Select Committee on Public Accounts Minutes of Evidence


Supplementary memorandum submitted by Sir Hayden Phillips GCB, Permanent Secretary, Lord Chancellor's Department


  1.  A brief history of the Libra project is at Annex A. This note describes the reasons behind recent events and the current position. Annex B provides information on the technical infrastructure in response to the question about equipment installed in offices.

  2.  The contract with FS (Fujitsu Services, previously ICL) was a PFI service contract which included:

    —  a national IT infrastructure (a comprehensive set of office services including desktop PCs and printers; Local Area and Wide Area Networks, full online support; and other services including disaster recovery);

    —  office automation facilities (including standard office software such as e-mail, word processing, spreadsheets, diaries, etc);

    —  a standard national application and related services to support court work (principally case progression, reception of parties, fine accounting and enforcement, in-court computing, management information) to replace the existing three legacy systems currently in the MCCs;

    —  Direct electronic links with the criminal justice agencies and their strategic systems (police, CPS, Probation, Prisons, Crown Court, DVLA).

  3.  By late 2000 (following the contract renegotiation described in Annex A) the first two of these (including secure e-mail) were being satisfactorily installed and the last two were under development. The critical date for the application software was July 2001 when it was due to be installed and proved in Suffolk MCC.

  4.  It became apparent around that time that development of the core application was falling behind schedule. At first FS believed that this delay was containable and various options for postponing part of the software by a few months were discussed. Indeed FS delivered a substantial part of the software into their testing area in January 2001. Close examination of this software showed that its quality and completeness was such that the July 2001 date would not be achieved.

  5.  It was at this stage that FS completely changed their project management team and carried out a full internal investigation into every aspect of the contract and their ability to deliver. They reached the conclusion that, from their viewpoint, there were serious problems with the contract. They estimated that full delivery of the application software would take up to a further two years, that costs would be far higher than anticipated and that the whole process of requirements definition and development had to change.

  6.  In the spring of 2001 FS approached LCD and indicated that their estimated potential losses were so high (figures between £100 million and £200 million were indicated) that they could not progress with the contract unless it was substantially renegotiated. At this stage rollout of the infrastructure was well under way but the company had not yet reached the contractual delivery date for the software application so they had not yet formally defaulted on the contracted.

  7.  In these circumstances there were only two options possible for the department—

    —  Insist on full delivery of the service as contracted;

    —  Open discussions to see if an acceptable solution could be found.

  8.  FS made it clear that they would not proceed with the contract rather than accept the first option and, given the complexity of the situation which needed extensive analysis and discussion, there was no real alternative but to investigate the possibility of re-negotiation. Making full use of professional expertise both internal and external, the matter was considered throughout the summer and possible solutions were discussed with FS.

  9.  The outcome of this work was a framework for a possible way forward in which the scope of the software application would be reduced, the period of the contract reduced and the delivery date put back. FS estimated a price for a revised contract on this basis (around £283 million), which appeared to be justifiable.

  10.  However this framework would require months of work to drive down to the detailed level, fully consider the implications, obtain a price and negotiate. The main elements were therefore built into a Memorandum of Understanding (MOU). Following extensive internal discussion and approvals, this was signed on 5 October 2001. While legally binding, the MOU only represented a basis for negotiation—not an agreed solution. Part of the MOU was that:

    —  Work would continue on rolling out the infrastructure and developing the software application;

    —  No remedies or other actions would be initiated;

    —  LCD would share FS costs for the period of the MOU.

  11.  The first months of the MOU work concentrated on refining and agreeing the very detailed definition of requirements to ensure that every detail was complete, accurate and fully understood. At the same time the commercial aspects were progressively explored.

  12.  In parallel with these negotiations the Department commissioned and carried out a range of studies using independent experts including:

    —  FS technical capability and financial standing;

    —  An assessment of risks;

    —  Benchmarking of costs for similar work in other organisations;

    —  Development of contingency options in the event that agreement could not be reached.

  13.  As the negotiations progressed, it became evident that the cost of continuing with the development and implementation of the software application were rising steeply. The initial FS estimate for the revised scope and contract duration proved to have been based on incorrect assumptions and clarification of the requirements brought in additional costs. By February 2002 the requirements definition and clarifications had reached the stage where FS were able to quote a firmer price. This was in the region of £400 million, and there were additional costs and risks, which had been transferred back to the Department.

  14.  Continuing work of development and testing of the software application had also confirmed that delivery was unlikely to start before May 2003 and there were measurable risks of further delays, technical problems and cost increase.

  15.  Given this situation it was decided that to go ahead with the development of the full Libra was just not acceptable in either value for money or risk terms. FS were therefore advised that we would not go ahead on this basis.

