NATIONAL AUDIT OFFICE

REPORT BY THE

COMPTROLLER AND

AUDITOR GENERAL

Information Technology ServicesAgency: Outsourcing the ServiceDelivery Operations

ORDERED BYTHE HOUSE OF COMMONSTO BE PRINTED4 MARCH 1996

LONDON: HMSOHC 255 Session 1995-96Published 8 March 1996 27.40

INFORWTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHE SERWCE DELI~RY OPERATIONS

This report has been prepared under Section 6 of the National Audit Act, 1983for presentation to the House of Commons in accordance Mth Section 9 of theAct.

John BournComp&oUer and Auditor General

National Audit Office21 Febmary 1996

The ComptroUer and Auditor General is the head of the National Audit Officeemploying some 750 staff. He, and the NAO,are totaUy independent ofGovernment. He certifies the accounts of aUGovernment departments and awide range of other pubhc sector bodies; and he has statutory authori~ toreport to Parliament on the economy, efficiency and effectiveness with whichdepartments and other bodies have used their resources.

INFORWTION TECHNOLOGY SERVICESAGENCY:OUTSOURCINGTHE SERWCE DELIVERYOPEMTIONS

Contents

Page

S-ary

Part 1: Introduction

Part 2: Outsourcing objective 1: Maiatatig and isnproviugexisting sertice levels

Part 3: Outsourcing objective 2: Gainiig aud maintainingsiguflcmt cost reductions

Part 4: Outsourciug objective 3: Effecttig a smooth transfer ofciti setice staff

Part 5: Outsourciug objective 4: Awwding contracts whichrequire supphers to take accouut of and respond tofuture customer needs

Appendices

1: Main recommendations made by the National Audit Officeduring the examination

2: The risks involved in outsourcing

3: The criteria used by the Agency to evaluate potential supp~ers’final offers

1

4

8

12

19

23

27

29

31

INFORMATIONTECHNOLOGY SERWCES AGENCY:O~SO~CING THE SERVICEDELIVERYOPERATIONS

Summary

Background to 1 The Department of Social Security’s Information Technology Services Agency

the outsourcing (the Agency) provide computing and other related services to support theprocessing and payment of social security benefits and the co~ection of NationalInsurance contributions. The Agency also manage the development and supplyof information technolo~ systems to the Department and other agencies.

2 In this report outsourcing describes the process under which a pubhc sectorbody enters into a contract with a third party for the dehvery of a service forwhich the pubhc sector body remains responsible and accountable. InJanuary 1994 the Agency announced that they wotid be outsourcing theirservice defivery operations. These operations are, mainly, the support of thenetwork of Social Secnri& computers on which benefits are calctiated andadministered, and the production of girocheques and order books. Servicedehve~ encompasses, therefore, the processing and payment of Social Securitybenefits. The decision to outsonrce was taken to enable the Agency toconcentrate on the provision of other services to the Department of SocialSecurity where they felt they codd best offer value for money, namely settinginformation technology standards and developing new information technologysystems.

Objectives 3 The Agency’s objectives for the outsourcing project were:

of theoutsourcing . to maintain and improve existing service levels;

project. to gain and maintain significant cost reductions;

. to effect a smooth transfer of civil service staff; and

. to award contracte which require supphers to take account of and, respond tofuture customer needs (customers in this context are mainly the other SocialSecurity agencies, for example the Benefits Agency, which are dependent onthe outsourced operations for the dehvery of benefits).

Result of the 4 In June 1995 the Agency signed five separate contracts for periods of up to

outsourcing ten years for the provision of the service dehvery operations withthree contractors, Electronic Data Systems Ltd (EDS), SEM Group PIC(SEW),and International Computers Ltd (ICL).In total, the contracts wi~ involvethe transfer to the private sector of approximately 1,600 staff, aboutone-third of the Agency’s 1994 complement and the transfer of aboutfew-fifths of the Agency’s assets, worth S62 miMon at market value.

INFOMTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHE SERWCE DELIWRY OPERATIONS

5

Scope of the 6

National AuditOfficeexamination

Conclusions 7

andrecommend-ations

8

9

10

The Agency estimate the contracts to be worth S577 mi~on at 1995-96 prices,representing a potential saving of S399 miMon against the E976 mi~on theAgency estimate they wmdd have borne if these functions had remainedin-house.

This report examines the Agency’s management of the outsowcing project up tothe final handover of business tothecontractors in December l995. It considersthe steps the Agency took, in their management of the project and in thecontract terms they negotiated, to secure as far as possible their objectives forfut~e semice dehve~. It is too soon to examine the contractors’ performanceunder the new contracts.

The main conclusions are thati

.

.

.

.

the Agency generated significant competition from the mwkets and havesatisfactorily put in place arrangements to monitor supphers’ performanceagainst contractual requirements (para~aph 2.2);

the Agency look likely to secue significant cost reductions from theoutsowcing, hut the fu~ extent of these reductions wiU only be demonstratedin time (paragraph 3.3);

the Agency took appropriate legal and contractual measues to protect therights and terms and conditions of staff transferring to the private sector(paragraph 4.2); and

the Agency took steps to offset the risk that private sector provision ofsemices will not be stilciently responsive to customers’ needs(paragraph 5.3).

The main recommendation is that

The Agency need to monitor contmctors’ petiormance and to exercise th~cbnt~iial Provisions ihiy

secured to control ptice changes which contractors may press for in future (pamgraphs 3.21 to 3.23).

This is necessa~ to realise the significant savings which the Agency expect toresdt from the outsourcing.

The National Audit Office also recommend that:

In negotiations with short-tiated supphers duflng future pubic sector outiotiming exemisis,’organisatibri$

should consider the appropriate level of disclosure of in-house costs necessa~ to ensure that supplie~

Mds are set at a reaHsfic level (parsgrapha 3.12 to 3.18),

The two main options for disclosure are to provide to the shoti-hsted supptiersfdl details of the in-house costs incwred in delivering the business to be

outsouced, or to provide full details of in-house cost components only.

2

INFORWTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHESERWCEDELIVERYOPERATIONS

11

12

13

14

15

The f~st option may reduce the risk that companies’ bids are set unreahstica~ylow, ody for companies to seek to increase prices once contracts are signed andthey become aware of the actual costs involved in running the business. Fddisclosure of costs may also set the tone for open and co-operative workingrelationships with supptiers.

