House of COMMONS




Monday 18 December 2006


ASPIRE - the re-competition of outsourced IT services



Evidence heard in Public Questions 1 - 135





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Oral Evidence

Taken before the Public Accounts Committee

on Monday 18 December 2006

Members present:

Mr. Alan Williams, in the Chair

Mr. Richard Bacon

Mr. Ian Davidson

Helen Goodman

Dr. John Pugh


Sir John Bourn KCB, Comptroller and Auditor General, National Audit Office, Mr. Tim Burr, Deputy Comptroller and Auditor General, National Audit Office, and Jane Wheeler, Director, National Audit Office, gave evidence.


Ms Paula Diggle, Treasury Officer of Accounts, was in attendance.




ASPIRE - the re-competition of outsourced IT services (HC 938)



Examination of Witnesses


Witnesses: Mr. Paul Gray CB, Acting Permanent Secretary, HM Revenue and Customs, Mr Steve Lamey, Chief Information Officer, HM Revenue and Customs, and Mr David Boulter, Chief Executive Officer, Capgemini ASPIRE, gave evidence.



Q1 Mr. Williams: Welcome to you again, Mr. Gray. It is good to see you. I shall wish you a merry Christmas at the start, to show that we are starting with good will.

Mr. Gray: I am pleased to hear that the season's good will is abounding in the Committee.

Mr. Williams: We are here today to consider the Comptroller and Auditor General's report entitled "ASPIRE-the re-competition of outsourced IT services". Mr. Gray, would you introduce your two colleagues?

Mr. Gray: Yes. On my left is Steve Lamey, who is one of the directors general on my board and the department's chief information officer. On my right is my partner, I think it is fair to say, David Boulter, who is the chief executive of ASPIRE, our outsource partner.

Mr. Williams: Thank you. Is this your first appearance before the Committee, Mr. Boulter?

Mr. Boulter: It is.

Q2 Mr. Williams: In that case, we will catch you before you learn any of the tricks of the trade.

This is a mammoth contract, is it not? It is a giant of a contract, which has shown a remarkable tendency to obesity. There has been a 40% increase in profits and in spend. Are you sure that you have the managerial capability to cope with it?

Mr. Gray: Are you asking the department or-

Mr. Williams: No, I am asking Mr. Boulter.

Mr. Boulter: You are absolutely right. Over the last couple of years, the contract has clearly grown, not only in size and scale, but in terms of the nature of the contract-the type of work that we have to do-and we have indeed been hiring significant capacity, both in terms of the number of people and technology and in terms of management capacity from the rest of the Capgemini Group.

Q3 Mr. Williams: But is that rate of growth a single spurt, do you think, or will it be sustained? As I said, it is big enough to start with. If you sustain that rate of growth, it will be very hard to keep control of it, will it not?

Mr. Boulter: From our perspective, it is manageable. Clearly, working in partnership with the department is about keeping aligned as to how that will change over a period.

Q4 Mr. Williams: Yes, but do you see the growth as an initial spurt that will rapidly settle down, or as something that still has a way to run?

Mr. Boulter: We have certainly seen a spurt over the last 18 months, since the contract started, and I think we will continue to see a spurt on the back of the five-year change programme in the department.

Q5 Mr. Williams: So, you have already had your Christmas present in the unexpected profits that come to you.

Mr. Gray, why was the incredible rate of growth not anticipated, or even partially anticipated, and used as leverage to get a better share of the profits?

Mr. Gray: Obviously, it is several years now since the initial contracting was done. A number of factors have come into play since the negotiations including, notably, the creation of the combined merged department-Her Majesty's Revenue and Customs. The contract was initially let by the former Inland Revenue and a number of things have grown and developed since then. The major factor I would point to is that, as we have been putting HMRC and its change programmes in place, in a number of areas we have sought to build up the amount of change with planning, which needs IT support and enablement.

We have reflected on whether the fact that the size of the contract has grown over time has impacted on ability to deliver, which David Boulter has just commented on, and on whether, if we had known the scale to which the contract would grow, that would have affected the original decision. We are clear from the benchmarking work and the sensitivity analysis that we have done that the original decision seems to be reinforced by the change in the composition of the work that has happened over the last couple of years.

Q6 Mr. Williams: May I put an unfair question to you? If you had anticipated the rate of growth, would you have expected a different share arrangement on the profits?

Mr. Gray: I do not think that we would. In drawing up the contract, we agreed specific levels of profit margin in relation to each of the different types of work covered by the contract. We are satisfied, as the National Audit Office report brings out, that the margins that we are paying on those types of work are well within margins on other similar contracts. As you will have seen from the report, the margins that we are paying seem to fall well within the so-called should cost model that had been developed at the time of the procurement. Had we known that the figures would be at the level that they are at the moment, I would not have expected that to have any material effect on the profit margins or on the profit share arrangement that we came to.

Q7 Mr. Williams: Let us switch, then, to the transition costs. Why did you feel that you needed to pay those costs? It would not be normal to pay, would it?

Mr. Gray: We simply paid what are termed the unique transition costs. If we go back to the position before the contract was re-let, we were facing the sort of issues that long-serving members of this Committee will recall considering as a Committee a few years' ago. Those issues relate to how to ensure that in re-letting a major 10-year contract-the original EDS contract was for 10 years-the incumbent bidder, which was EDS/Accenture, was not in a preferential position. Part of our consideration, which I think was in line with the Committee's recommendations from its earlier report, was that, in order to encourage other bidders to come forward, it was right to offer to pay the transition costs. If we had not done that, the incumbent bidder would have had a very strong advantage in relation to any newcomer in the competition.

Q8 Mr. Williams: But why, then, did you choose not to negotiate the transition costs before you signed the contract? It seems a strange situation to get into to say, "I have signed up in the contract. Now we will haggle over how much I have to give you." That does not seem a particularly businesslike way of going about things, does it? What led to that?

Mr. Gray: There were a number of factors. We were anxious to ensure that any new bidder in the competition was not put off by the negotiating approach that we took. With the benefit of hindsight, one of the lessons that emerges from the NAO report is that in any future competition we would consider whether there were some changes that we could make in relation to that arrangement. As the record has rolled out, the NAO has assured itself that the transition costs that we paid were all legitimately and appropriately incurred. The overall margin that we paid under the new contract for procurement and transition costs came to about 2% of the original estimated total value of the contract. As the NAO report brings out, that is significantly lower than the prevailing industry benchmark of about 3%. Given those figures, it is not fair to imply that we have ended up paying over the odds for the transition costs.

Q9 Mr. Williams: Saying 2% makes it sound quite small, but it is a small percentage of a very large animal, is it not?

Mr. Gray: Indeed it is.

Q10 Mr. Williams: So that small percentage, in money terms, was what?

Mr. Gray: The absolute figure for transition costs was, I think, 37 million.

Q11 Mr. Williams: That seems incredibly high.

Sir John, what is your impression of the argument you have just heard? Does it alter in any way what you have said in your report?

Sir John Bourn: It certainly was a legitimate payment in the way that Mr. Gray says. At the same time, of course, it is an odd way for the Government to do business-to pay people to enter the competition. The department makes the case for why, in those circumstances, that was perhaps the only way in which it felt that it could have a competition. It is a matter for careful analysis and not something that the Government drift into as a matter of course.

Q12 Mr. Williams: Mr. Gray, you chose Capgemini, which cost you more than you needed to pay. What do you think that it brought to the contract that no one else could bring?

