Examination of Witnesses (Questions 80-99)
SIR NICHOLAS MONTAGU KCB, MR JOHN YARD CBE, AND MS LIS ASTALL
MONDAY 3 DECEMBER 2001
80. Okay. I just want to quickly move on to one or two questions about the rate of return. What is the rate of return assumed in the contract, since I understand you operate in an open book?
(Mr Yard) We are in the process, at the moment, of carrying out an open book audit to ascertain that.
81. I understand that a rate of return has been determined. If there is something like a super profit there may be a sharing between the public purse and the private sector so, therefore, the rate of return must be known. I am saying what is the rate of return at which the trigger for super profit clause would operate?
(Sir Nicholas Montagu) Chairman, I do not want to be difficult. This takes us, particularly with a competition already launched, into some rather difficult commercially sensitive territory for Lis Astall.
82. Do you know the answer? Do you want to tell us in a private session? Do you want a note?
Jon Trickett: I would be happy to receive a note on it.
(Sir Nicholas Montagu) Okay.
83. A confidential note, please.
(Sir Nicholas Montagu) I am grateful for the understanding that it must be confidential to the Committee, Chairman.
84. What I would like to ask, though, which is consequent to that, is supposing we get into higher productivity rates than were assumed at seven and a half per cent. Therefore the notion of super profita word which I am using which no doubt is entirely an inappropriate wordhow does the share between the public purse and Accenture then break down?
(Sir Nicholas Montagu) 50:50.
Jon Trickett: 50:50. Thank you very much.
85. Perhaps I can pick up on a point a number of members have made, and that is the fact you were tied to Accenture in effect. They concentrated on the break costs but perhaps I can concentrate on paragraph 3.14 on page 17 of the Report. It says here, "In carrying out their evaluation, the Inland Revenue also took into account the need to deliver changes arising out of the legislative timetable. Using a supplier other than Accenture would have delayed implementation of the changes because of the time it would have taken for them to mobilise and become familiar with the system." The next sentence talks about the delays a new competition would have brought. Is this not the key? If you had not gone to Accenture you would have had to admit you could not deliver major welfare reforms on time?
(Sir Nicholas Montagu) It would certainly have been a lot riskier, yes, which is why I said earlier that going ahead with Accenture not only represented best value for money but also minimised the risk to the business.
86. If you had gone with another contractor there would have been a very high likelihood you would have been unable to deliver the stakeholder pension on time or the pension sharing arrangements?
(Sir Nicholas Montagu) It would certainly have been riskier.
87. So in effect you were going to government ministers and saying, "You have a choice. Either go with Accenture or risk seeing all your welfare reforms not implemented on time"?
(Sir Nicholas Montagu) No, we were going to government ministers and saying, "This is the cost of going with Accenture. Going with Accenture offers less risk to the business. Not going with Accenture would cost more, represent less good value for money and increase risk." That is certainly true. These were all, as I have indicated, factors behind our decision to extend the contract with Accenture.
88. When were you first aware that the legislative changes were going to require basically a whole new contract? If you had identified that need earlier, would it have been the case you could have started the process earlier and then you would not have had the risk of going with someone else because they would have been able to deliver?
(Sir Nicholas Montagu) I will get John to answer, if I may, on when we became aware but, of course, the other elements which are noted in the Report would not have gone away. There would still have been break costs, there would still have been the issue of another supplier, had another supplier been successful, in having a steep learning curve, so the risks were not all going to go away. In particular, there is no reason to think that even if we had been able to identify it earlierand, as I say, I will get John to answer you on thatthe value for money argument would have been any different.
(Mr Yard) The legislative changes came in over a period of just over a year from November 1997 to December 1998, and that is set out in Table 4 on page 12. When we took over responsibility in April 1999 we took that opportunity to look at what they added up to, and we worked with DSS, as it was then, to understand whether that exceeded the limit of 2,000 functions points or not. It was clear having all of those changes over the period proposed that would exceed the limit, but it was around April 1999 that we looked at how we should move forward given that that limit was extended.