The second option may offer advantages h terms of not @ving away hancialyardsticks against which companies bids W be judged (for example in-housecosts less a certain percentage). &o, it may draw innovative solutions to thebusiness needs from the marke~ that is companies’ bids wodd not be basedsimply on the existing level of in-house costs which reflect the operationalconstraints faced by the Agency.

The decision on which option to choose is not an easy one, and eachoutsourcing exercise needs to be considered on its merits. In this instance theAgency chose the second option, in Une with their previous procurementpractices, and in pursuit of innovative solutions to their business needs.AddltionaUy, the Agency considered that disclosure of the fti in-house costs ofoperating and managing the organisation which existed prior to outsourcingcotid be misleading to contractors, when bids were required for a businessre-organised into five discrete areas ofwork, see Figure 1.

A key factor in which option to choose may we~ be the level of competitiongenerated for the business to be outsonrced. mere this is extensive, the releaseof fd costs may be appropriate, as external competition will offer someassuance that companies wiUnotbase their bids solelyon the in-house costsditiged.

This report also shows, at Appendix 1, the main recommendations the NationalAudit Officemade to the Agency during the course of the examination. Theserecommendations, which were accepted by the Agency, covered, in the main,initiatives begnn by the Agency. The recommendations and the key questions tobe addressed when outsourcing, shown at Appendix 2, are capable of general

apphcation and are for consideration by others undertaking outsourcing,

lNFOMTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHE SERWCE DELIVERYOPEMTIONS

Part 1: Introduction

The 1.1 The Agency were estabhshed as an Executive Agency of the Department of

Information Social Security in 1990 as part of the Government’s “Next Steps” initiative.

Technolo~Setices 1.2 The Agency play a key r61e in supporting the dehvery of social securi& benefits.

Agency They are responsible for the provision of a range of information technolo~services to support the processing and payment of social security benefits andthe co~ection of National Insurance contributions by other Departmentalagencies. At any given time, over 30 milhrm people are receiving one or moresocial security benefits.

The decision 1.3 The Agency’s business strategy is to develop those areas of business where they

to outsource can add value for their customers, mainly the Department and other SocialSecurity agencies such as the Benefits Agency and the Contributions Agency,and to withdraw from direct provision where the private sector can provide ane~al or better service.

1.4 In developing their strate~, the Agency had identified a we~ estabhshedcompetitive market for the day to day support of computers, output handhngoperations and computer communication networks. The competitiveness of themarket had also been borne out by experience - the Agency had secured costreductions by contracting out the production of benefit instruments of paymentat their Area Computer Centres (para~aph 3.2). The Agency also took accountof the flexibihties available to private supphers, their speciahst capabihties andtheir economies of scale. They concluded that, over time, they codd notcompete effectively with the market in the provision of day to day computeroperations, and that transferring this work to the private sector provided thebest prospects for staff.

1.5 In January 1994 the Agency announced that they wmdd he outsourcingtwo areas of their information technolo~ services known as “Distributed

Systems” and “Data Centre Services”. These services are set out in Figure 1,opposite.

1.6 The Agency beheved that outsourcing the service dehvery operations meant thatthey would be able to concentrate on those services where they judge they canadd value for their customers:

● providing a strategy for the Department’s information technologyinfrastructure, and defining information technolo~ pohcies and standards;

. supplying information technology products and services, ranging fromsoftware development through to the support of customers’ existinginformation technology systems; and

4

lNFORWTIONTECHNOLOGYSERWCESAGENCY:OUTSOURCINGTHE SERWCE DELrVERYOPERATIONS

Objectives 1.7

of theoutsourcingproject

. acting as an agent to help customers in the Department and elsewhere assesstheir tiformation technolo~ needs, and to manage contracts with the privatesector on their beha~.

Distributed systems

This involves the provision and suppoti of data and computer network communications services involving

over 70,000 terminals and personal computers wittin and between Depatimental and agency office

locations across the count~.

Distributed systems are an important component of the Social SecutiW benefits system, For example,

Benefits Agency staff at a local office dealing with an individua~s claim for a retirement pension would use a

computer terminal to access the central pensions systems, based in Newcastle, to allow them to assess

and calculate the claimants entitlement.

For the purposes of mdaourcing, Distributed Systems were dvided into three geographical business packages

Notih 168 staff, assets of fO.2 million

South: 107 staff, assets of fO.1million

Centrah 234 staff, assets of fO.8 million

Data Cenlre Services

This involves the management and operation of nearly 200 mainframe computers located at four Area

Computer Centres providing on-hne capaciW for the production of benefit paymenta and notifications. The

Data Centre Services produce the 85 million girocheques and 57 miltion benefit order books which are sent

annually to benefO recipients.

For outaourcing, Data Centre Services were divided into two business packages, each with two Area

Computer Centres

ACC 1 Livingston

ACC 2 Norcmss } 463 staff, assets of f29.2 mi160n

ACC 3 Swindon

ACC 4 WasMngton } 621 staff, assets of f31,6mil[on

Mote: A furfherpackage of work covering cusfomerseNices, including ‘fielp desVsewices, waswithdmwn from the outsou~hrg when it failed to generate bids safisfiing the Agerrcyk requbsmerrkfrom the market Thispacksge represented about one percent by value of the to~l business to bemdaourced.

Source: Information Technology Services Agency

The Agency’s objectives for the outsourcing project were:

. To maintain and impl-ove etisting setice levels

. To gain and maintain significant cost reductions

● To effect a smooth transfer of citil service staff.

5

INFOWTIONTECHNOLOGYSERWCESAGENCY:OUTSOURCINGTHE SERWCE DELIWRY OPERATIONS

Key stages in 1.8the outsourcing

. To award contracts which rewire supphers to take account of and respond tofuture customer needs.

The key stages in the outsourcing are set out in Figure 2.

1.9

Examination 1.10methodology

1.11

1.12

Stage

1.

2.

3.4.

5.

6.7.

8.

9.

