Examination of Witnesses (Questions 1
MONDAY 12 MARCH 2001
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 servicesand
I would be happy to talk about those in more detailcould
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
(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
(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
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
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
(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 lossesnot losses, that is
the wrong termthe 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 CMGand Mr Topp would be able
to say whether he agreed with me of courseand 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.
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
(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
16. If you had been held strictly to the letter
of the contract, would that have cost you more than you voluntarily
(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
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
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.