Mr. Gray: We were extremely keen to ensure that in the new contract we had a partner who was able to respond extremely flexibly to the likely demands within the change programme. In evaluating the bids, we felt that the Capgemini bid offered a significant advantage in that respect. The pure financial gap between the two bids, as the report showed, was extremely narrow. We felt that that would be more than offset by the higher quality and overall higher value for money offered by the Capgemini bid.

To go back to your earlier question about the increase in the value of the contract over the past couple of years, it is also worth saying that our sensitivity analysis shows us that the major increase in work, compared with the original forecast, is in the particular areas of work where Capgemini's bid price was lower than the competing price. If we were to recalculate the purely financial figures on the basis of the latest estimates of work volumes, it would be the cheaper contract. Our main reason at the time was that we thought that the overall quality of the bid was higher and that it more than offset, in percentage terms, the small differential in pure price.

Q13 Helen Goodman: Would you begin at the beginning and explain what you are paying Capgemini to do? How do you divide responsibility for the work between the Revenue staff and the private sector?

Mr. Gray: I might ask Steve Lamey to add to my answer, if I may. There are two primary things that we are asking Capgemini to do for us. First, there is the whole range of the day-to-day provision of IT services that were originally contracted out to EDS, so there is a lot of routine operation of IT systems. Secondly-this has become an increasing proportion of the total work load-we are looking to Capgemini to help us to develop innovative solutions and proposals to roll out our change programmes. Steve may want to add to that.

Mr. Lamey: Yes, if I may. We looked at this as a demand and supply model, in that our suppliers would be responsible for all the supply-side activity and HMRC civil service staff would be very much on the demand side in terms of measuring what was required, ensuring that it was being delivered and ensuring that the appropriate strategic architectures were being shaped.

We used very much a business standard model, the Gartner information systems light model, to determine the roles on the civil service side and on the supply side. There is quite a well defined structure of activities, but essentially we are there to ensure business engagement, to identify what the business wants from IT systems, to work with our partners to deliver that, and to ensure that what they are delivering to us, both in life services and in programmes and projects, is to the standards that we expect and meets all the surrounding commercial and contractual obligations. We have a well defined model.


Q14 Helen Goodman: Thank you; I understand. Mr. Gray, I want to pursue the line of questioning that Mr. Williams was following. Is there not a risk with large contracts that looking at things in percentage terms means that big increases in costs are not addressed sufficiently rigorously?

Mr. Gray: There is clearly a risk in that, but we do not just look at things in percentage terms. Percentages are clearly sometimes relevant for some comparisons, but we certainly look extremely closely at the absolute costs, and my accountability to the Committee and the House more generally is to ensure that I account appropriately for the absolute sums that we are spending. My budget is not set in percentage terms; it is set in absolute terms. I would regard that as the primary focus of attention.

Q15 Helen Goodman: You wrote to us a few days ago to tell us that your top estimate now-we are nearly in January 2007-is 8.5 billion. That compares with an estimate only three years ago of 3.5 billion. You have agreed a profit margin of 15%, which means that over the 10 years of the project Capgemini's profits will have increased from 600 million to 1.2 billion. With profits as high as that, would it not be better value for the public sector to develop the expertise itself, rather than continuing to shell out in that way? Would it be possible to do that for 1.2 billion?

Mr. Gray: May I comment first on the figures? As our note of a few days ago said, the total value of the contract is now 8.5 billion, but the right like-for-like comparison is with the earlier estimate of 6.6 billion. None the less, I accept that it is a very big increase.

What we need to do in terms of value for money is regularly to assess how to derive best value in the running of those services. The view was taken more than 10 years ago by the Inland Revenue, in parallel with the former Customs and Excise, that the services that Steve and I have described should be procured by going to the external market.

Q16 Helen Goodman: I understand that, but I am asking you whether it is worth re-examining that assumption, given the great increase in costs.

Mr. Gray: It is certainly worth re-examining from time to time, but I do not accept that the fact that the estimated volume of work has increased is sufficient to justify us suddenly saying, "Okay, we're now going to bring the contract to an end and seek to develop this very sophisticated skill set wholly in-house."

What we have done as the new contract has rolled out is ensure that the in-house staff become more appropriately skilled not only in contract management, but-to use the jargon slightly-in being an intelligent customer to ensure that we buy in only the services for which we can get the best value for money.

Q17 Helen Goodman: What is the cost of the in-house staff working on this?

Mr. Gray: I am not sure that I have a money figure in my head, but we have about 1,700 members of staff in Steve Lamey's directorate in the department. That has been reduced somewhat over recent years. The ratio of those staff to the number of staff employed by ASPIRE and its partners is roughly 20:80. So, about 20% of the staff are in-house and 80% are contracted out in ASPIRE and elsewhere.

Q18 Helen Goodman: But if each of those members of staff cost the Revenue 50,000, that would be only 50 million. So, are you telling us that you cannot upskill staff at a cost of less than 1.2 billion to carry out the work?

Mr. Gray: What we are doing is not just incurring staff costs. We are also purchasing major systems, where we are talking about not just the staff costs involved, but significant capital procurement programmes.

Q19 Helen Goodman: Mr. Boulter, may I ask how different you really are from the people with whom you were competing, given that you have taken on, initially at any rate, their work programmes and a large number of their key staff? Why are you different from EDS?

Mr. Boulter: There are several things that we do differently and that we have added. Mr. Williams asked earlier what we have added in new staff. We have added about 1,000 new members of staff to the 2,800 whom we took over from EDS, so we have basically augmented that number by a third. We have also brought in significant project management expertise.

We talked earlier about the nature of the work that we are doing, a very significant amount of which, now and going forward, is in project management. So, bringing great project management to the table is one of the things that Capgemini does, compared with some of the competition.

Q20 Helen Goodman: Mr. Lamey, if the people working in the Revenue are good at commissioning and are intelligent customers, how come they underestimated so drastically the quantity of work in this project over such a very short period?

Mr. Lamey: I think that this contract was originally looked at for reworking in about 1998, which was about six years before we let it. When I joined in October 2005, what was on the order books was a fairly modest amount of growth. You have to look at the reason for the growth in the light of components such as Lord Carter's review, which has added 350 million, and the departmental transformation that resulted from the comprehensive spending review 2007 period, which would not have been known back then.

The investments that we are making to produce the cost reductions and the performance increases that we have to introduce are probably quite substantial. Looking back, but not having been there at the time, I honestly do not think that it would have been reasonable to assume this 3 billion-plus increase, when most of that work has probably been generated within the past 12 months.

Q21 Helen Goodman: That is the point-the increase has happened very swiftly.

Mr. Lamey: But at that time the department had some 2,700 civil servants working in the IT organisation, doing a mixture of different work. The 1,700 to whom Paul referred earlier are now absolutely working on predicting the work ahead and governing the work that is in progress. That was not what the model of two or three years ago was doing, so we are in a much better place today to look forward and make predictions, and to control the work that is leading to the 6 billion-odd total investment pot.

Q22 Helen Goodman: Mr. Gray, one reason that the project is now estimated to be much more expensive than it was three years ago is the bringing together of the two Revenue departments. Were Ministers told about the potential cost of bringing them together when they took that decision?

Mr. Gray: Ministers were clearly aware that there would be additional cost pressures when the department was created, but by far the greatest part of the increase reflects decisions that have been taken since the merger about the appropriate work programme for the department. Ministers have taken a number of decisions and said that they wish us to deliver more than we were delivering before. One consequence of that is the figures to which you referred.

