Select Committee on Public Accounts Forty-Fifth Report

1 Contract procurement and implementation

1. When developing the User requirement for the Bureau and the Prospectus issued to bidders, the Agency's Implementation Team made a number of assumptions within which bidders worked. As later events showed, however, these assumptions had not been properly tested and were unsound, particularly the expectation that some 80% of applications would be made by telephone and that applications would be received from individuals rather than in bulk from employers. The Agency's research included a customer forum in 1999 in which trade associations and other high level bodies had participated, and in May 2000 six focus groups were organised with potential customers as well as in-depth telephone interviews to find out how they would behave. The feedback at that point was that the telephone service planned by the Agency would have been well received. The Agency admitted, however, that it should have undertaken a larger scale consultation earlier in the development process. It was only much closer to the launch date that the Agency found out that a large number of potential users of the service would not accept a telephone based system.[2]

2. The Agency also acknowledged that some stakeholders felt that they had not been listened to as part of the consultation process. The Agency had contact with about 5000 stakeholders during seminars, and took a number of actions as a result of those seminars, including producing blank paper application forms in volume. The Agency had, however, relied on the e-strategy across government together with experience from other major service provider organisations such as the insurance and banking industry, in suggesting that a telephone channel should be the primary means of contact. When it became clear to the Agency that this did not meet the preferences of the Agency's customers, the Agency took the decision to re-engineer processes so that paper applications in bulk could be accommodated. The Agency admitted that this had been at a late stage, and that they had not allowed sufficient time to re-engineer the processes adequately to ensure that they would work at the launch of the Agency.[3]

3. The Agency acknowledged that one of the other bidders for the contract had suggested up to 40% of applications might be paper based. The Agency had, however, selected Capita as the successful contractor, whose bid was based on a 15% paper based application channel applying the Agency's tender documentation assumptions. Capita confirmed that at the time, the assumption that 80 to 85% of customers would choose the call centre option appeared reasonable to them because it was largely the only option being made available to customers. The introduction of the paper forms half way through the implementation process led to a fundamentally different business process having to be developed, which in turn impacted on the contractor's costs. Capita also noted that the option for employers to group applications together and send them into the Bureau in bulk was not an option available at the time Capita submitted their bid since the blank paper form route was not anticipated. At the project start, the alternative to a telephone application had been planned as a web-based application route.[4]

4. From the outset the Agency underestimated the need to test the system thoroughly before it went live. The Agency had always planned to undertake a pilot within the acceptance test phase but the pilot would have been of fairly limited duration, comprising a number of dummy applications processed through the test programme. As the development programme became delayed, some testing became squeezed and it was not until around July 2001, partly as a result of the Gateway Review process, that the Agency recognised that it would be preferable to let the launch date slip to take more time and put in a pilot phase. With hindsight, however, it should have further deferred the launch date to allow more time for a final round of tests. Discussions had been held in the run up to the actual launch in March 2002, including a final Gateway Review. That review had found that it would have been, in the judgement of the reviewers, more harmful than less to defer the launch date again, so the decision was taken to go ahead; but the Home Office now acknowledged that it had been the wrong decision. It would have been better to have deferred the launch again to make sure the system was working effectively before it became available for public use. A pilot scheme had taken place at the end of the programme but it should have been longer, particularly with the introduction of the blank paper form route. Capita should have given themselves more time to undertake piloting by deferring the go live date for a few weeks further.[5]

5. The Agency had received three different bids using different sets of assumptions as a result of its original tender process. Rejected bids had raised questions about the extent of use of a telephone application channel and also the timescale for delivery of the project. Capita had submitted a bid of just under £250 million based on demand for 3 million applications over a 10 year period. Other bidders were at least £100 million more expensive over the ten years. Consultants had been used to review the Capita bid, and on the basis of the consultants' advice that there was little difference between the technical evaluations of the different bids, the Agency had awarded the contract to Capita. The Home Office confirmed that as contract negotiations had reached the stage of best and final offers, it had not been thought appropriate to go back to other bidders, and seek bids based on different assumptions. The Home Office considered that the Agency had, in many ways, followed good practice by allowing bidders to offer innovative solutions, in asking consultants to audit the procurement process and looking for the best in final offers. Other bidders had taken account of the fact that there were likely to be more paper requests, however, and as a consequence their price had been higher. Capita's price had risen from £250 million to £395 million and hence over the ten year period would be higher than the comparative bids.[6]

6. The Home Office considered that it was not possible to conclude that other bids might have been more cost effective because of the fundamental change made to the business process by accepting more applications on paper than by telephone. Although other bidders had forecast higher levels of paper based contact and lower levels of telephone contact none had forecast paper based applications at the level which actually materialised. The Home Office had renegotiated the contract with Capita, leading to the estimated price over the lifetime of the contract of £395 million, less than might otherwise have been the case, and also including more rigorous clauses in terms of performance and the costing of the contract. With effect from October 2004, the Bureau had secured a reduction in the price paid to Capita of just under £1 for processing each Disclosure application, representing an estimated saving of £17 million over the remaining life of the contract. Capita confirmed that the reason the price had changed was because the nature of the job and the service being received by customers was far wider and more complex than had originally been envisaged. They did not think that competitors' higher bids had been due to their greater realism about the number of paper applications likely to be received.[7]

2   C&AG's Report, para 3.3; Qq 2-4, 21  Back

3   Qq 23-24, 38-39, 82, 93-94, 104, 106, 109 Back

4   Qq 83-84, 104 Back

5   Qq 5, 12-16, 85 Back

6   Qq 32-33, 78-82 Back

7   Qq 24, 28, 32-37, 40-43, 65-68, 70-72, 89-92; Ev 23 Back

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Prepared 28 October 2004