Announcement of outsourcing

Advetiaement of business on offer

Receipt of expressions of interest from contractors

Short-list of contractors approved

Issue of operational requirement

Volume 1 (a description of the Agency’s business and the pachges to be

outsourced)

Volume 2 (further details of the Agency’s requirements of contractors, and

draft contracts)

Negotiations with contractors up to issue of the Invitation to Tender

Receipt of final offers

Ngnature of contracts

Handover of business to contractors

Source: Information Ethnology Services Agency

31 Jan 1994

18 Jun 1994

18 Jul1994

9Sep1994

29Sep1994

21 Ott 1994

31 Mar 1995

18 Apr 1995

22 Jun 1995

1 Ott 1995

to 1 Dec 1995

The Agency spent El.6 miMon managing the outsourcing, from itsannouncement in January 1994 to the award of contracts in June 1995.

The National Audit Office examined successive stages of the outsourcing, up tothe final handover of the business to the contractors in December 1995, againstthe stated objectives for the project. The National Audit Office, at the invitationof the Chief Executive of the Agency, protided an interim report andrecommendations to the Agency at the end of each stage. Theserecommendations covered, in the main, initiatives begun by the Agency. N the

main recommendations, set out at Appendix 1, were accepted by tbe Agency.

The approach throughout was to assess whether the Agency’s management ofthe outsourcing process was hkely to minimise risks to value for money andcontinuity of service once the contracts were let. The risks identified and the key~estions addressed are shorn at Appendm 2.

The examination drew on work commissioned by the National Audit Office&omBird & Bird (la~ers) on contractual and other legal matters, and horn WMG(management constitants) on asset valuations, the information technologymarket and outsourcing genera~y. The Agency’s customers in the Departmentand other agencies, Agency staff representatives and the short-listed suppherswere consulted.

6

INFORWTION TECHNOLOGY SERWCES AGENCYOUTSOURCINGTHESERWCEDELIWRYOPERATIONS

Scope of the 1.13 The Report considers, in Parts 2 to 5, the steps the Agency took, in their

report lnanagement of the project and in the contract terns they negotiated, to secueas far as possible their objectives for future semice dehve~. It is too soon toexamine the contractors’ performance under the new contracts.

7

lNFOWTION TECHNOLOGY SERWCES AGENCYO~SOURCING THE SERWCE DELIVERYOPERATIONS

Part 2: Outsourcing objective 1:Maintaining and improvingexisting service levels

Introduction 2.1 Under the first outsowcing objective, the Agency were see~ng to secure privatesector provision of business which wodd be initially at least as good as andsubsequently better than provision by the Agency themselves. In pmsuit of thisobjective, the Agency aimed to generate competition for the business to beoutsourced so as to exploit the capabihties of the information technologyservices market.

Conclusions 2.2 The Agency generated significant competition from the market and have set upprocedues to monitor service levels, mile only time wiU show whether seticelevels wi~ actua~y be maintained and improved, the steps taken by the Agencyprovide a firm basis for the achievement of the objective.

2,3 The main steps taken by the Agency in pusuit of the objective are shown below,along with conclusions on each step. Paragraphs 2,4 to 2.16 give the mainfindings behind the conclusions.

Maintaining and improving service levels main National Audit Office conclusions

Step 1: Identifying competition in the msrket.

Conclusion 1: The Agency identified a competitive market for the provision of information technology

services.

Step 2: Generating suticient competition among potential supplere,

Conclusion 2 The business to be outsourced generated significant interest in the market. Many

potential contracto~ expressed an interest, and the short-hsted contractors were all

major companiea in the information technology business,

Step 3 Selecting technically compliant bids

Conclusion 3: The Agency’s evaluation of potential contractors and their bids was conducted by staff

with appropriate skills, and was conducive to selecting technically comptiant Mds.

Step 4 Preparing to manage contracts,

Conclusion 4 The Agency re-organised their management stmcturea, estabhshing a Service Supply

Group to monitor supplers’ performance against the levels of service specified in the

contracts.

8

lNFORWTIONTECHNOLOGYSERVICES AGENCY:OUTSOURCINGTHE SERWCE DELIVERYOPERATIONS

Findings: Step 1: Identifflng competition in the market

2.4 The Agency identified a weU estab~shed competitive market for the day to daysupport of computer and output handhg operations, and for providing andmaintaining computer networks, and concluded that the sKIUSand knowledge

appropriate tO the activities to be outsourced were available from the market.

2,5 The Agency took the foffowing steps to assure themselves that the market forthe business wodd be competitive:

● they held prehminary discussions with potential supphers to estabhsh whatbusiness it might be feasible to outsource;

. they packaged the bueiness to attract interest from potential supptiers.Dividing the business into packages enhanced competition and reduced thechance of the Agency being locked in to any one suppher, with the additionalrisks to securi~ of supply that wodd bring and

Findings:

. in fo~owing the negotiated procedure laid down by the European Communi@Services Directive, the Agency gave potential supphers flexibih~ to decidehow services wotid be operated, &us promoting innovative, competitivesolutions to the business re@rement.

Step 2: Generating sufficient competition amongpotential suppliers

2,6 As re@red under European procurement law, an advertisement describing thebusiness on offer was placed in the Official Journal of the EuropeanCommunities in June 1994. This advertisement generated considerable interest,and forty-one companies responded.

2.7 The Agency sent a ~estionnaire to each of these forty-one companies, aekingfor information about their experience of and abifity to undertake the businessto be outsourced. The ~estionnaire was based on tested models devised by theGovernment Centre for Information Systems (CCTA).Seventeen of theforty one companies responded to the ~estionnaire.

2,8 The Agency used the responses to evaluate potential supphers’ technical and

economic capabih~, against criteria derived from estabhshed best practicemodels, notably from the CCTA,and from the Agency’s prior extensiveexperience of procurement. As a result of this evaluation, seven potentialsupphers were shoti-hsted in September 1994 for one or more of the businesspackages on offer. The shoti-~sted companies were all major players in theinformation technology market (Figure 3, overleaO.

9

INFORWTIONTECHNOLOGYSERWCESAGENCY:OUTSOURCINGTHE SERWCE DELWERY OPERATIONS

2.9

2.10

2.11

1.

2.

3.

4.

5.

6.

7.