Q23 Helen Goodman: But is there not a difference between thinking that it is a good idea to join the departments at a cost of 50 million and then being told later that the cost will be X hundred million pounds more if they are to work together effectively? That is the point we are trying to get at.

Mr. Gray: Yes, I understand the point. The numbers that you are talking about are controlled within the overall resources that the department is given, and those resources are being reduced during the current three-year period up to 2008. As you know from an earlier hearing, we now have a settlement up to 2011 that points to a further 5% a year real reduction in overall resources.

The amounts for IT procurement are part of the overall cost envelope, and this particular element of our costs is increasing because we are making major investments over this period, some of which involve important IT enablement-Steve referred to online services, for example-for a more efficient model going forward. The investment will generate cost reductions down the line.

Q24 Helen Goodman: Another thing that we discussed at an earlier hearing was the money that EDS will pay to the Government and the fact that it could not afford to pay it without winning further business. Having given the contract to Capgemini, where are you on recovering the money from EDS?

Mr. Gray: At the standard report hearing in October, some of your colleagues asked questions about that. We indicated that a number of further quarterly payments had been made following the initial major payment under the contract.

What I indicated then, and think that I need to indicate today, is that the confidentiality undertakings that we gave in the agreement with EDS mean that I am constrained in public from giving the amounts that were received in the last quarterly payments. We owe the Committee a note-I apologise for you not having received it yet-in which we will provide you with the numbers, privately and confidentially. I am sorry you did not receive it before today.

Helen Goodman: Thank you.

Q25 Mr. Williams: Perhaps we can have five minutes at the end of the hearing in a closed meeting. If the information is available, we could get it then, rather than just a note.

Mr. Gray: I can certainly give you some information.

Mr. Williams: We will do that at the end, if that is acceptable.

Mr. Gray: I would need to ask Mr. Boulter and a number of others to leave for that occasion, as they are not covered by the confidentiality position.

Mr. Williams: Of course, we understand.

Q26 Mr. Bacon: I will come to the questions about the quarterly payments later, Mr. Gray, although is it not true that some facts are in the public domain, including the total quantum?

Mr. Gray: The total quantum is in the public domain.

Q27 Mr. Bacon: It is 71 million.

Mr. Gray: It is 71.25 million, and at the last hearing I put in the public domain the fact that 48 million had already been paid.

Q28 Mr. Bacon: I remember that 44 million was paid up front, as part of the initial settlement. I suppose that the remainder is 26 million or 27 million.

Mr. Gray: Sorry, I misquoted the figure of 48 million. There is 27 million to come.

Q29 Mr. Bacon: And that is in quarterly payments.

Mr. Gray: That is the provision of the agreement that is governed by the confidentiality arrangement.

Q30 Mr. Bacon: Yes, but those were basically quarterly payments over a period-

Mr. Gray: Over a three-year period. If they are insufficient to discharge the full payment of 71.25 million, as I explained at an earlier hearing, we have the right to pursue that money in other ways.

Q31 Mr. Bacon: But the 27 million was the basic balance that had to be settled by the quarterly payments. Paragraph 11 states that the department "has yet to evaluate the new supplier's overall performance." How would you characterise Capgemini's performance overall? Are you happy with it?

Mr. Gray: Yes, generally I am happy with it. I think that the transition between the old contract and this contract, which was always an extremely high-risk operation, was managed extremely successfully. As we have moved forward over the past two years, Capgemini's performance as our partner in the change programmes has worked out extremely well and now on our mission-critical projects its performance on delivery, time and price significantly exceeds the target that we set. Overall, I am happy. I am never a satisfied man-

Q32 Mr. Bacon: Has Capgemini met 100% of its service level agreements?

Mr. Gray: Not quite 100%.

Q33 Mr. Bacon: Which ones has it not met?

Mr. Gray: I might ask Steve to add to this in a minute. We have some 500 measures and in each quarter a handful of those have not been met.

Q34 Mr. Bacon: Mr. Lamey?

Mr. Lamey: There were two specifics over the period. One was our IDMS-our integrated debt management system-which was very complicated. The other was a testing service that we provide for third-party agents. There are 38 that we regularly measure, and of those 34 exceed and four do not. The other two are in the customs world, so they are not necessarily as applicable yet. In general, I would support Paul-I think that they are doing an excellent job.

Q35 Mr. Bacon: When you first took over, Mr. Lamey, you made a speech at an IT conference in which you said that millions of letters were going astray. I see that you are smiling; I know that there was a frantic operation by the HMRC press office to say, "What Mr. Lamey actually meant was-" and that there was a lot of backing and filling.

Mr. Lamey: I think the statement stood, but you are right.

Q36 Mr. Bacon: How many millions of letters do you think you are misdirecting?

Mr. Lamey: Nowadays, much much fewer. When we had those numbers, we were getting accurate addresses for about 60%.

Q37 Mr. Bacon: And inaccurate ones for 40%? So, of the 35 million that you spent on postal services in the 2005-06 resource count, you reckon that 40% was spent on postage to the wrong place?

Mr. Lamey: That was the statement at the time, yes. We are now about-I cannot tell you an exact figure-96% accurate.

Q38 Mr. Bacon: You did not get into trouble with your masters for telling the truth?

Mr. Lamey: No. Allan Leighton at the Post Office was very worried, because if I had it right, spending on it would go down seriously-as it has. I notice that I have not received a Christmas card from him this year.

Q39 Mr. Bacon: You could have been sent one, Mr. Lamey; it just may not have arrived. [Laughter.]

I want to move on the question of the rising costs. If there is any justification for such automation and expenditure on IT, surely one reason should be that it is not only more efficient and effective but more economical. It is supposed to save cost. In 1994, the EDS contract for the Revenue had a total value of about 1 billion. You have added on to that this other contract, but we are now talking about 6 billion-except that we are not, because we know from your letter that it could be 8.5 billion. How is it that the costs are going up and up when IT is supposed to be saving us money?

Mr. Lamey: I think that there are two parts to that equation. The business as a whole will be spending a huge amount of money on delivering paper processes that do not have the required level of automation. The challenges that have been given to the department mean that we need to be much more efficient in how we process information, and most of that improvement will come through the application of IT systems.

Two years ago, something like 80,000 employers submitted online; transactions for the other nearly 1 million employers involved going through bits of paper. The year after, 950,000 employers were submitting online, so there was a much smaller amount left. You will see an increase in IT costs, but you will see, as we have been tasked to do, a reduction in the overall cost of delivering HMRC. IT is an investment to enable us to reduce the overall running costs of HMRC.

Q40 Mr. Bacon: I would like to pursue the subject of online services. You are receiving many complaints, are you not, from firms that are being pursued to make payment by the recovery office, which claims that they have not filed, although those clients have an electronic record-a receipt from you-that they have filed online. You have somehow lost the file. I have an e-mail which states, "it seems a little over the top that the first our clients or we should hear about it is from the Recovery Office." How many people do you estimate are filing online in that way whose online files are being lost, with the recovery office chasing them for payments and claiming that they have not filed?

Mr. Lamey: I can answer part of the question. I know that we have 1,040,000 employers filing online. I am not aware of the defect numbers that you report.

Q41 Mr. Bacon: Is it possible for you to send us a note about that? It is the case, is it not, that people are being pursued by the recovery office for not having filed who it turns out have filed and who have an electronic record of doing so?

Mr. Lamey: It is true that we pursue people who we believe have not filed.

Q42 Mr. Bacon: But if it turns out that they have filed-I have another e-mail on the subject-the best solution when filing electronically is always to keep evidence to safeguard against HMRC alleging later that it has not received it and so making money from a penalty.