  16.  This decision was strongly opposed by FS who had sunk costs on developing software in excess of £50 million. They proposed a number of alternative pricing and delivery mechanisms but these did not materially affect the position as decreases in FS charges were often cancelled out by increases in LCD costs.

  17.  The work that had been done on the contingency options had identified an alternative way forward in the event of FS not delivering the Libra software application. Over recent years, one of the current legacy system suppliers has updated and enhanced their system to the point where, with extra development, it could deliver similar functionality to that which the Libra application would have provided. This application is already in use across a third of the country and is thus tried and tested. This would represent a much lower cost and lower risk alternative to delivering through FS.

  18.  Once the negotiations with FS reached the point that their total price for Libra was known, there were three options. The estimated total costs for each option are shown in bold:

    —  Accept the new price for the total Libra system despite the fact that it had been assessed as being neither value for money nor affordable. Allow FS to continue to develop the software application despite the continuing risk that it could be yet further delayed, could lead to further cost increases and that there were technical issues yet to be resolved. Estimated total cost £457 million;

    —  Terminate the Libra contract completely. This would have left the MCCs with a partly rolled out infrastructure, with minimal support and no opportunity to develop it until a procurement had secured a new supplier, placing MCC business at risk. It would inevitably have led to claims for damages from both parties with a high probability of this leading to litigation. Work on the application would cease. Because of the costs of procurement and contract termination, this option would almost certainly cost more than the third option and risks were high. Estimated total cost £405 million;

    —  Negotiate a value for money deal with FS for the infrastructure only and procure the software application by building on the best of the legacy systems. Estimated total cost £392 million.

  19.  It became clear that the third option represented the lowest cost and the lowest risk while providing MCCs with the services they required within an acceptable timeframe. The subsequent negotiation with FS has been on this basis.

  20.  This conclusion has been subject to extensive review by independent experts. As part of normal government procedures it has also been reviewed by a government review team and they have confirmed that the best decision has been made in the circumstances. The business case has been approved by the Treasury, and Office of Government Contracts (OGC) approval was received following resolution of concerns about Parent Company Guarantees and the use of the FS Flexible Finance arrangements. It is clearly acknowledged that this is a considerably higher cost than that in the original contract. But FS will not deliver the original contract and the choice has to be made from the available options.

  21.  The FS part of the option selected is to continue to deliver, enhance and support the infrastructure. Their total cost for this is £232 million. This price has been benchmarked against infrastructure of similar size and type across a number of public and private organisations and shown to be within, but at the top end of the expected cost range. The additional costs are for enhancing, delivering and supporting the new software application.


  22.  We completed the negotiations with FS on the variation to the original contract and the revised agreement was signed on 23 July. An announcement was made by Yvette Cooper, Parliamentary Secretary, Lord Chancellor's Department on 24 July.

  23.  Negotiations have begun with the chosen legacy supplier, STL, to licence their software for national use and to agree the necessary enhancements.

  24.  An advertisement was placed in the European Journal on 30 August 2002 to begin the process of selecting a Systems Integrator to host the new services and manage the migration of MCCs onto the new services. Seventeen bidders have completed the Questionnaire, which will allow a shortlist to be chosen.


  25.  Technically, penalty clauses (clauses which penalise a party in breach of contract rather than looking to recompense the innocent party for loss suffered by it as a result of the breach) are not enforceable under English law, and as such the current Libra contract does not contain any penalty clauses.

  26.  There are, however, a number of remedies in the contract in the event of failure, including liquidated damages and termination, depending on the default. In the case of the core software application the liquidated damages could have been applied from the date of failure to deliver at a rate of £2,000 per day up to a maximum of 100 days. The Department can, of course, sue for damages over and above this amount in court. The real penalty for the supplier in failure to deliver the application on time is the loss of revenue caused by the delay and the extra costs of completing the work. Since this is a PFI service contract, FS were not due to receive any significant payment for their software development work until it was delivered. FS have intimated that their costs of the software development to date are in excess of £50 million.

  27.  The contract also made provision for the Department to terminate the contract following a major breach. Failure to deliver the core application did give the Department the right to terminate. In that event, the Department could sue for damages up to the Limits of Liability set in the contract at £40 million. Equally, the company could counter-claim.

  28.  In agreeing to enter into negotiations with Fujitsu, the Department suspended these provisions pending the outcome of those negotiations. Failure to reach an agreed variation to the existing contract would automatically bring these provisions back into force.

  29.  It is part of the negotiated settlement that the revised contract the Department has signed with FS waives those provisions. Fujitsu will bear the sunk costs on the development of the application, save for the £6.8 million already paid for which we have free and unfettered use of the documentation.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 27 November 2002