Electronic Data Systems Ltd (EDS), a wholly owned subsidia~ of the EDS Corpomtion,

SEMA Group plc (SEMA),

Nemens Nixdoti Information Systems Ltd (SNI).

international Computers Ltd (lCL).

Integrated Syatema Solutions Company Ltd (ISSC) (a wholly owned subsidiary of International Business

Machines - IBM),

Hos~ns Group plc (Hoskyns),

CSC Computer Services Ltd (CSC) (withdrewfmm the competition after ahoti-lisfing).

Following the withdrawal of CSC the Agency issued a ~o volume operationalrequirement to the remaining six contractors, describing the services to bedelivered and enclosing draft contracts for the business. FoUowing receipt ofinitial proposals from the contractors in December 1994, the Agency helddiscussions with them, in accordance with European Community law, to clari~in detail their understanding of the operational re@rement, and to negotiatecontracts.

Information requested by individual supphers that was basic to anunderstanding of the services to be dehvered was released to an contractors.Where individual supphers requested information relevant to a partictiarbusiness solution to the operational requirement, the Agency releasedinformation only to the individual supplier requesting it, The Agency sought hythis means to encourage the development of innovative bustiess solutions andthereby maximise the benefits of competition. Four of the six short-fistedsupphers told the National Audit OffIcethat they were genera~y satisfied thatthe competition was fair and that bids were prepared on the basis of sticientinformation. However, tio supphers expressed a reservation, noting that somedetailed technical information about productive capacity and cost information,such as certain costs related to maintenance, was unavailable during thenegotiations.

FoUowing discussions, the six remaining short-hsted supphers were invited at

the endofMarch1995formatiyto tenderforthework,andto Qveindicativeprices for contracts lasting five, seven and ten years. There were at leastWO bidders for each of the five business packages on offer, as shown inFigure 4.

Business paskage ContractorsDistributed Systems (North) ISSC, SEMA

Distributed Systems (South) Hoskyns, ISSC, SEMA

Distributed Systems (Central) Hos~na, ISSC, SEMA, ICL, SNI

Data Centre Sewices (Livingatrm and Norcmss) [SSC, SEMA, ICL, EDS

Data Centre Services (Swindrm and Washington) SEMA, ICL, EDS

10

INFOMTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHE SERWCE DELIWRY OPEMTIONS

Findings:

2.12

2.13

2.14

2.15

Findings:

2.16

Step 3: Selecting technica~y compliant bids

The technical and the financial aspects of the bids were evaluated separatelybefore the winning bids were selected. The technical evaluation was made byspeciahet teams consisting mainly of Agency staff with operational,procurement and personnel expertise. Representatives of the customers, forexample the Benefits Agency and the Child Support Agency, were also involved.The teams assessed the bids against the first eight of the ten pre-determinedcriteria shown at Append& 3. The criteria were developed from thefour objectives set for the outsourcing and derived from best practice modelssupphed by the CCTA.The criteria were set in a priori~ order, were furtherdivided into detailed areas, and those areas were ditided into items. A weightedscoring system led to a single overa~ score for each contractor’s bid.

The technical evaluation teams concluded that each of the supphers was~ahfied to manage and dehver each of the business packages for which theywere bidding, and that all supphers’ proposals exceeded the minimumoperational requirement. To ensure objectivi~, the technical evaluation teamsdid not have access to the contract prices quoted by potential supphers.

The technical evaluation teams reported to an Evaluation Panel estabhshed bythe Agency. The Panel was chaired by a senior customer and included seniormanagers from the Agency’s customers, the project’s legal advisers, andrepresentatives from the Department and the CCTA.The reports did notrecommend which supphers shmdd be chosen - this was for the EvaluationPanel to decide, based on their review of the technical reports and of separatereports on tie financial aspects of the bide.

The Panel judged afl bids received to have exceeded the minimum levels oftechnical comp~ance set, and to have met the Agency’s business requirements.Their selection of the most competitive bids was based on an appraisal of thecost-effectiveness of each bid and a concern for the overall balance betweensupphers (paragraphs 3.5 to 3.7).

Step 4: Preparing to manage contracts

The Agency identified the additional demands which wodd be placed on theirorganisation from managing five separate large-scale outsourced contracts. TheAgency began the detailed planning for the implementation phases of theoutsourcing in January 1995 and, fo~owing the award of contracts, estabhsheda Sefice Supply Group to monitor supphers and ensure that the Agency’scustomers receive the level of sefice specified in the contracts. For example,the Benefits Agency wi~ reqoire the timely production of correctly addressedbenefit order books and girocheques for those people assessed as entitJed tobenefits.

11

INFOMTIONTECHNOLOGYSERWCESAGENCY:OUTSOURCINGTHE SERWCE DELIVERYOPERATIONS

Part 3: Outsourchg objective 2:Gaining and maintainingsignificant cost reductions

Introduction 3.1 In pursuit of their second outsourcing objective, the Agency sought to secure asfar as possible contract prices significantly lower than the Agency’s in-housecosts of deEvering the services before outsourcing.

3.2 The Agency expected that cost reductions wotid accrue from the outsourcing,based on their experience including the contracting out of operations at theArea Computer Centres and other functions. Their approach was to rely on thecompetition generated by the outsourcing and operation of the market to reahsesavtigs over the fife of the contracts.

Conclusions 3.3 The estimated difference between the costs the Agency wotid have bornewithout outsourcing and the prices of the contracts let is such that the Agencylook hkely to secure significant cost reductions from the outsourcing. The f~extent of those reductions wi~, however, only be demonstrated in time.

3.4 The main steps taken by the Agency to gain and maintain significant costreductions are shown below, along with conclusions on each step.Paragraphs 3,5 to 3,24 give the main findings behind the conclusions.

Post reductions: maio National Audit Office conclusions

Step 1: Selecting the most economically advantageous bids.

~onclusion 1: The Agencyk evaluation of bids was conducted by staff with appropriate skills, and wa!

conducive to selecting the most economically advantageous bids.

Step 2 Estimating cost reductions.