Mr. Lamey: I assume that the incident to which that e-mail refers-

Q43 Mr. Bacon: It is incidents in the plural. It is happening quite a lot, is it not?

Mr. Lamey: It is happening on some occasions. I assume that the context is the delays we had in bringing to account the online filing of payments by employers in 2004-05. I am certainly aware that some demands have gone out when the payment has been registered, but I think that it is a rather small proportion of the total.

Q44 Mr. Bacon: I return to the question of costs. In the 2005-06 resource accounts, the operating cost statement says that you spent 2.657 billion on staff costs and 1.815 billion on other administration costs. What has happened to those costs over the years? What does the trend line look like?

Mr. Gray: If you go back to before the former Inland Revenue contracted out that part of its IS/IT services and its estate management costs, although I do not have the figures in my head, the internal staff proportion would have been significantly more because a lot of that cost was incurred in-house. As we go forward, now that we have major contracts for our estate management and for our IS/IT costs, I would expect, for the reasons that Steve gave, the relativity of staff costs to go down relative to the costs of procuring the contracts.

Q45 Mr. Bacon: Under "Other administrative costs" is a line item for IT services and consumables, which is 495.5 million, and for consultancy, which is 63.5 million. Do the IT services and consumables include your payments to outsource contractors?

Mr. Gray: Yes, it does.

Q46 Mr. Bacon: It is possible that you could send us a note? I would like to see the trend over a good long period. Could you get someone to go back through it?

Mr. Gray: We could certainly do that, although we would need to be careful to ensure like for like.

Q47 Mr. Bacon: I fully accept that, but, for that reason, could you go back say 15 years and explain the items for staff costs and other administration costs, with the breakdowns that have been given in the accounts each year, and, if necessary, explain any changes as you go along?

Mr. Gray: We will certainly see whether we can do that on a consistent basis, but I am conscious we will have to go back to the accounts of the two former departments.

Q48 Mr. Bacon: I understand that, too, but it might be helpful if you could do it on, as it were, an inconsistent basis and on a consistent basis and explain the difference. To see the difference with the raw data would be helpful.

Mr. Gray: We will certainly do our best.

Q49 Mr. Bacon: May I ask you to turn to page 25 of the report? Figure 9 shows that "Total costs of transition" were 47.5 million, 2.4 million of which was for "Consultancy advice and support". If you turn back a few pages to page 20, you will see that paragraph 1.19 says at the fourth bullet point, "The total cost of advisers during the procurement process was just over 9 million." What is the difference between the 9 million referred to on page 20 and the 2.4 million referred to in the chart on page 25?

Mr. Gray: I think I am right in saying, off the top of my head, that the figures on page 24 in the table that you have referred to-

Q50 Mr. Bacon: Page 25-figure 9, headed "Transition costs". The first item is "Unique Transition Costs".

Mr. Gray: Yes, so it is the figure of 2.4 million. That relates to the transition period-that is, from EDS transferring the delivery of the contract to Capgemini and its partners. I think the figure you are referring to from a few pages before relates to the cost of consultancy through the whole process, which includes costs that were incurred for consultancy advice during the procurement process.

Q51 Mr. Bacon: So that 9 million includes the 2.4 million?

Mr. Gray: It probably does, but I need to check that.

Q52 Mr. Bacon: Why did the department not evaluate the consultants' performance and the quality of the advice?

Mr. Gray: We have done a certain amount of evaluation. There was particular value in the project that was looked at-the construction industry scheme. We reflected carefully on whether it was sensible for us to spend significantly more money in commissioning somebody to evaluate something when our sense was that we had got pretty reasonable value out of that consultancy advice, so we have not incurred extra expenditure in doing a formal evaluation, but we are pretty satisfied that it was a good use of money.

Q53 Mr. Bacon: May I ask you to turn over a couple of pages from figure 9 to figure 11? That chart shows another 14.9 million of costs, including 7.3 million of "Transition costs". I am not quite clear-perhaps the NAO can help-on whether that 7.3 million of transition costs is completely different from the 47.5 million of transition costs on the other page. I am referring to pages 27 and 25.

Jane Wheeler: If you look at the note to figure 9, you will see that included in the transition costs paid to Capgemini is 3.4 million, which related to NIRS2-national insurance recording system 2-and there is 3.4 million that is paid to Accenture as part of NIRS2, so the transition costs of 37.6 million at the top of figure 9 include something for NIRS2.

Q54 Mr. Bacon: So the two 3.4 millions-Capgemini transition costs and Accenture's support costs-are the same money?

Jane Wheeler: They are part of the 37.6 million.

Q55 Mr. Bacon: But the Capgemini costs for NIRS2-7.6 million-are not. Is that right? This is in figure 11.

Jane Wheeler: That is right; that is separate.

Q56 Mr. Bacon: So what were the total transition costs?

Jane Wheeler: The total transition costs, in terms of what was paid to Capgemini and Fujitsu, are the figures in figure 9, which relates to the 37.6 million.

Q57 Mr. Bacon: Say that again.

Jane Wheeler: The transition costs in the first line of figure 9 are 37.6 million.

Q58 Mr. Bacon: But figure 9 says that "Total costs of transition" were 47.5 million.

Jane Wheeler: That is right.

Q59 Mr. Bacon: You just said that the two 3.4 millions are, as it were, double counted, but the other 7.6 million is not. I want to be clear: should I be adding the 14.9 million in figure 11 to the 47.5 million, or should I be adding part of it?

Jane Wheeler: I think you should be adding part of it.

Q60 Mr. Bacon: How much? When it says at the bottom of figure 9 that the "total costs of transition" are 47.5 million, is that accurate or does that exclude the costs to the department?

Jane Wheeler: What we have tried to portray in figure 9 are the total costs of transition. We have tried to separate out what was transition on NIRS2 in figure 11, but part of the figures in figure 11-the 7.3 million contract costs for NIRS2-are about running NIRS2 during transition.

Q61 Mr. Bacon: That is on top of the 47.5 million. So that we are not double counting, I would like to see in one chart the total transition costs-whatever they were for. Could we be sent a note along those lines?

Jane Wheeler: Yes.


Q62 Mr. Bacon: Finally, I would like to ask Mr. Gray a question about secondment from HMRC to Capgemini, although this might be a question for Mr. Boulter. Is it right that you have some civil servants seconded across?

Mr. Boulter: We have one person, yes.

Q63 Mr. Bacon: That is Mr. Ian Pretty, is that right? Is it correct that he wrote the part of the contract that allows and encourages civil servants to "broaden their horizons by working for Capgemini"?

Mr. Boulter: I am not familiar with that quote.

Q64 Mr. Bacon: Did he write that phrase?

Mr. Boulter: I do not know.

Q65 Mr. Bacon: My information is that he did. Would it surprise you that, if that is true, the author of that phrase then decided to, as it were, broaden his horizons by working for Capgemini? It is correct that he is working for Capgemini, is it not?

Mr. Boulter: He is seconded to Capgemini, yes.

Q66 Mr. Bacon: May we have a note confirming that that is the case and that he was the author of the contract, as well as outlining the terms of the secondment? Is he employed by Capgemini, or is he still employed as a civil servant?

Mr. Boulter: He is still employed as a civil servant.

Q67 Mr. Bacon: What is the purpose of having a civil servant working for Capgemini?

Mr. Lamey: That is very interesting. He must be very good, because I was the one who suggested to Ian that he broaden his horizons and work elsewhere.

