Select Committee on Public Accounts Thirty-Eighth Report

THE DECISION TO EXTEND THE CONTRACT WITH ACCENTURE

1. In examining the contract extension, we looked at the options available, the rigour of the evaluation of Accentures' proposals and other changes to the contract.

(a) The options available

2. The alternatives to using NIRS 2 to support the new legislative requirements included clerical solutions and using other information technology systems (Figure 2). Most of these were rejected because they were not technically feasible or were likely to involve greater risk or cost than enhancing NIRS 2. The Inland Revenue concluded that NIRS 2 was the most practicable option for some 80 per cent of the work required.[12]

 

 

Figure 2: Alternative options considered for delivering key legislative changes

Development	Solution	Alternatives considered	Rationale
Restructuring of National Insurance contribution thresholds and limits	Full implementation on NIRS	Clerical Defer changes	Affects core NIRS functions. Clerical option not viable as 48 million records affected. Deferral difficult as employers had started amending rates and thresholds on payroll systems.
Enabling SERPS pensions to be shared on divorce	Implementation on Benefits Agency system with some modification to NIRS	Defer scheme Clerical Full implementation on NIRS	Could be implemented using Pension Valuation on Divorce System at similar cost.
Revised rules for calculating Incapacity Benefit	Full implementation on NIRS	Alternative IT Clerical Deferral	Change manageable on NIRS. Alternative IT system likely to be more expensive. Clerical option available as fall-back. Deferral would jeopardise £25 million of savings.
Reform of bereavement benefits	Full implementation on NIRS	Clerical Deferral	No alternative to NIRS which delivered predecessor benefit. Deferral would risk legal claims from bereaved claimants under Human Rights Act.
Introduction of stakeholder pensions	Partial implementation on NIRS, plus new EDS system	Full implementation on NIRS Deferral	Registration of schemes and scheme members could be delivered by EDS on separate system at similar cost, reducing risk to NIRS.
Introduction of State Second Pension	Full implementation on NIRS	Alternative IT Deferral	Timetable not yet fixed so could be implemented on NIRS at lower risk.

 

The joint design team considered other developments, which mainly involved changes to the processing of annual returns from employers, and determined that they could be implemented without amending NIRS.

3. In order to implement the new pensions arrangements, the Inland Revenue therefore identified three main contractual options for commissioning the new NIRS 2 development work. These were to negotiate a contract extension; ask Accenture to provide the additional resources required at Department of Social Security framework rates, under the original contract terms; or exercise the break clause in the original contract and hold a new competition for the continuing operation and development of the system. They saw these as real choices and rejected the view that in practice Accenture were in a monopoly position.[13]

(b) The evaluation of Accenture's proposals

4. The Inland Revenue took four key factors into account in deciding whether or not they should go ahead with Accenture:

• Value for money;

• Whether the technical platform of NIRS 2 was robust, and would take the changes envisaged;

• Whether Accenture were capable of delivering the changes at the pace the Inland Revenue wanted them;

• The opportunity to revise some of the management controls in the contract, in areas commented upon by the Committee of Public Accounts in earlier reports, such as testing and acceptance criteria.[14]