Conclusion 2: The Agencyk estimate of their own costs of delivering the business is significantly

higher than the contract prices generated by competition, This suggests that the

Agency will secure cost reductions from outsourcing. The Agency’s estimates of the

estent of the cost reductions need to be treated with some caution, however, because

the volatile nature of the business creates a difficulty in forecasting what the Agency’s

internal costs would have been over the period of the contracts,

Step 3: Realising the estimated cost reductions,

Conclusion 3 The Agency included contract provisions designed to control contractors’ future prices

and thereby secure, as far as possible, the estimated cost reductions.

12

INFOR~TIONTECHNOLOGYSERVICESAGENCY:OUTSOURCINGTHE SERWCE DELIVERYOPERATIONS

Findings:

3.5

3,6

3.7

Findings:

3.8

3.9

;

Step 1: Selecting the most economically advantageousbids

The financial evaluation of the bids was conducted separately from the technicalevaluation (paragraphs 2.12 to 2.15). The financial evaluation teams analysedindividual supphers’ bids against the Agency’s basefine of their own costs ofdehvering the business, and against other suppfiers’ bids using sensitivi~analysis (to understand the impact on costs of changing business volumes) anddiscounted cash flow techniWes (to put the monetary aspects of the variousbids on a common basis).

This financial analysis, hke the technical evaluation, led to reports by thefinancial evaluation teams to the Evaluation Panel. The Panel examined thesereports and assessed the bids against the last two of the ten pre-determinedevaluation criteria shown at Append& 3. These criteria concerned the extent towhich potential supphers wodd contribute to competition in future, and tbeoveraU balance between services and potential supphers. As all bids weredeemed by the Panel to be technically comphant (paragraph 2.15), the Pane~sselection of the most competitive bids was based on an appraisal of thecost-effectiveness of each bid and a concern for the overaU balance betweensupphers.

The Pane~s recommendations as to which supphers shoufd win the outsourcingcompetition were reviewed and ratiled by the project board and steeringcommittees. FoUowing the agreement of Ministers to the Pane~srecommendations, contracts were awarded as shown in Figure 5 (overleafi.

Step 2: Estimating cost reductions

Prior to the outsourcing, the Agency had an estabhshed financial accountingsystem in place to monitor the costs of au business areas includlng the in-houseService Dehvery organisation. This system was not set-up to provide costinformation in a form which matched fly to the business packages to beoutsourced. During the period of negotiations the Agency retised their costingsystem and identified the relevant costs for 1994-95, the financial year beforethe contracts were awarded. This figure, S231 mi~on, was finahsed after theend of the financial year, 31 March 1995, and after issuing the Invitation toTender to contractors, provided a financial basehne against which to judgecontractors’ bids. The method of calculation was verified by the Agency’sMarket Testing Accountancy section, which was independent of the outsourcingproject. At E231 milhon, the Agency’s 1994-95 outturn costs were some861 milhon higher than the winning contractors’ prices for year one of thecontracts as adjusted to take account of the Agency’s costs of managing thecontract (E5.5milHon) and a charge for the write-down of the assets transferredto the private sector (S30 mi~on).

The Agency’s estimate of the cumulative cost reductions resulting fromoutsourcing over the length of the contracts is at Figure 6 (overleafl. Theestimate needs to be treated with caution because changes are inevitable in

13

[NFOWTrON TECHNOLOGY SERWCES AGENCYOUTSOURCINGTHE SERVICEDELIVERYOPEStATIONS

Business package Contractor Length of contract Esffmafed value of

(years) contract at

Note 1 1995N6 prices

(fro)

Note 2

1. Distributed Systems (Noflh) SEMA Group plc (SEMA) 5

2. Distributed Systems (South) SEMA Group PIC(SEMA) 5

3, Distributed Systems (Central) lnterna~Onal COmPutere 5

Ltd (lCL)

4. Data Centre Services Electronic Data Systems 10

(Uvingston and Norcmss) Ltd (EDS)

5. Data Centre Services EDS 10

(Swindon and Washington)

140

Total ~

Note 1: The Distributed Systems contracts were let for five yea& because of the pattern of mpidtechnological change in this sector of the market, In contrast, cmrtmcfs for Data Centre Sewices,where there is relative~ greater sfsbility in the market, were for ten years.

Note 2: The figures for the estimated vahre of contracts are shown at net present value, afterapplisationof the Reasury Discount Rate of 6 per cent and are net of the money paid by the contractors forassets transferred (f62million in total, paid on the handover of business).

Sourse:Agencypapers

business volumes, business strategies and computing technolo~ (for example,increased computer processing capaci~) over the hfe of the contracts. TheAgency have given guarantees of minimum business volumes for the first threeyears of the contract (paragraph 5.5) and estimate savings of up to 30 per cent

in this timescale compared to the cost of providing the business in-house.

3.10 The Agency estimate the potential savings arising from the outsonrcing overten years at f399 million, based on their calculation (Figure 6, opposite) of thedifference between the costs the Agency would have borne through keeping thebusiness in-house and the value of the five contracts let,

3.11 The extent of the estimated savings suggest that there was further scope forimproving in-house de~very of the business before outsourcing. The Agencyjudged that private sector contractors enjoyed freedoms and flefibifitiesenabhng them to offer lower prices, which were not available to the Agencywhen they undertook the business in-house. For example, the Agency is aUowedonly to undertake business with efisting customers in Government whereas

14

INFOWTIONTECHNOLOGYSERVtCESAGENCYOUTSOURCINGTHE SERWCE DELIVERYOPERATIONS

3.12

3.13

3.14

,. ,..

Net present value 1995.-96

prices (Note 3)

f million

Costs the Agency wouldhave borne without outaourcing 976

Contract values (Note 2) a

Estimated savings ~

Note 1: All estimates are net of money paid by the cordmctors for assets transferred (f62million, paid onthe handover of business).

Note 2: Estimates include the contract management coats the Agency w61have to bear over the life of thecorrtmcts(f30millionat net present value).

Note 3: Usingthe Feasury 6per cent discountrate.

Source: Agency estimates/buainesa case to HM 7reasmy

contractors would be able to make use of any spare capacity in the assetspurchased from the Agency to undertake business for ctients other than theAgency’s customers.