Q68 Mr. Bacon: And he scribbled down what you said as is faithfully reflected in the contract?

Mr. Lamey: No. I am referring to many years after the contract was signed. The purpose of any civil servant going out to work in industry-Ian had been in the civil service all his career and had been very successful-is to broaden their horizons over a two year period and to see how a private sector organisation works on a global basis. Ian has been learning an awful lot from the experience and we are expecting him back in the department some time next year. His experience so far has been very good value for the department. We will come back and answer on whether he wrote the quotation you gave from the contract.

Q69 Mr. Bacon: Is the assessment of his personal reporting targets done by Capgemini or HMRC? Who monitors it?

Mr. Lamey: Capgemini sets him the challenge and obviously he and I review how well he is doing on a six-monthly basis. In fact, I met him just recently and we had an update. He is doing very well.

Q70 Mr. Bacon: Many people leave the civil service and go and work in the private sector; indeed, some people leave the private sector and go and work in the civil service. Why could he not have just done that-others have done it?

Mr. Lamey: I think that Ian has had a very successful career. He started as a tax officer and worked in IT. He has a lot of potential for us to leverage in HMRC.

Q71 Mr. Bacon: Sorry, to leverage what?

Mr. Lamey: To leverage in HMRC. I have 1,700 IT staff, who can benefit from the experience that Ian has gained during his time at Capgemini, and that will be very useful for us in going forward.

Mr. Gray: May I add, Mr. Bacon, that I am keen to follow a mixed economy? Some people decide that it is the right thing for them and the organisation they work for to make a permanent move. I am generally very keen within the department to encourage appropriate secondments from HMRC to external organisations, and externally into HMRC, as that is a good way of building and broadening experience.

It is equally very important to me to ensure that that is done in an appropriate way that observes all the necessary formalities and proprieties. I am satisfied that that is what is happening in this case and in any others I authorise.

Q72 Mr. Bacon: Your two predecessors were from the private sector, were they not? Sir David Varney and Sir Richard Broadbent, as I think he is now known.

Mr. Gray: Sir David Varney was a predecessor in HMRC; Sir Richard Broadbent was, of course, just Customs and Excise.

Q73 Mr. Bacon: Yes, one was Shell and the other was Schroders-I am not sure they intended to alliterate in that way when they successfully applied for their jobs.

Mr. Gray: But they were both appointed following open and competitive processes overseen by the Civil Service Commissioners in accordance with the established procedures.

Q74 Dr. Pugh: My first question is rhetorical. What I glean from the NAO report is that you went for the higher bidder rather than the lower, that your spending could be 6 billion rather than 3.4 billion when the project is finished, and that you spent 47.5 million in transition costs and 7 million to 8 million in bidding costs alone. Company profit in the first year is 53 million, not 38 million. Your spend was 539 million, not 383 million. You do not have any estimate of the final costs, and there have been at least 15 systems failures so far. Is that a good deal? If so, what would a poor deal look like? If a local authority had a bid deal structured like that, the district auditor would be called in and the local press alerted.

Mr. Gray: I am not sure that I accept that conclusion, although I recognise all the figures you quoted. The profit that was secured by Capgemini in the first year was below the target specified in the contract. As we sought to bring out in earlier comments, the issue is about assessing the value that the department is getting out of the expenditure, relative to the other options at our disposal, and I am satisfied that the arrangement offers good value for money.

Q75 Dr. Pugh: Okay, let us go to one of the sources of the added transition costs. One problem that you have is the issue of intellectual property, which is highlighted in the report. You do not have control over that and you wish to avoid being locked into large suppliers in future, and so to reduce your transition costs.

I understand all that, but would not a solution be for the Treasury to insist on a greater degree of intellectual property when it starts the deal-in other words, sharing the resource code and stuff like that-and so reduce the transition costs when it moves on?

Mr. Gray: That is certainly an issue that I am happy to look at.

Q76 Dr. Pugh: An open-source solution would suit you very well, would it not?

Mr. Gray: It would, but we have built a very large number of aspects of transparency and openness into the contract. I am certainly happy to look at how we might be able to learn even more lessons for the future as we move forward, but I am happy about the overall arrangement on intellectual property.

Q77 Dr. Pugh: What struck me was that there was a replatforming job for the national insurance recording system, with new hardware, a new operating system, a new database-the lot. Was the cost about 29 million? Have I got that figure right?

Mr. Gray: For the total cost incurred by the both the department and Capgemini, that is probably right. The total cost to the department was about 15 million.

Q78 Dr. Pugh: What surprises me is that the project was such a radical reshaping, when clearly half or most of the work had been done and the system prior to that kind of worked as well. Was all the work entirely necessary?

Mr. Gray: Yes, but I will let Steve add something in a moment. Yes, there was a NIRS2 system in place and yes, it did lots of things, but the replatforming has added major areas of additional functionality that were not there before.

Mr. Lamey: The hardware and the operating system, which you quite rightly referred to, had not been upgraded for seven years.

Q79 Dr. Pugh: So you might have replaced it anyway.

Mr. Lamey: We would absolutely have had to replace it. There were 11 applications on it. Typically, the system would be set up seven years before that and just added to, without any of the hardware being changed. You should look at what the system was required to do and the fact that we had to add in 20,000 new users to it. The batch processes were taking so long because there were so many records on the old system, so we have reduced the number of batch times from 30% to 100%. During the day, we now do 1.7 million transactions, where we could do only 1.3 million on the previous system, and we have far more scope to go further, so the change was absolutely justified.

Q80 Dr. Pugh: So it was not just replacement of like for like, simply because you had a different company?

Mr. Lamey: No.

Q81 Dr. Pugh: Okay. Under the Gershon savings-I think that Mr. Bacon was trying to get at this-I would expect you to spend more on IT and possibly less on staff, but the staff whom you do not want to lose are obviously those with appreciable in-house IT expertise. Do you know what percentage of your staff at, say, the top five grades have appreciable IT expertise?

Mr. Gray: I cannot give you a figure off the top of my head, I am afraid. Increasingly, it is a requirement for senior management people in the department to be not IT experts, but IT literate.

Q82 Dr. Pugh: It is useful for us to know that. I have asked the question of other Departments. I asked the Department for Work and Pensions how many staff it employs in the top five grades who have a graduate qualification or previous employment in IT, and it gave me a fair answer. The Home Office did not have an answer, but few of us would trust it on a trip to PC World. But you do have an answer.

Mr. Gray: I do not have the answer with me, but I will ensure that you get it.

Q83 Dr. Pugh: You can provide the answer.

On previous contracts, one of the difficulties that you had was not so much with the contractor-say, for example, difficulties with EDS-but with some of the data entry, which was subcontracted as part of the contract or ancillary to it. It was very badly done, was it not? For example, data entry in respect of tax credits created part of the problem. Have you assessed how much outsourcing of data entry will or is likely to occur under your new arrangements?

Mr. Gray: The great majority of our data entry is being done in the first instance by our own staff as information comes into the department. As we move to more sophisticated systems and the online environment, a clear distinction between our staff and contracted staff as to who is doing the data entry will increasingly get a bit more artificial, as a lot of data are being entered directly.

Q84 Dr. Pugh: But you are confident that the mistakes that were made in respect of tax credits will not be repeated in this case.

Mr. Gray: That is certainly my firm intention.

Q85 Dr. Pugh: EDS has been rather good to you, has it not? It paid for a 65 million pensions shortfall. Were you surprised by that?

