IT services are crucial for HM Revenue & Customs’ business. In its procurement of the £3 billion IT outsourcing contract, ASPIRE, the Department secured competition for a contract which meets its IT needs, and completed the transfer to the new supplier Capgemini without loss of service to customers.
The Department secured the competition by contributing to firms’ costs of bidding, paying the winner’s costs in taking over from the existing supplier, discounting the transition costs for the purposes of comparing bids and paying the incumbent supplier to effect the transfer. There was justification in this case for using incentives to encourage competition. The premium paid by the Department to secure a competition was £8.6 million in contributions to bidding costs, and £43.3 million paying for contractors’ transition costs.
Contributing to bidders’ costs and the costs of transition to encourage and maintain sufficient competition during the procurement was an essential step to achieving value for money in this deal. Compared to the total value of the ASPIRE contract the costs of procurement and transition totalling £75 million were small – some 2 percent of the projected value of the contract. The Department estimated that transition costs would be in the range of £30 million to £50 million. The actual transition costs were £37.6 million paid to Capgemini and £5.7 million paid to the incumbent suppliers. There remains a question whether the Department needed to pay this much. Although the Department was in new territory, it might have obtained better value for money by maximising the benefits from its contribution to the cost of bidders’ design and implementation studies and from tighter control over the transition costs.
The eventual value for money of ASPIRE will depend on how far the Department can control the volume of demand for IT services and the prices it negotiates for changes in services. Compared to the contract it replaced, the new supplier is paid on the basis of performance achieved (outputs) rather than resources used (inputs). The Department spent £539 million in the first year of the contract. There have been significant cost increases due to the Department’s increased demand for IT services and projects which was higher than anticipated at the time the procurement was run.
The new supplier has provided IT services from day one of the contract, meeting or exceeding target service levels. The transition of the NIRS2 system took longer than planned. Since the transition there have been some delays on mission-critical projects, which have on the whole been caused by the Department changing its requirements. The Department will need to ensure it has robust arrangements for managing the contract so that it delivers the best performance from the contractor.
ASPIRE provides lessons for other government departments on preparing for the end of a contract and encouraging competition, and for managing the transition from one supplier to another and also in providing sufficient flexibility within a contract to deal with likely changes in IT requirements. The report sets out good practice and recommends further guidance for departments on the use of incentives to encourage competition, including the circumstances in which payment of transition costs or other mechanisms might be used.