During the negotiations, the Agency gave the bidders details of cost elements

appropriate to the business to be outsourced including staff numbers andgrades, salary levels and contractual obhgations with third parties. The Agencyconsidered this was appropriate to matimising competitive, innovative bids.The bidders therefore had to make their own estimate of the total costs ofrunning the business. Some supphers considered the Agency wodd haveassisted the bidding process by providing a ftier picture of in-house costs at anearly stage, a~owing bids to be constructed on a common basis, without theneed for estimation.

The main options for the appropriate level of disclosure are:

. provision of fd detafls of the h-house costs incurred in dehvering thebusiness to be outsourced; and

● provision of fd detafls of the cost components of the business to beoutsourced.

The first option has the potential advantages for those outsourcing of:

. reducing the risks that short-fisted companies’ bids are set unreafisticaHY lowand do not take account of au the known costs of dehvering the business tobe outsourced; and

lNFOMTIONTECHNOLOGYSERWCESAGENCY:O~SOURCINGTHESERWCEDELIWRYOPEWTIONS

. reducing the attendant risk that once awarded contracts, supphers wiU seekprtce increases to cover costs that they had not aUowed for in their bid.

3.15 The second option has the advantages for those outsourcing of:

. not indicating to short-listed companies the approximate level of price thoseoutsourcing are prepared to pay, which could be interpreted by potentialsupphers as for example, in-house costs less a certain percentage; and

. being more conducive to drawing innovative solutions to the businessrequirement from the short-ksted companies - their bids wmdd not be basedsimply on the level of current in-house costs which reflect the operationalconstraints faced by the Agency.

3.16 In this particdar case the Agency chose to provide fdl details of the costcomponents of the business to be outsourced, as they had done in previousmarket testing exercises, mainly on the grounds that this wotid he mostproductive of innovative solutions a main aim of outsomcing as a businessproposition. AdditionaUy, the Agency considered that fti disclosure of thein-house costs of operating and managing the organisation which existed priorto outsourcing could be misleading to contractors, when bids were rewed fora business re-organised into five discrete areas of work. The Agency M berelying on the contract management arrangements, and “contractual measwesand working arrangements negotiated with supphers (paragraphs 3.22 to 3.24)to protect against rejustified price increases.

3.17 The decision on what financial information to release is dlfflcnk and not clearcut, and each outsourcing case needs to be considered on its merits. Theadvantages cited for provision of costs components rather than f~ in-housecosts codd be of less importance in cases where extensive competition isgenerated for the business to be outsourced. The Agency generated significantinterest in the business on offer in the case of this outsourcing, and attractedmany expressions of interest from major companies (paraWaphs 2.6 to 2.11),

3.18 Mere there is extensive competition, the release of fu~ costs may he

appropriate, as competition wi~ Offerasswance that companies wiu not basebids solely on the in-house costs divdged. The release of ti in-house costsmight confer some further advantage in that it wotid estabtish an openrelationship from the start with companies. This wotid set the tone forco-operative, non-adversarial working relationships with the suppherseventually awarded contracts.

3.19 The Agency’s calculation of the savings from outsonrcing took account ofreceipts for assets transferred to the contractors. These assets consistedprkcipally of computer equipment for the production of order books and otherinstruments of payment associated with the Data Centre Services. On Treasuryadvice, the Agency asked potential supphers to bid for the assets. The Agencyemployed Grimley’s, a firm of international property advisers, to value theassets offered for sale.

16

INFORWTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHE SERVICEDELIVERYOPEMTIONS

3,20 Gtiey’s estimated disposal value for the assets was E12 mi~on and theirmaximum open market existing use estimate was E93 mi~on. As Figure 7shows, the Agency received 862 miMon for the assets sold. This amountincludes El 1 miMon for assets bought by the Agency in 1994-95 and sold to thecontractors at cost. The bids can be considered reasonable as they were madecompetitively and feu in a similar range - for example the bids for Data CentreServices’ assets at Stindon and Washington were in a narrow range fromS29.7 mfion to 831.8 milhon. The Agency have a fmther safeguard againstbidders undervaluing assets, because they have included a “clawback clausefor the duration of the contracts to ensure that they wiU have an equal share inany profit received by contractors from the re-sale of assets.

fm fm

Grimley’s open market existing use valuation 93

Assets acquired in 1994-95, at cost 11

Potential open market value of outsourced assets ~

Contractor’s kids, as accepted @

Note: ‘bpen market existing use” valuation is an estimate of the bestpdce that could be obtained for theassets.

Findings: Part 3: Realising the estimated cost reductions

3.21 Paragraphs 3.8 to 3.10 examine the estimated savings that might accrue to theAgency from outsonrcing. As in all such exercises, reahsing these savings -ensuring the value for money of the outsourcing depends largely on theAgency’s control over the prices charged by the contractors. The Agency canexpect contractors to press for price changes as the nature of the business to bedehvered, or the level of business, changes over time, or if contractors estabhshthat, inadvertently, the Agency did not disclose fu~y technical or costinformation during the contract negotiations.

3.22 The Agency wiUbe relying primarily on contractual measures to control pricesin future. These measures include:

. a contractual right to hold market tests of tbe services at any time aftertwo years of contract performance. If the market test shows contractor pricesto be uncompetitive, the contractor can be obhged to match market prices. Ifthe contractor does not do so, the Agency can go elsewhere for the business;

. a provision to check that contractors are not offering more favorable pricesto other customers - in this respect the Agency has the status of “mostfavoured customer”;

17

INFOMTIONTECHNOLOGYSERWCESAGENCYOUTSOURCINGTHE SERWCE DELIVERYOPEMTIONS

● an agreed model for Enking changes in unit prices to changes in businessvolumes;

. provision for annual re-negotiations on price finked to an an Wltial three yearguarantee of minimum business volumes. Contractors wi~ be advised of therequired service levels on an annual basis, The guarantee of businessvolumes over the initial three year period, and any subsequent guaranteesnegotiated, will cease to have effect if the contractor fails to maintatisatisfactory levels of performance, or fails to maintain price competitiveness;and

. the right to a free exit from the ten year contracts after the seventh year.

3.23 The Agency ti~ have further checks on contractors’ pricing and performancethrough their exercise of audit access rights. Through contract clauses theAgency will have access to contractors’ premises, systems, books and recordsThe ComptroUer and Auditor General wiU have the same access for thepurposes of financial and value for money audit.

