Examination of Witnesses (Questions 620
WEDNESDAY 27 FEBRUARY 2002
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
(Ms Metcalf) Going up until then and then beyond,
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
625. I seem to have seenand you appreciate
we have a lot of documentation herethe 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
(Ms Metcalf) It did.
627. Focused entirely on the issue of complaints
(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
(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
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