89. So what you are telling me is that many months, in fact well over a year, after the first changes were introduced, but still four or five months after the last changes were introduced, you suddenly woke up and said, "My gosh, the computer system we have is not going to be able to deliver the things which have just gone through Parliament?"
(Mr Yard) We were working with DSS as it was at that time, and together with them we had looked at what that added up to in order to decide whether or not the limit had been exceeded.
(Sir Nicholas Montagu) I think, Mr Osborne, the key paragraphs are 2.10 to 2.12, which explain the process. When we became responsible for NIRS 2, when the Contributions Agency joined us in April 1999, we commissioned a review which was initially to look at the technical robustness of the system and then, as 2.11 says, we formed this joint design team which included EDS as well as Social Security to look at what was needed. In October of that year, which is only six months after we took over, the team concluded that more was needed than the Contributions Agency had contracted for, and that then led to the procurement.
90. I have no doubt that this is a story of the Treasury to the rescue, which I know is a common theme in Whitehall
(Sir Nicholas Montagu) I would love it to be a true story with a happy ending, Mr Osborne, but not in my experience.
91. What you are really telling me is that not until October, ten months after the last change, which was the introduction of the state second pension, a full two years after the first change, did the civil servants say, "Our computer system cannot cope with this", whereupon you say, "Well, we could offer it to somebody else but they will only have a few months to set themselves up", so it had to go to Accenture because you had waited a whole year before you had identified you needed a new computer system.
(Sir Nicholas Montagu) No, I am not saying that. As soon as we became responsible for NIRS 2 we launched a detailed examination, first, of the robustness, which after all has to be the first questionif we had not satisfied ourselves on that I think the Committee would have some rather awkward, difficult questionswe then formed a joint design team. This is complex stuff, what is going to be required to deliver complex and extensive legislative change, and within six months of our assuming responsibility we reached conclusions. I do not think that is dragging our feet.
92. I would suggest that if by October, ten months after the last legislative changes were introduced, you only then wake up to the fact that you need a whole new way of delivering what the Government has just introduced in Parliament, you were dragging your feet. As the Report makes absolutely clear in paragraphs 2.8 to 2.9, the Contributions Agency, when they were advising government ministers, should have spelt it out to them these legislative changes would need changes to the computer system, and then by the time it finally comes to your hand, it takes months before you realise you have to order a huge extension to your computer project.
(Mr Yard) We appreciated before October 1999 that the limit would be exceeded. Paragraph 2.12 was the point at which we quantified the minimum and maximum but it was clear shortly after April, May time that the limit would be exceeded, and we were looking at that stage at the options we had available. Again the Report spells out what those various options were, including deferral, which was unpalatable perhaps but it was an option, including looking at another supplier, and indeed on the registration of stakeholder pensions we did use another supplier.
93. But these are civil service options to ministers. "Option one, Minister, is to break all your commitments before Parliament. Option two is to give Accenture an extension of the contract." It is not much of an option. It is like something out of Yes, Minister.
(Sir Nicholas Montagu) No, it was, "In order to deliver your commitments to Parliament, this is what will be required and these are the options for delivery." If you are saying to me, "Do I believe the case for going ahead with Accenture was overwhelming", then the answer is yes. The Comptroller and Auditor General seems to have endorsed that belief.
94. I do not doubt the case for going with Accenture was overwhelming but I want to establish whether the case was overwhelming because by the time you had realised you needed to have an extension to your system the time was so late that you had to go with the existing supplier and you did not have time to organise another competition and so on?
(Sir Nicholas Montagu) No. The argument in the Report remains valid. It owes nothing to the timing. In terms of delivering the required outcomes and taking account of the cost of breaking what was a sound contract, then going ahead with Accenture would I think always have been the sensible outcome. Nobody dragged their feet, and it was not a question of an emergency solution. It was a considered solution.
