THE
VALUE
FOR
MONEY
ACHIEVED
Performance in the provision of IT services
25. The Agency concluded that the joint venture would
deliver improved services at a lower cost. The cost savings were
expected to come mainly from the replacement of contract staff
with a cheaper and more efficient alternative. As all other potential
partners had dropped out at an earlier stage, the Agency and CMG
agreed prices without competition. The 7-year contract with CMG
cost some £51 million in 1998 prices, an estimated saving
of between £4.9 million and £8.0 million compared to
the Agency carrying on with their existing arrangements.[27]
26. Improvements in the delivery of services are
difficult to measure as there is a lack of information on the
levels of service before the partnership came into effect. A benefit
of the partnership is that it has led to service standards being
set and changes over time can now be measured.[28]
27. The Agency said, when asked whether the expected
value for money benefits had been achieved, that they had asked
Capita, their financial adviser, to make an assessment nine months
into the contract. Capita advised that, although there were changed
circumstances, they were still able to reach the same value for
money conclusions in the original business case. This had given
the Agency the confidence to undertake further investment. Both
parties affirmed that the partnership was working well and that
contract provisions were primarily a safeguard.[29]
28. The Agency have sought to retain commercial pressures
on Radio Spectrum International by exercising their right under
the contract to go out to tender for certain IT services, including
modifications to existing service and the development of new systems.[30]
The Agency said that they had done so in one case and had
acquired software from another firm, which Radio Spectrum International
had then integrated into the Agency's systems. This allowed the
Agency to get better value for money but also encouraged the partnership
to ensure the technical result was a good one.[31]
29. Radio Spectrum International and the Agency realised
shortly after the start of the partnership that the charging structure
for providing computer services at the desktop was too rigid to
accommodate the rapid technological advances to computer hardware
and software. Radio Spectrum International were able to levy a
flat-rate charge for technology improvements under the contract
which, in many cases, was greater than the cost of supplying and
maintaining the enhancement. Where this was so Radio Spectrum
International, with CMG's agreement, waived the flat rate charge
and agreed to recover actual cost only, resulting in expected
savings to the Agency of about £1 million a year.[32]
30. The Agency agreed that some of the timescales
laid down in the contract had not been met by CMG, but considered
that they had gained more than they had lost in financial terms
by not sticking rigidly to the contract. The substantial reduction
in desktop pricing which CMG had volunteered was a worthwhile
improvement, outside the scope of the original contract. CMG said
that the Agency would have been able to secure price reductions
because the contract permitted the Agency to market-test the services
provided by the joint venture company. The Agency and CMG said
that both parties had gained: the Agency from lower charges, and
the joint venture company in terms of extra time to prepare a
service improvement plan and to delay delivery of certain services.[33]
Performance of the international business
31. In its first 18 months of operation the international
business, set up to market the Agency's systems and expertise,
made a loss of some £150,000. CMG bear any losses on the
international business. Witnesses explained that the main cost
was in marketing and producing proposals and that projects were
unlikely to produce revenue earning work for up to 12 months afterwards.
They said that when the business was set up it was expected to
make money from selling licences for the Agency's systems rather
than from consultancy work. International business had now been
refocused on consultancy work, and it had been profitable in recent
months.[34]
32. CMG explained that the joint venture company
was operating in a difficult and fragmented market. The Agency's
statutory duties differed from those of equivalent organisations
in other countries, making it difficult to sell the Agency's IT
systems. CMG said that they were still as optimistic as when they
entered into the project. At the beginning there were a lot of
unknowns and some of the potential had not materialised. On the
other hand they had now identified other avenues which looked
very promising.[35]
The management of risk by the Agency
33. Some of the Agency's IT systems which had been
transferred to Radio Spectrum International were crucial to the
Agency's ability to meet business objectives. In the Agency's
opinion the risk of non-performance could be minimised if the
partners related well to each other, with a relationship founded
on mutual trust.[36]
Trust took time to develop and they had therefore placed the partnership
within a contractual framework to protect their interests.[37]
34. The Agency made it a contractual condition that
Radio Spectrum International retains an open book accounting regime
for IT services, giving the Agency full access to the company's
records. CMG have also agreed to grant the Secretary of State
the right to audit compliance with the relevant contractual terms.[38]
35. A key risk for the Agency was whether they would
have sufficient technical expertise to manage their interest in
the contract. The Agency said that although they had not been
able to retain as much in-house IT expertise as they had envisaged,
they had retained enough to be an intelligent customer of the
joint venture company and to negotiate significant savings in
the cost of new projects. If the new joint venture had failed
to work, their in-house staff could have been deployed into managing
either a direct IT operation or a relationship with another supplier.
Their good relationship with CMG meant, however, that they were
now comfortable with having less in-house IT expertise.[39]
36. CMG said that they had been keen for some of
the Agency's in-house staff to transfer to the new company because
they had valuable knowledge of the Agency's systems. They were
surprised when only a few staff transferred. They had retained
the right to fill on secondment up to 16 designated posts in Radio
Spectrum International if they wished to do so. In the light of
the positive development of the joint venture, they had decided
that their staff should fill only four of these 16 designated
posts. If confidence in the partnership were to deteriorate they
could fill more of them.[40]
Conclusions
37. The Agency believe that there are robust legal
agreements in place giving them adequate control over the business.
Partnerships require a will to cooperate and a community of interest
if they are to work well. But they should still be underpinned
by sound legal arrangements to protect the public interest in
the event that the interests of the parties should no longer be
aligned.
38. The international business is now beginning to
realise a profit, with the focus of commercial activity moving
away from the sale of the Agency's IT systems to the marketing
of consultancy services. The original focus had been agreed without
a structured assessment of the market potential. Departments promoting
commercial ventures need to undertake such assessments, to keep
the market under review, and to be ready to reposition the business
in the light of market evidence.
39. The Agency believe that they have retained sufficient
in-house IT expertise to enable them to act as an intelligent
customer. It is important that departments should be able to maintain
the capability throughout any partnerships with the private sector,
taking into account career development and skill enhancement requirements
and the need to replace losses of key staff.
27 C&AG's Report, para 17 Back
28
ibid, para 18 Back
29
Qs 20, 61-62, 65, 67 Back
30
C&AG's Report, paras 3.34, 4.18 Back
31
Q63 Back
32
C&AG's Report, paras 3.27-3.28; Evidence Qs 9, 20 Back
33
Qs 15, 19-20 Back
34
Qs 12, 56, 58 Back
35
Qs 57, 59 Back
36
C&AG's Report, para 3.12 Back
37
ibid, para 3.14; Q23 Back
38
ibid, para 3.13 Back
39
C&AG's Report, para 3.31; Evidence, Qs 4, 6, 13 Back
40
Q14 Back
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