of things that you are concerned about in this Committee to do with public money and value for money, and another is to discharge the management of radio spectrum which is recognised these days to be a resource of great economic importance, not just in terms of what people will pay for it but the economic wealth of the country that rides on the back of it. If I cannot do that because some system is not working then this could cost the country quite a lot of money. When one is looking at the value for money of a deal like this, I think it is important to include those sorts of considerations too.

  12. I am sorry, I said it was my final question, can I just follow on directly from the answers you have given. If your own brain child, the commercial development of the overseas activity, takes off, and of course the profit figures could look markedly different, then the losses—not losses, that is the wrong term—the profit share could begin to become in gross terms markedly different, could it not?
  (Mr Hendon) I think it is important to remember, Mr Williams, that we do not actually expose ourselves to any risk in this international business. The losses in the international business are borne by CMG. So, yes, if it is massively successful then clearly our proportion of the profit will be lower than if we had chosen another percentage, but perhaps it would have been quite difficult to persuade CMG—and Mr Topp would be able to say whether he agreed with me of course—and get them to accept a situation where they took all of the downside and shared the upside in a more equal way.

  Mr Williams: Before I open the questioning up to the Committee, may I just make a point to all of you, particularly as we are a relatively small number today because the Budget debate is on and inevitably quite a few of our Members have split loyalties. Although the question may be addressed to any one of you, if any of you feel you have anything useful to add, as far as this Committee is concerned we are here to get information, get advice which may help us in future schemes and so on, so please individually, all of you, feel free to indicate if you wish to participate.

Mr Rendel

  13. Thank you, Mr Williams. It sounds as if I ought to just let them get on with it and not put any questions. As usual, of course, you have asked a lot of the questions I might have wanted to ask. I will perhaps start by following up on one or two of those. Mr Hendon, you were talking just now about the retention of in-house expertise and you said you had wanted to do it as you had foreseen various risks but you were not able to retain the in-house expertise. You seemed to indicate, if I understood you correctly, that you did not feel these risks had worked out too badly in the end, you had done okay. Would you therefore advise anybody else going into this sort of scheme not to worry too much about retaining in-house expertise or would you take the same decision again if you were now starting all over again?
  (Mr Hendon) I think the first thing I would say is that it is always difficult to do something for the first time and this was the first time, as far as I am aware, that the Government had had this sort of contract in the IT services area. Certainly it was the first time the Government had tried to put together a deal involving a wider markets initiative. So we were, to quite a large extent, feeling our way. I think therefore we were cautious actually about how we would get out of something if it turned out to be all a terrible disaster. In fact, I joined the Agency just before the contract was signed so making sure it was not a disaster fell, as it were, to me. I know we had some interesting discussions with the CMG at the beginning about the nature of the relationship that we were looking for and, indeed, they were looking for and the fact that this relationship was not to be like an out-sourcing relationship. There had to be some reason why we had gone through all this pain to put together a different way of doing it. If it ended up looking like an out-source with us in some sort of fuzzy role in the middle then the whole thing would not have been worth doing. Now, having had that sort of discussion, which I think was very helpful, then what I found was that CMG were, indeed, entirely ready to engage in that sort of relationship, in other words, in a relationship where we were able to discuss with them the risks associated with a particular piece of business, we were able to talk to them about the way things were going to be changed and so on and all of that made me over a period of months more and more comfortable with the fact that the IT expertise I retained in-house, outside of my intelligent customer function, which is absolutely critical, was rather lower than we had started with. I think actually CMG were quite far sighted to have accepted that sort of partnership arrangement in such a novel way and in advising anyone else I would say to them that they would need to be fairly clear about the sort of deal they were going to have, the way it was going to work in practice before they assumed that they would not need a reasonably easy way of getting out. I remember at one point saying to myself "Would I be prepared to walk away from this deal if it did not feel right" and I decided I would. Part of the reason was that I believed I could actually do the job another way. If I had not been able to do that then I would not have been able to think about walking away and that would have made me a little bit less tough perhaps in some of those early skirmishes where we were finding our feet.

  14. Mr Topp, Mr Hendon has called you far sighted. Is what he really means two things, that you spotted the fact that most of these in-house people would go fairly soon and you would be left with a rather different sort of deal from the one which the Agency originally thought they had?
  (Mr Topp) From our point of view there was quite a large uncertainty in this area. We were very keen that some of the in-house people did transfer to us because they had knowledge of the system that we did not have at that stage and getting that knowledge across, we needed that to help support the systems initially. Looking further ahead, there was just uncertainty, we did not know. In fact not as many people came across as expected, which was a surprise to us. Subsequently some of those people have transferred to CMG so, although we have not got as many secondees as was expected, a couple of the people are with CMG so they are still working in RSI providing value to the Agency.
  (Mr de Grouchy) Could I just add to that? We have retained a number of posts, we call them designated posts. There are 16 of them within the joint venture which the Agency still retains the right to fill on secondment if we wish to do so. As it happened, as confidence in the partnership has built, we reduced the number of those we felt obliged to fill and I think only now four of them are filled, others are filled by CMG. We have not given up that right to fill them and if confidence begins to tail away we may choose to do so.

  15. Mr Topp, I was also interested in a question Mr Williams asked you about what was in it for you, in relation to this business of your letting the Agency off with some of the terms of the contract. You indicated that you thought that was a good thing because otherwise the Agency might in other areas of the contract hold you to something which you did not want to be held to. What have you not been held to in the contract?
  (Mr Topp) What have we not been held to? I think we have not done some of the things on precisely the timescale that was set down in the contract, for instance. I think the Agency could have invoked, say, the value testing clauses earlier than they did. We delivered the service improvement plan somewhat later than was originally envisaged. It is that sort of area where we have done something on a slightly different timescale to what was envisaged.

  16. If you had been held strictly to the letter of the contract, would that have cost you more than you voluntarily gave up?
  (Mr Topp) Our expectation was that had we not given way in this area, the Agency would then have invoked a value test which would have shown that area to be too expensive and we would have been forced into a reduction similar to the one that we gave voluntarily.

  17. The question I asked you really was whether you thought you gained more than you lost by this mutual agreement?
  (Mr Topp) Yes, I do, because we have developed the goodwill.

  18. Mr Hendon, do you think you have gained more than you have lost?
  (Mr Hendon) No. I think actually we got a good deal. When we negotiated the contract I think we probably did not understand quite the extent of change that was going to apply to IT systems in the future. In fact, we were trying to standardise our IT systems across the desktop area and at the same time you can pick up any newspaper these days and you will find there are full of adverts for computers. That change in the sort of socialisation of IT systems has meant that general expectations are completely different from what they were four years ago.

  19. I understand that but the question I was trying to get through to you was there were various things apparently on both sides which were contractually agreed that have not been strictly adhered to.
  (Mr Hendon) In terms of the timescale, yes.

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