(Mr Yard) There were four key factors we took into account in saying whether or not we should go with Accenture. The first was whether it represented value for money, which was the comparison that was done in the report. Secondly, we wanted to be absolutely certain that the technical platform of NIRS was a robust platform and would take the sort of changes that were being envisaged. Thirdly, we wanted to satisfy ourselves that Accenture were capable of delivering the changes at the pace that we wanted them. Lastly, we wanted to take the opportunity of any extension of the contract to revise some of the management controls, as the Committee spoke about earlier, to ensure there was better understanding between the parties, for example around testing and the acceptance criteria. It was only in the light of that work and those considerations that we put our recommendation forward.
95. Can I come at it from this angle. Could you quantify the likelihood that if you had gone with another contractor you would not have been able to deliver the Government's welfare reforms on time?
(Sir Nicholas Montagu) I do not know to what extent we could quantify it with any degree of exactness. What is certainly true, as I have indicated, is that going with a new contractor, who was unfamiliar with the system and who, therefore, lacked what Accenture had, would have been less well placed than Accenture to provide us with that degree of assurance. In addition, a competition, and we would of course have had to go to a full competitive process, would have taken, what, about 18 months, something of that order?
(Mr Yard) Yes.
(Sir Nicholas Montagu) So, yes, to that extent it would have delayed matters.
96. Would you agree what the Contributions Agency should have done, way back in November 1997, or even arguably on May 2nd 1997, is say to the new Government "Look, we have read your manifesto. You have got lots of welfare reform proposals which I know you are keen to introduce. We have to work out the details. I have to say in the round these are probably going to put extra demands on your NIRS 2 system and, therefore, we should be looking at whether we need a new competitive round. We need to see whether, in other words, we need time to give other competitors a chance to have a look at it"?
(Sir Nicholas Montagu) It is always very easy with hindsight, Mr Osborne, to say the Contributions Agency should or should not have done this at a particular time. If you look at table 4, by November 1997 all that had been proposed was the restructuring of National Insurance contribution thresholds and limits. I think that you would have to bless the Contributions Agency with perhaps rather more of a crystal ball than was reasonable.
97. I have to disagree with you. Anyone who took the remotest interest in politics in the second half of the 1990s would know that if the Labour Party won the election they were going to introduce significant welfare changes, indeed, I have to say, the Conservative Government were proposing significant welfare changes as well. How is it not possible that anyone at the Contributions Agency when the new minister came in said "Our computer system is not up to what you people are likely to suggest"? Is not the job of civil servants to advise ministers of the likely financial costs of the policies they are proposing?
(Sir Nicholas Montagu) Indeed, which, as I have indicated, we do. Again, I think it is perhaps demanding a bit much to assume that the then Chief Executive of the Contributions Agency should have been able to foresee the exact form of the welfare reforms, the extent to which they would impinge on the National Insurance Recording System.
98. I am not saying exact.
(Sir Nicholas Montagu) This became apparent at a later stage. We could argue indefinitely on what point it should have been foreseen that the NIRS 2 system would not be able to sustain the changes.
99. I am not arguing that they should have foreseen the precise nature of all this legislation. I am saying they should have foreseen that there were likely to be changes made and thatthe point the National Audit Office madethere should have been much more flexibility in the original contract. Could you give me an estimate, if there had been flexibility in the original system, of how much money the taxpayer would have saved?
(Sir Nicholas Montagu) No, I cannot because, of course, the other thing the National Audit Officeapart from finding the original contract provided excellent value for moneypoint out is that, given the system requirements detailed in the report, the original arrangement, the so-called framework rates that DSS entered into with Accenture, was not apt for that extension. I do not think that is a possible calculation. Also, I say I suspect the National Audit Office might find fault with an Accounting Officer who went to ministers and said "Look, I would like X million to extend our system on the off-chance that you might want to do something". I make a serious point there. There is a real issue when you decide that you need more. Do you do it on a contingency basis or on the basis of known need?
3 `Commercial in Confidence' note not printed. Back
4 Ref footnote to Q 54. Back