3.24 The contractual measures and the audit access rights (paraWaphs 3,22 and3.23) are the formal under-pinning of the Agency’s business arrangements withthe supphers. The Agency also intend to secure, less formatiy, a close andconsultative working relationship with supphers, to facihtate the provision ofsemices to customers. The relevant measures agreed between the Agency andsupphers are covered in paragraphs 5.7 and 5.8.

18

INFOR~TIONTECHNOLOGYSERWCESAGENCY:OUTSOURCINGTHE SERVICEDEL~RY OPERATIONS

Part 4: Outsourckg objective 3:Effecting a smooth transfer ofcivil service staff

Introduction 4.1 Some 1,600 civil servants are transferring from the pubhc sector to thecontracting companies. In pursuit of their objective of effecting a smoothtransfer of civil service staff, the Agency sought to negotiate with biddingcompaties the transfer of Agency employees on terms and conditions that wereno less favorable than those they had enjoyed as civil servants.

Conclusions 4.2 Up to the handover of business to the contractors, in negotiating terms with thecontractors, the Agency took appropriate steps to protect the rights and termsand conditions of staff transferring to the private sector.

4.3 The main steps taken by the Agency in pursuit of the objective are shown below,along with conclusions on each step. Paragraphs 4.4 to 4.14 give the mainfindings behind the conclusions.

Effecting”a”amooth transfer of stafh main National Audit Office conclusions

Step 1: Taking appropriate legal and contractual meaaures.

Conclusion 1: The Agency sought to protect staff rights, terms, and conditions, as rsquired by law, and

by insisting that contractors offered pension schemes comparable to those enjoyed by

staff before outsourcing.

Step 2 Including staff matters in the evaluation of contractors’ proposals.

Conclusion 2 The Agency considered contractors’ track records in managing staff tranafera, their

personnel policies, and their training and development programmed when drawing up

the shotilist of contractors and when selecting the most competitive bids.

Step 3: Keeping staff informed.

Conclusion 3 The Agency held regular consultations with staff transferring and with their

representative and the Agency required contractors to brief staff.

Step 4 Addressing the possibiliW of redundancies.

Conclusion 4 The Agency required contractors to identify any intentions they had for making staff

redundant. None of the winning contractors declared such an intention.

19

INFOR~TIONTECHNOLOGYSERVICESAGENCY:OUTSOURCINGTHE SERWCE OELIVERYOPERATIONS

Findings:

4.4

4.5

4.6

Findings:

4.7

4.8

4.9

Step 1: Tahing appropriate legal and contractualmeasures

The Agency’s lawyers adtised that the Transfer of Undertakings (Protection ofEmployment) Re@ations 1981 ~UPE) would apply to the tiansfer of Agencystaff from the public to the private sector. This meant that the rights ofemployees were protected at the point of transfer to the new supphers, andemployees would, by law, tiansfer on the same terms and conditions as theyhad with their previous employer. The Agency made it clear to potentialsupphers that they wotid re@re contractors to ensure that TUPE conditionswere apphed.

Since TUPE legislation does not cover pensions, the Agency insisted thatcontractors had to offer pension arrangements in respect of service after thedate of tiansfer that were broadly comparable to those available to civil semicestaff under the Principal Citil Setice Pension Scheme,

To check that the shoti-hsted contractors had comphed with tils re@ement,the Agency referred details of the contractors’ pensions proposals, as shown intheir final bids, to the Government Actua~’s Department, The GovernmentActuary’s Department assessed the schemes and, where they considered thebenefits fell short of being comparable with the Principal Civil Semite PensionScheme, negotiated improvements in the benefits under the pension proposals,Once aWeement had been reached for a set of benefits which the GovernmentActuaW considered to be broadly comparable with the Civil Setice Scheme, theGovernment Actua~ provided the Agency with Certificates of BroadComparability in respect of the contractors’ pensions proposals.

Step 2: Including staff matters in the evaluation of

contractors’ proposals

Before the short-hsting stage, the Agency asked interested suppfiers to provideinformation about their approach to and experience of taking on staff as a resdtof outsourcing, and evidence and details of staff haining and developmentpro~ammes,

Short-hsted suppliers were told that the personnel tiack record of suppherswould be an important factor in assessing their overall suitabih~.

The Agency’s evaluation of the bids received was made againstten pre-determined ctiteria (Appendti 3). The fomtb of these criteria, thepotential suppher’s record in absorbing an established information technologyfacihty, and their plans for doing so in the particular case of the Agencyoutsourcing, was specifically concerned with staff matters. Supphers’ bids werescored under seven areas covered by the criterion, and the evaluation teamshad regard in particular to:

. tbe terms and conditions offered by the contractor;

20

lNFOR~TION TECHNOLOGY SERWCES AGENCY:OUTSO~CING THE SERVICEDELIVERYOPERATIONS

Findings:

4.10

4.11

Findings:

4,12

.

.

.

the pension arrangements;

any proposals for re-locating staff; and

the contractors’ experience and handhng of previous staff transfers underTUPE.

Step 3: Keeping staff informed

The Agency kept staff informed of the progress of the outsourcing and itsimplications for them by, among other things:

.

.

.

.

.

maintaining regtiar monthly contact with trade unions:

newsletters and briefing to staff covering key events in the outsonrcing;

dedicated telephone fines, so that staff with Weries could speak direct topersonnel speciahsts;

presentations by the successfti contractors to staff transferring, after theaward of contracts; and

presentations and written material prepared by the Government Actuary’sDepartment which were provided to staff transferring, after the award ofcontracts, in order to explain the impact on pension benefits and redundancyentitlements.

The National Audit Office consdted staff representatives from the NationalUnion of Civil and Pubhc Servants and the Civil and Pubhc Services Associationabout the steps the Agency took in pursuit of the objective of effecting a smoothtransfer of staff. They said that the Agency had kept them informed regtiarlyabout progress and were responsive to particdar concerns and en@ries. Thestaff representatives expressed concern about the principle of outsourcing butaccepted that the key elements of the terms and conditions of service offered bycontractors were analogous with those offered by the Agency. They noted,however, that contractors may not have been fu~y aware of the practicalinterpretation of some of the more detailed aspects of the terms and conditionsoffered hy the Agency, particularly with regard to the pension rights of lowerpaid Civil Servants, who receive a sma~ pension enhancement under the rulesof the Principal Civil Service Pension Scheme.