1. On value for money, the Inland Revenue commissioned PA Consulting to develop a financial model to compare the cost of Accenture's proposals with that of using alternative suppliers. The work showed that Accenture's unit costs compared closely with the comparators. Accenture's staff charges were higher, but they agreed to a productivity target of 7.5 staff days a function point compared with rates of 8-10 staff days achieved on the base system, and an estimate of 11.5 staff days for any new supplier. Accenture's view was that their higher staff charges reflected the fact that they recruited and retained the best people, invested in their training and therefore delivered higher productivity. Their familiarity with the system was also a major factor in the higher productivity they were able to offer.[15]
2. Based on unit costs, Accenture's proposal compared closely with alternative benchmarks for suppliers. For example Accenture's proposal was costed at £100 million for 8000 function points compared with £105 million from EDS. However, breaking the NIRS 2 contract with Accenture and using alternative suppliers would have incurred additional costs estimated at £44 million. The results therefore supported the option to extend the contract with Accenture.[16]
3. As regards the stability of NIRS 2 to take the changes, and Accenture's ability to deliver software of the required quality, the earlier problems with NIRS 2 had been cleared up at the point that the Inland Revenue signed the extension. All its major elements were fully operational and it was performing in excess of requirements. There were, however, a number of lower priority areas that remained outstanding, for example automatic printing of labels. The Inland Revenue had also received assurance about Accenture's commercial stability, and legal, commercial and security issues.[17]
4. As regards delivery of the government's welfare reforms, moving away from Accenture would have put delivery of them at risk, not least because a fresh competition could have taken in the order of 18 months.[18]
5. In addition to these factors, the Inland Revenue took the opportunity to introduce changes to the way development work is managed and paid for:

• There are stage payments for development work, whereas under the original contract development costs were rolled up into operational charges for the system as a whole.

• Productivity targets are agreed for each project under the extension, and the cost of variations shared between the parties. In addition, there is a "super profits" clause, which provides that if overall profits are higher than a target margin, the difference is shared between Accenture and the Inland Revenue 50:50. There is an open book accounting arrangement, which allows the Department's internal audit to check costs.

• There are improved processes for dispute resolution and for dealing with difficult issues.[19]

1. At the same time, Accenture became liable for penalties for non-delivery and failure to meet service targets. These include liquidated damages if they do not deliver on time representing a fixed amount for a period of up to three months, equivalent to 1.5 per cent of the project manpower cost up to a ceiling of 150 per cent of those costs.[20]
2. The new arrangements correspond closely to the latest best practice guidance from the Treasury Taskforce and the recommendations of the McCartney Report, which was issued following the Committee of Public Accounts' report on Improving the Delivery of Government IT Projects.[21] The risks of new developments not being delivered to cost and time are shared between the Inland Revenue and Accenture, recognising the Department's view that they have an essential role to play in effective software development.[22] The Inland Revenue have also responded to the difficulties encountered in the original contract for NIRS 2 and to our conclusions and recommendations (Figure 3).
3. After taking these factors into account, as well as the latest Treasury guidance the Inland Revenue concluded that Accenture's proposals were the best option.[23]

 

 

 

 

Figure 3: Action addressing points raised by the Committee of Public Accounts on the original contract for NIRS 2

Timetable for delivery In view of the risks of attempting to deliver the system to a tight timetable, there was a need for a fall-back position, and the Contributions Agency should have taken a hard look at alternatives (46th Report, Session 1997-98, conclusion (xi)).	Mechanisms have been introduced to manage the risks of delays in delivering software developments. Development work is managed as a series of projects leading to a single 6-monthly release. If the Inland Revenue order work to a timetable not accepted by the contractor, a grace period can be negotiated which can protect the contractor from unfair penalties.
Definition of responsibilities Where risks are transferred it is necessary to define responsibilities clearly (22nd Report, Session 1998-99, paragraph 8).	The contract addendum sets out each party's objectives and responsibilities. The business structure for managing the development work was endorsed by an independent adviser.
Acceptance testing Post-acceptance difficulties cast doubt on the quality and rigour of the Contributions Agency's acceptance testing; sufficient time needed to be built into the implementation plan to conduct rigorous testing (22nd Report, Session 1998-99, conclusions (viii) and (ix)).	The contract addendum sets out a clear framework for acceptance testing. Joint testing arrangements require the parties to agree definitions of acceptance as well as avoiding duplication of work.
Shared understanding of delivery The Contributions Agency and the contractor had not developed a shared understanding of what was meant by delivery of the system (22nd Report, Session 1998-99, conclusion (xi)).	As noted above, there is now agreement on what constitutes acceptance, and there are also joint project management arrangements.
Balance of benefits and risks on IPRs The Inland Revenue should look again at the balance of benefits and risks underpinning decisions on ownership of intellectual property rights in major government systems (31st Report, Session 1999-2000, conclusion (iii)).	The Inland Revenue did not seek to obtain explicit IPRs to the software to be developed under the extension, since it is inextricably linked to the main system software. However, the transfer payment to Accenture (£14 million) for rights to use NIRS 2 after the contract expires in 2004 remain unchanged, so the Inland Revenue gain the rights to use the new software and no extra cost.