Mr. Gray: No, that issue emerged during the negotiations. It was discussed with EDS and an agreement was reached that it would meet that bill. I am slightly surprised by your comment about EDS being very good to us. That is not usually the line of questioning that I get.

Q86 Dr. Pugh: It surprised me that EDS is helping out with the 65 million pension shortfall. I wondered why. Was it a quid pro quo?

Mr. Gray: As Mr. Boulter's evidence brought out earlier, we are talking about a TUPE arrangement-that is the jargon. Initially, the great majority of the staff were contracted out from the Inland Revenue to EDS.

Q87 Dr. Pugh: But would EDS be legally obliged to pay the 65 million?

Mr. Gray: I am not sure that it was absolutely legally obliged to do so, no.

Q88 Dr. Pugh: Would you confirm that in a note? It is quite important to know that.

Mr. Gray: I will confirm it.

Q89 Dr. Pugh: You could not realistically have given the work to EDS this time, could you? Not after the tax credit fiasco. It was difficult politically, and there were contractual reasons.

Mr. Gray: In running the competition, we sought to come out with the appropriate value-for-money answer, and I think that we have done that.

Q90 Dr. Pugh: So you are saying that there were no political considerations in the background.

This is my final question. One advantage of not going through EDS relates to the requirement to pay people for their preparatory costs. The sum for EDS was relatively small-millions, but still a relatively small sum-but it would have been some 33 million for Capgemini. Is that correct? Had it not got the contract, you would have paid it money that would have been dead money, in a sense.

Mr. Gray: We would have had to pay that money if the decision had gone the other way.

Q91 Dr. Pugh: But the sum was much smaller for EDS because of various matters of due diligence. The process was simpler for EDS, was it not?

Mr. Gray: A decision was made that we should pay transitional costs to any new bidder coming into the equation, in order to encourage competition. Inevitably, that means that whether or not the new bidder is successful, a cost is incurred as part of the price of ensuring that there is effective competition.

Q92 Dr. Pugh: That seems to be an odd feature. Had there been a third contractor in the frame, you would have had to pay it out as well as EDS, which was quite cheap to pay off in many respects. That would have added appreciably to the transition costs, would it not? It would have almost doubled them.

Mr. Gray: That would have depended on the point at which the competition moved from multiple players to two. Basically, we are talking about a commitment to pay transition costs if the contract is being transited. It is not a commitment to paying transition costs to people who are unsuccessful and do not have to pay them. The commitment is to meet a certain proportion of the bidding costs involved.

Q93 Dr. Pugh: I think that you would accept that it is a less than ideal solution. In this case, you went for the higher bidder, but the one that you would have to pay the most to, because it would have been dead money had you not appointed them. That is not an ideal bidding situation. It is not one in which you would want to find yourself.

Mr. Gray: I do not see how we can avoid that difficulty.

Q94 Dr. Pugh: You cannot avoid it?

Mr. Gray: In line with all past recommendations from this Committee and elsewhere it is important, if you have an incumbent bidder, to create the conditions for effective competition in order not to give the incumbent an unfair advantage. So that will be an inevitable consequence of the overall arrangements.

Q95 Dr. Pugh: My final question is what would you do to ensure that that rather strange bidding environment does not exist next time round?

Mr. Gray: We will seek to learn the lessons from this process.

Q96 Dr. Pugh: What would you do?

Mr. Gray: If we have an incumbent bidder as opposed to new competition, it would be appropriate to go through the same issues.

Q97 Dr. Pugh: You will be staring at the same kind of numbers.

Mr. Gray: As I said to the Chairman earlier, I am certainly open to learning that in the future we might seek to negotiate paying transition costs slightly differently from the way in which they are at the moment. However, I do not think that it would be possible to avoid paying any transitional costs.

Dr. Pugh: You always pay transition costs: the question is whether they are 33 million or 66 million next time. They will certainly inflate.

Q98 Mr. Davidson: May I clarify one point. Do the IT systems we are talking about have anything to do with tax credits?

Mr. Gray: The tax credits operating system is one of those operated under the contract, yes.

Q99 Mr. Davidson: Oh I see, right. The new contract that is now running is responsible for the mistakes in the tax credits that my constituents are receiving. Is that correct?

Mr. Gray: All our major IT systems operate within this contract and, therefore, are covered by it.

Q100 Mr. Davidson: I see, right. I thought-obviously erroneously-that the IT systems and the operator thereof were part of the difficulty with tax credits. I had assumed-obviously foolishly-that when it was transferred to a new supplier, the service would improve. Why has that not happened?

Mr. Gray: I believe that the service has improved and over the past two years some of the major problems that were experienced on the introduction of the new tax credits system in 2003-04 have been significantly improved. As we have discussed in previous hearings, that process is far from complete, but we and our supplier are on an improving trend in operating that very difficult system.

Q101 Mr. Davidson: I still get constituents in tears about tax credits, so I am not entirely convinced that the system is improved. Will you clarify something? Presumably, the fact that I and many other Members of Parliament are still having substantial difficulties with the tax credit system means that the contract is not operating to the level that it ought to be. Are substantial penalties accruing to Capgemini as a result?

Mr. Gray: There are performance standards in relation to that system, as there are in relation to others, that we expect Capgemini to meet. That is not the same as saying that no individual difficulties are being faced. As we have discussed in previous hearings, there clearly are still some difficulties that we are trying to handle.

Q102 Mr. Davidson: I know that there are difficulties. I am seeking clarification. Ideally those difficulties would not exist, but since they do, something is obviously wrong somewhere in the system. Does that mean that penalties are accruing to Capgemini as a result of the fact that I and many other MPs continue to have difficulties with tax credits?

Mr. Gray: At the moment, they are not, but we set service standards for the tax credit system, along with others. If those standards are not met, that will obviously be reflected.

Q103 Mr. Davidson: Right. So at the moment Capgemini's contract allows for a certain level of mistakes and misery in the tax credits system, but over time that level will be reduced and if it is not penalties will accrue?

Mr. Gray: It has been reducing. It needs to reduce further, but each year we will set the appropriate service standards to be met.

Q104 Mr. Davidson: What level of mistakes and misery is acceptable at the moment before penalties fall on Capgemini?

Mr. Gray: It is important to bear in mind that that some of the mistakes that happen in relation to individual tax credit recipients might reflect difficulties in the IT system and others might reflect difficulties arising from other players in the equation. Sadly, I am conscious that, on occasion, members of my staff might make mistakes.

Q105 Mr. Davidson: I understand that, but with respect that was not quite the point that I raised. I am trying to get at the extent to which improvement is expected and what level of error in the IT system is currently considered acceptable for the contractor.

Mr. Gray: With each of the system releases where we seek to improve functionality or add to it, we set expectations and parameters that we expect the contractor to meet.

Q106 Mr. Davidson: That is right. I know that-you have explained that before. I am asking you to say what level of error is within an acceptable parameter before penalties accrue to Capgemini.

Mr. Gray: I do not think that I can collapse that into a single figure or statement. If it would be helpful, I can certainly let you have a note.

Q107 Mr. Davidson: But you understand what I am driving at? I am no wiser.

Mr. Gray: Yes, I do understand. I am sorry that I cannot boil down for you to a simple figure what is a complicated story.

Q108 Mr. Davidson: It would be helpful if you could give us a note telling us what level of IT error is acceptable at the moment before penalties accrue and what the curve is in terms of driving that downwards-depending on which direction you look at the graph.

