Select Committee on Education and Skills Minutes of Evidence

Examination of Witnesses (Questions 620 - 639)



  620. I have here the annual quality review for the first contract year ending 31 May 2001 produced by Capita for the DfES.
  (Ms Metcalf) I beg your parton. I thought you were talking about the annual audit. In terms of the annual review, I am not sure I understand your question. We presented that review, we had a discussion with the Department, they were quite satisfied at that point.

  621. So there was a discussion on the annual review after 31 May 2001.
  (Ms Metcalf) Yes; yes, there was.

  622. In addition to that there were quarterly reviews.
  (Ms Metcalf) Going up until then and then beyond, yes.

  623. What happened to those quarterly reviews?
  (Ms Metcalf) The quarterly reviews post May. I am not sure what happened to the review which would have been done at the end of August. At that point we were having weekly meetings with the Department over the issues. I cannot say I know whether we completed that quarterly review because events were somewhat overtaking us at that time.


  624. Was everyone running around in the Department like headless chickens?
  (Ms Metcalf) No, but we were meeting with them very regularly.

Mr Chaytor

  625. I seem to have seen—and you appreciate we have a lot of documentation here—the quarterly review for the June to August period which suggests that there ought to have been the establishment of a quality standards and prevention unit to monitor all these issues.
  (Ms Metcalf) I beg your pardon, you pick me up. You are quite right, that review was done and in fact I was responsible for proposing the setting up of that unit. I just had not tied it in with the quarterly report. That unit was set up. It was set up quite quickly. Initially we did it on a month's trial because we were not absolutely sure that we had not just stumbled on a pocket of isolated instances. Throughout that summer period we were working very, very closely with the Department and what we were doing was some of the preliminary sorting work, gathering the evidence if you like, to assist the Department in some of the work which has now gone on much further through and involved the police in some instances.

  626. That unit would comprise members of Capita staff.
  (Ms Metcalf) It did.

  627. Focused entirely on the issue of complaints and allegations.
  (Ms Metcalf) Absolutely, yes.

  628. May I move on to the question of the contract and link this back to quality monitoring. The contract documentation we have seen is hugely detailed. Broadly speaking, how does it compare with other contracts with government departments which Capita would be involved in? Is it normal for there to be so many revisions and challenges to the original specification?
  (Mr Doyle) I would say it is not unusual. We have several which are a lot tighter.

  629. So the number of revisions here agreed after the original specification was excessive compared with others.
  (Mr Doyle) We move into different types of contractual arrangements. In some cases the customer can have gone through a two-year period of working with advisers in tying down exactly what it is that they want from a service; absolutely tied down, nuts and bolts, extremely tight. That is what you are bidding against. Then when you move into it the number of changes you would see they would be fewer than you are seeing there. There are others where you move through a reasonably fast procurement, where you have more than an outline of what a contract is going to look like but it has not been nailed down to that level. You then come to an agreement. You are chosen effectively as a preferred supplier, you are awarded the contract and you accept in those instances that in the early days you are going to be working very closely together and that there will be a number of changes because you are going to be going through a learning process post contract as opposed to pre contract. It is not unusual in that respect.

  630. Were there far more revisions here than normal?
  (Mr Pilling) You need to recognise also that a number of the contracts we have with government are against established businesses within government where something has been running for a number of years. You need to recognise that in this particular area it is new. It was a new scheme, a lot of thought was put into it but not necessarily everything absolutely categorically fully nailed down. During the process of building the scheme together there were revisions and there would have been revisions afterwards as well as we learned more and more. You only learn by delivering a scheme and running a scheme and incorporating the changes back in. It is not particularly unusual to have a number of revisions when it is a new scheme.

  631. If you were involved in an ILA 2, would you expect the original specification to be much tighter?
  (Mr Doyle) Absolutely.

  632. In terms of the basis of the payments, we have here a section in the annual review for the first year which talks about the annual unitary payment. It comes up with an interesting formula which says AUP = the sum of each MUP in the relevant year +/- CVA +/- AQRA -TPR. You will appreciate that is not terribly clear. I understand that the basis of the payment will fundamentally remain commercially confidential, but can you describe to us without giving away any confidentiality the essence of the financial basis of the contract and in particular how it related to the numbers of ILAs established?
  (Ms Metcalf) Essentially there would be an element of management fee and there is an element which is related to the volume. A relatively small element of that was related to accounts opened, but there was also a factor for accounts used. As accounts became used, the individuals then had to receive annual statements and so on. It was essentially activity based.

  633. Was there a ceiling on the total payments in relationship to the volume?
  (Ms Metcalf) From memory I do not think so.

  634. Was the management fee fixed or was the management fee set in relation to the volume?
  (Ms Metcalf) The management fee was substantially fixed.

  635. The management fee was fixed but the volume had no ceiling.
  (Ms Metcalf) I am going from memory here. The volume was the smaller element because it was fixed in relation to the call centre activities and to the web based activities.

  636. In terms of that period between June and August when the numbers of ILAs increased by 50 per cent or a little bit more, did the payment you received under the terms of the contract increase proportionately?
  (Ms Metcalf) Yes, because we were handling more application forms, we were handling more telephone calls, those elements rose.

  637. The issue is therefore that as the scheme got out of hand there was in the nature of the contract financial advantage to Capita as you were earning proportionately more as the number of ILAs increased.
  (Ms Metcalf) We certainly did not see it in that way.

  638. In terms of the cash payments under the contracts it is clearly the case that you gained directly, if not directly proportionately, as a result of the explosion in the number of ILAs.
  (Mr Doyle) The amount of money which was paid to us by the Department went up, yes. It was going up against a rising cost base. We had to provide more people in the call centres, we had to provide more back-office staff to provide the administration. They were the elements in the contract which both the Department and ourselves could see when the contract was put together we did not have total control over. There had to be a mechanism by which if our costs went up because of increasing volumes, we would get paid for that. It was not a direct relationship. In the early days of those volumes they were causing us more problems than ... We certainly were not thinking it was a way of increasing our profit margin. We were actually struggling to keep up with those volumes. Indeed at that time we went into penalties.

  639. Looking forward to an ILA 2, do you see the same contractual basis as the way forward or do you think there ought to be a cap on numbers to control costs?
  (Mr Doyle) We would have no problem with a cap, provided that the Department were prepared to put a cap. No contractor would accept a cap against something which he had no control over because the control would be with the Department in terms of what volumes were going to be. If the Department sat down and said they would put a cap on this when it got to 2.5 million learners, that was it, they would take no more, then you could put a cap on that, you could work that through in terms of cost and you could apply a sensible ... You cannot put a cap on something which says that if there is a change of policy there will be another million.

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