 

 

4. In 2004, the Inland Revenue's contracts with Accenture and EDS come up for renewal. Asked whether true competition was likely or whether Accenture would have competitive advantage because the entry costs would be high, the Inland Revenue accepted that there would be transition costs, but that these would not be the same as breaking the contract with Accenture in mid-stream. They had already taken steps to ensure that there was competition for the contract, which could be worth as much as £4 billion.[24]

ACCENTURE'S PERFORMANCE SO FAR

5. The Comptroller and Auditor General reported that the contract managers at the Inland Revenue and Accenture both considered that the relationship between the parties had improved since the introduction and operation of the new arrangements. The Inland Revenue and Accenture agreed that much stronger and more robust partnership arrangements had contributed to the improved relationship. The first two software releases under the contract extension, which included changes required for pensions sharing on divorce, bereavement, incapacity and the restructuring of national insurance contributions, had been completed on schedule. The quality of software had improved significantly, compared with the earliest releases.[25]
6. The Inland Revenue had also benefited from cost and productivity improvements under the new profit and productivity sharing arrangements. For the last three releases up to October 2001, actual productivity (3.4 days per function point) had been significantly less than the 7.5 days agreed in the contract extension. This had resulted in a total saving to the Inland Revenue of £9.6 million.[26]
7. The average margin made by Accenture for the year ending 31 August 2000 at 26 per cent was below the average gross target margin of 30 per cent. However, their provisional margin in 2000-01 of 54 per cent had exceeded the trigger (35 per cent) by a large margin and assuming the provisional figures are ratified will result in a rebate to the Inland Revenue of £3.6 million. There have been no penalties under the contract extension so far.[27]

 

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12   C&AG's Report, paras 9, 3.2 Back

13   C&AG's Report, paras 10, 3.3; Qs 2, 15-16, 93-94, 175-176 Back

14   C&AG's Report, para 3.14; Qs 85-87, 94-95, 120, 174  Back

15   C&AG's Report, paras 12, 3.5-3.8; Qs 1, 14, 17-22, 62-71, 121-126, 127-142, 225-226; Ev 23 Back

16   C&AG's Report, paras 12, 3.5-3.6; Qs 1, 7-9, 14, 25-27, 71, 113, 169-173 Back

17   C&AG's Report, paras 13, 3.10-3.16; Qs 7, 13, 91, 94, 103-109, 111-113, 117, 164-166, 171 Back

18   Qs 85-86, 95, 174 Back

19   C&AG's Report, para 3.22; Qs 29-34, 80-83, 197, 203-204, 208; Ev 23 Back

20   C&AG's Report, para 3.22 and Figure 9; Qs 35-38, 76-79, 198, 204-205; Ev 23 Back

21   C&AG's Report, para 3.22; 1st Report from the Committee of Public Accounts, Improving the Delivery of Government IT Projects (HC 65, Session 1999-2000); Successful IT: Modernising Government in Action, Cabinet Office Central IT Unit, 2000; Q188 Back

22   C&AG's Report, para 3.22 and Figure 9; Qs 39-45, 187-188 Back

23   C&AG's Report, paras 13, 3.10-3.16 Back

24   Qs 10, 178-180 Back

25   C&AG's Report, paras 3.29-3.30; Qs 51-52 Back

26   Qs 29-35; Ev 23 Back

27   C&AG's Report, para 3.22 and Figure 9; Qs 81-83, 202; Ev 23 Back

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Prepared 7 August 2002