I am interested in the whole question of transfer. Do you think that any mistakes have been made or that there are lessons that we ought to be drawing for other cases? If we are letting substantial contracts, we clearly should consider how we have genuine competition. Yours seems to be one of the first and was well-handled, in general terms. Do you think that there were any omissions of which the Committee ought to be aware?

Mr. Gray: I do not think that there is anything in addition to what the NAO brought out in the report. Part 4 talks about lessons learned, and I think that I am accurately reflecting its assessment when I say that by and large we have done a pretty good job of implementing the process and that we adopted previous lessons. I think that a number of the points that we have already touched on in the hearing are the areas where I would happily accept that there might be further learning that one might deal with through slight modifications.

Q109 Mr. Davidson: Okay. Can I pick up three particular points? First is the issue of transition costs. I understand the argument for that but to what extent do you think that it is reasonable for the successful candidate to get a profit at 15.5% on the transition costs? Is that not just a bit greedy?

Mr. Gray: That is one of the areas where it is appropriate to seek to draw lessons from our experience. We reached the judgment in negotiating the contract that in order to set the right incentive to manage the transition, where it was in our interests to ensure that Capgemini put its maximum efforts in, that a profit should be charged.

Q110 Mr. Davidson: Does it not smack a bit of cost-plus?

Mr. Gray: I would not put it like that, but I think that there is a lesson to be drawn, which I quite accept, about whether it will be appropriate in future to do that in precisely the same way as we did it. That is the issue that the NAO is raising, and it is an entirely reasonable lesson.

Q111 Mr. Davidson: The next point I want to raise is about collaboration, as it were, from the loser, which is important. Are you satisfied that the loser behaved properly throughout the entire transition process?

Mr. Gray: Yes I am. As you say, a successful transition required both parties to tango. Just as I am pleased about the way in which Capgemini took it on, I think that EDS behaved professionally on its side of the equation. We have had and no doubt will continue to have other conversations in which I might express a lower level of satisfaction with EDS's performance, but in respect of the basic transition of the contract, all parties performed well.

Q112 Mr. Davidson: Okay. The third point is about the work force. Some of the people involved will originally have worked for the Government; they were transferred to one company and they are now being transferred to another; and if Capgemini loses the contract, they may be transferred again. Do you think that that has been handled as well as it might have been, or would you draw any human resources lessons that we ought to take account of in future?

Mr. Gray: I think it has been handled pretty well. I would not point to any major failing or lessons to be drawn.

Q113 Mr. Davidson: So the work force are happy? If I go and see them, they will be noticeable by the fact that they are skipping down the street? Indeed, as we speak, at twenty minutes to 6, some of them will be halfway home by now. Right? Is that fair?

Mr. Gray: Steve and David can add their comments on this, but my sense is that staff feel generally happy about the way in which the process has been handled.

Q114 Mr. Davidson: Right. Presumably, they remain represented by the Public and Commercial Services union. When was the last time you discussed this with PCS?

Mr. Gray: I have regular discussions with PCS. I met its representatives only a couple of weeks ago, and on that occasion, we did not get into specific discussions about this. Since PCS usually brings its problems liberally to me, if it thought there were major issues, I would expect it to have put them on the table, but such issues were notable by their absence.

Q115 Mr. Davidson: That is fine. That is very helpful.

Can I ask about one other issue to do with the nature of the contract? When I read through the document I was surprised at the number of third parties to which EDS had subcontracted. To what extent in the circumstances does a company such as Capgemini or EDS become a virtual company, in the sense that they just bid and badge, and the work is actually put out to everyone else? To what extent can anybody be held accountable for anything in those circumstances? People can say, "It wasnae me; it was him," and, "Oh, it wasnae him either; it was somebody else."

Mr. Gray: I recognise that point, and there is an important balance to strike. We are extremely keen that Capgemini should bring in experts from other companies to deal with our world-scale problems. Given the size and sophistication of our requirements, it would be amazing if any one company could provide everything that we need. One good factor of the contract is the operation of a so-called ecosystem, under which Capgemini brings in other players, but it does not do so in a way that enables it to say, "Nothing to do with me, guv; it's down to somebody else." Frankly, we would not allow it to do so. We hold it responsible and accountable for delivering the overall service, and we ensure that the position is not such that Capgemini or anybody else in the supply chain can say, "It's nothing to do with me."

Q116 Mr. Davidson: In terms of the department as an intelligent customer, I take it that the phrase quoted earlier, "people should broaden their horizons and go and work elsewhere," is not quite the same as a Minister going "to spend more time with his family", but that it is a genuine effort to ensure that people are rotated. In terms of the sub-suppliers, the main supplier and the Government, do you intend to foster that process, or is the example that was quoted just a one-off?

Mr. Gray: I would seek to foster it in appropriate circumstances. I do not think there is a general rule either in the case of a particular individual or in relation to general skill sets. I go back to some of the points raised by Helen Goodman. If we recognise in our current work force certain skills that we do not have that we think it would be appropriate to have as an intelligent customer, then we have a choice of ways to go about procuring them. We can go to the market and recruit people directly, but that is not always the easiest thing to do; we can bring in consultants or short-term contractors, but there are sensitivities around that; or we can look to identify people in our own staff who we think could have those skills developed, which we can do via outward secondments and other methods. At the moment, we are bringing in fixed-term appointees or interim managers, but we are deliberately seeking put one of our own members of staff to work alongside them in order to develop their skills, so that in future we will be less reliant on outside support. As a general rule it is to be encouraged, but I do not think there is some formula to be followed.

Q117 Mr. Davidson: I am interested in that response. One submission that I received from some members of the work force was that you were making undue use of consultants and that although you had some specialists within your service, they were being told that you did not intend to use them, but that you would buy in those talents. It seems to me that you are going to have difficulty maintaining your position as an intelligent customer. If it is acceptable, I shall clarify that point and if necessary come back to you.

My final point arises from discussions that we had with the Ministry of Defence on other issues. What percentage of the top 100 or so people in your department went to public schools? If you do not know, could you find out?

Mr. Gray: I honestly do not know; and it is not a statistic that I regard as being a particularly important bit of management information.

Q118 Mr. Davidson: I must say that I do, in terms of whether you are an equal access, equal opportunity employer. I presume that you have statistics on gender, race, religion and the rest of it; we would be interested in seeing whether or not you have that information too.

Mr. Gray: I will see whether we can collect the information. If it helps, I think that neither of the two civil servants here today went to public school.

Mr. Davidson: That is interesting.

Mr. Gray: And neither did the contractor.

Q119 Mr. Davidson: That says something for you compared to the military, but we shall have to wait and see. If there is a suitable level taking in 40 to 100 people, will you draw the line and let us have it?

Mr. Gray: I will let you have the data for our staff in the two senior civil service levels, if that will help. It will probably be about 50 or so.

Mr. Davidson: That will be helpful. Thank you very much.


Q120 Helen Goodman: Mr. Gray, the overall increase in the contract in the last two years was about 2.5 billion. What was the increase in 2005-06, and what will it be in 2006-07?

Mr. Gray: The increase in the estimate? In those two years, we would have had a significant increase as a result of the integration of the Fujitsu contract.

Q121 Helen Goodman: Yes, but you wanted to strip that out. What would it be on the stripped out basis?

Mr. Gray: I am not sure that I have that immediately to hand, but I can obviously let you have a year-by-year breakdown of when it occurred. I would think it was roughly equal across those two years. That would be my expectation, but I shall check the figures.

Q122 Helen Goodman: So it would be about 250 million?

Mr. Gray: Yes.

Q123 Helen Goodman: Are you telling us that it was possible to accommodate the increases in that work within your cash limit, or departmental expenditure limit?

Mr. Gray: That is what I was seeking to say earlier. This is not a special category of expenditure that gives me a free ride. It has to be accommodated within my overall spending settlement, which is going not up, but down.

Q124 Helen Goodman: And you did not have recourse to the contingency reserve?

Mr. Gray: No. We have access during the next three years to a modernisation fund within our settlement for that period-

Q125 Helen Goodman: That is within your internal settlement. You do not have to go back to the Treasury?

Mr. Gray: Well, in the jargon it has a dual key-I am not allowed to spend that part of my budget without getting approval from the Treasury. But you and I, as former Treasury colleagues, will recognise how the Treasury does these things.

Q126 Mr. Williams: Paragraph 3.11 says: "The Department is seeking to reduce the ratio of its own information management staff compared to the supplier team from 30:70". That is, 30 of yours to 70 of theirs, which is a ratio of virtually one to two. Why does it take one person in your management team to manage two people in a contractor's team, and how long will that last?

Mr. Gray: What we are seeking to get to is 20:80, as I was saying earlier, and we have almost got to that figure. This is about not just managing the work, but, as Steve was explaining, the appropriate roles of staff within the department and outside it. Steve, do you want to add anything about the key roles that the in-house staff are providing?

Mr. Lamey: Yes, sure. The 20:80 ratio is fairly well established industry best practice in spaces of this sort. At the current rate, we will end up with about 1,500 civil servants to about 6,500 contractors. Those civil servants are not directly managing all 6,500 contractors. With the civil servants, we will have business solutions engagements-working with the business to identify business process opportunities.

A lot of the benefits that are going to come out of the IT work over the next couple of years to benefit the business will come through those routes. We have solutions architects who are mapping the future architecture and the technologies that we require, as well as ensuring that we get the best value for those. We have contract people who are managing the contract-it is a very big, complex contract, as I am sure you have become aware-and we have staff ensuring that we get value for money on that. We have a finance team, because we are spending a lot of money. My overall budget every year is obviously hundreds of millions of pounds, and I need to ensure that it is spent in all the right ways, so I have staff managing that.

In all, we have 1,500 civil servants, 800 of whom-to return to what one of the other members of the Committee mentioned earlier-are subject matter experts and managing all the programmes and activities that Capgemini currently undertakes. They are crucial, because they are our experts. They are the people who know how the molecule of a tax receipt flows through our internal systems. It is absolutely vital to retain that as one of the key civil servant roles.

A lot of the roles that we keep internally are for subject matter experts, and they are managing the activities of our partners, as I think you would expect me to ensure. That is why the organisation model is changing quite seriously from very much doing a bit all together to very much saying, "That's our role as intelligent buyers." We expect those concerned to perform intelligent supplier roles, and that is the model that we have been working to build. I think that 1,500 staff is where I am targeted to get the right balance for my organisation, and I think that it is currently about 6,500 on the supply side.

Q127 Mr. Williams: Mr. Gray, when you were dealing with NIRS2, you spent 14.9 million on transition costs and another 14 million for the right to use it. That is 28.9 million, when a previous supplier is still running NIRS2. What value did you get? Did you get 28.9 million value out of that?

Mr. Gray: I am not sure that I recognise those figures. The total that we spent was the 14.9 million. I think that some of the other costs to which you are referring were probably incurred by Capgemini.

Q128 Mr. Williams: Does the CAG have a comment on this?

Jane Wheeler: Yes. There were costs of transition, but there were also costs associated with acquiring intellectual property rights, so those were the two elements.

Q129 Mr. Williams: They say that they do not recognise the figures, but the figures in our briefing are quite specific.

Mr. Lamey: The 14.9 million is the transition cost, as was mentioned. There was an earlier payment of 14 million, which gave us the intellectual property rights to, as such, use the work that Accenture had done back in the '80s at some point, which created the national insurance system in the first place. I am not sure exactly what the timing was, but note 2 on page 5 refers to that 14 million. I think that is accurate.

Q130 Mr. Bacon: That is separate from the 14.9 million, is it not?

Mr. Lamey: I believe so, yes.

Q131 Mr. Bacon: Making the figure 28.9 million, which is the figure given by Mr. Williams.

Mr. Gray: I apologise. We do recognise those figures. My memory failed to spot them.

Mr. Lamey: May I help with the second part of the question, which is about whether we got value? The national insurance system is absolutely huge; it is probably the largest computer system in the UK and in Europe. Let us consider the scale of what it does. Every day, 60,000 to 70,000 civil servants use that system across the DWP and HMRC, and local authorities are starting to use it now, too. It does a massive number of transactions. There are 70 million records on the system and it has to be available, as it is, 99.9% of the time.

I do not know what the value for money judgment is, because this system is outside most of the leagues for what a big system does, but it is a hugely important system to the tax and the benefits systems of the UK. Making it available every day for those 60,000 to 70,000 staff and protecting the records of 70 million people, whose pensions will rely on much of the source information that comes out of the national insurance system, makes it a very good investment.

I cannot comment on whether the 14 million figure was right, because I was not there at the time, but I think the transition charges, which I have been through, and the transition process should be seen as one of the biggest successes that we have had so far in IT. It was a huge programme and very successfully implemented by all the people involved at the time, even though it seemed to take slightly longer. That helped to make it an even bigger success.

We do not talk about great IT successes, especially in HMRC, but we do have them, and this is one. It went live with better than 6-Sigma accuracy rates, which is astounding, so I think it is a success and the money was well spent, although I could not justify where the 14 million came from.

Q132 Mr. Williams: Again to Mr. Gray, your department, like others, faces a 5% real cut over the three years coming up. How difficult will it be for you to control your costs in such a growth situation when your department faces cuts?

Mr. Gray: I would say that that challenging but manageable. Part of the reason, as I sought to explain earlier, for us consciously increasing the planned investment spending on new systems, including new IT support, is to support us in building more efficient systems in future where we are able to reduce our other costs.

We are drawing up a detailed plan as to how we will deliver the overall spending allocations that we have been given, together with the things we are expected to provide. That is challenging, but I am confident that we are capable, first, of putting a plan in place to do that and, secondly, of delivering it.

Q133 Mr. Williams: In what sort of time scale would you hope to devise that plan?

Mr. Gray: Different years of the period are at different stages. We are finalising our detailed budgets for the year ahead for all the major investment programmes. We are going through an intensive process of challenging the propositions that have been put forward to my top team in the department. We are looking, early in 2007, to draw up more detailed business cases for all those investment programmes to see whether, first, we can finance all that investment and, secondly, on robust assessment, they look likely to deliver the benefits downstream over the following three or four years of the period. I think that, by next spring, we will be in a firmer position than we are now to say that we have a robust plan in place.

Q134 Mr. Williams: Thank you. That almost ends our deliberations. I thank the three of you, because this has been a very detailed and intricate exchange, and it has been very informative. It will take a lot of absorbing and analysing when we look at the record. Having thanked your colleague, Mr. Gray, we now need to go into private session. Is Mr. Lamey staying for the private session?

Mr. Gray: Yes. May I make one request if you wish to go into private session? May I be joined as a witness by my finance director?

Q135 Mr. Williams: Of course. Would it be helpful for anyone else to be present?

Mr. Gray: It would be appropriate for David to leave because he is not covered by this arrangement, but if Stephen Jones, my finance director, could join me, that would be helpful.

Mr. Williams: That is great-no problem whatever. I would be grateful if everyone else left now. Thank you for joining us.

Sitting suspended.