Step 4: Addressing the possibfity of redundancies

Under the provisions of the TUPE regtiations the Agency were reWired toinform trades union representatives of any measures the contractors envisagedthey wotid take in relation to staff who wmdd become tieir employees.

21

INFOMTIONTECHNOLOGYSERVrCESAGENCY:OUTSO~CING THE SERWCE DELIVERYOPEMTIONS

4.13

4.14

In the Invitation to Tender issued to the short-fisted contractors, the Agencysought to meet this requirement by asking those bidding to declare any suchmeasures. The Agency also asked the contractors to submit bids whichidentified separately how many staff might be made redundant, and the effecton bid prices of any proposed redundancies,

Only two of the bids received indicated plans for redundancies, and thenumbers involved were sma~. None of the contractors awarded contractsdeclared any intention to make redundancies.

22

WFOR~TIONTECHNOLOGYSERWCESAGENCY:OUTSOURCINGTHESERWCEDELIWRYOPERATIONS

Part 5: Outsourctig objective 4:Awarding contracts whichrequire suppliers to takeaccount of and respond tofuture customer needs

Introduction 5.1

5.2

Conclusions 5.3

Outsourcing reduces the Agency’s direct control over business operations, andincreases rehance on contractors to meet customer needs. This brings increasedbusiness risks to the Agency associated with the Wahty and flexibih@ ofservice. The contracts need to be caretiy drawn up and, after award, to becareftiy managed by the Agency in order to secure as far as possible theobjective of meeting customers’ needs. Contract management in this contextmeans, mainly, monitoring contractors’ performance and making effective useof the contractual provisions, backed up by consultative working relationships,to ensure that contractors’ performance meets retirements.

This is especiaUy important as the Agency will retain titimate responsibihty andaccountabihty for the provision of services to customers. In order to ensure thatthey are able to do so they intend to check closely on a continuing basis thelevel and extent of service provided by the contractors, to confirm that it meetscustomers’ needs.

The Agency took steps to offset the risk that private sector provision of servicesti not be stilciently responsive to customers’ needs. The extent to which thefourth outsourcing objective is reatised wi~ only be demonstrated in thelong-term, with experience of the operation of the contracte. However, Wlsconclusion is based on the steps taken by the Agency as shown overleaf.Paragraphs 5.4 to 5.13 give the main findings behind the conclusions.

INFOMTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHESERWCEDELIVERYOPERATIONS

Responding to customer needs: main National Audit Offfce conclusions

Step 1: Translating customer needsintocontracts.

Conclusion1: The Agency and customers reviewed required service levels in detal, and have set up

contractual provisions to amend service levels aa neceaaary,

Nep 2 Checking contractors’ performance against customer needs.

Conclusion 2 When managing the contracts, the Agency are planning to monitor contractors’

peflormance closely to check that it meets customers’ needs. The Agensy have

contractual rights to redefine service requirements when there is a shortfall in

contractor performance, and have developed indicators for contractors’ petiormance.

Step 3 Secudng continuity of service for customers.

Conclusion 3: The Agency have taken steps to protect against non-petiormance by suppliers,

including contractual safeguards, and contingency arrangements to cope with

unanticipated interruptions to service delivery. The Agency are also planning to monitor

the continued commemial viabihty of contractors.

Findings: Step 1: Translating customer needs into contracts

5.4 Prior to outsourcing, the Agency had some WO hundred service levelagreements with eleven principal customers, including the Department andother Agencies, setting out customers’ business requirements in detail. TheAgency and customers together undertook a review of those agreements, toidentify customers’ expected levels of service after outsourcing, to consider howsemice levels might be reflected in contracts; and to decide what faU-backarrangements might apply in the event of services not being maintained,

5.5 Under tbe contracts, tbe Agency have guaranteed minimum business volumesfor each of the first three years. This was done to help secure the best possibleprice from contractors - it reduced tbe risk that contractors wmdd add a

premiumto pricesbecauseofuncertain~aboutfuturebusinessvolumes.Theguarantees cease to have effect if the contractor fails to maintain satisfactoryperformance or price-competitiveness. The Agency will consider guaranteetigbusiness volumes on a three year rolhng basis subsequently. Again, any suchguarantees would be subject to contractors performing satisfactorily andremaining price competitive. Tbe Agency beheve three vears to be tbe mostsuitable period for such guarantees because of the uncertainties associated withforecasting business volumes over a longer period and the fink with PubhcSector Expenditure plans.

5.6 The Agency have provided for the possibihty of the need to amend soficcsrequired by the inclusion of “Agreement Change Procedures” in the contract.Again, this is intended to allow for changes in the nature, level and quahty ofservices which may be required by customers in future.

INFORWTION TECHNOLOGY SERWCES AGENCY:O~SOURCING THE SERWCE DELIWRY OPERATIONS

Findings: Step 2: Checting contractors’ performance againstcustomer needs

5,7 The contracts specify required service levels and performance indicators againstwhich the Agency intend to monitor contractors’ performance. In addition, theAgency are developing, in consukation with customers and contractors, aService Code of Practice, which wi~ set out in more detail than the contractshow quahty of service wiU be maintained and monitored. The Code a~ows theAgency to retain flexibility, enabhng them to amend the detail of the monitoringarrangements as experience requires, without incurring the delay and costassociated with making amendments to the contracts.

5.8 To ensure that customers’ continuing needs and concerns about quahty ofservice are given W consideration, the Agency have appointed CustomerService Managers, whose brief includes regular consultation with customersand supphers. Together with the Service Code of Practice, the Service Managersare important Enks in a close and consultative working relationship withsupphers (paragraph 3.24).

Findings: Step 3: Securing continuity of sertice for customers

5.9 Any disruption to the continui~ of service may affect the abih~ of the Agency’scustomers, for example the Benefits Agency, to dehver social securi@ to those inneed. The Agency incorporated a range of safeguards in the contracts designedto offset the risk of non-performance by contractors. These included:

. provision of services by contractors to agreed times, as we~ as to agreedstandards;

. measures to safeguard confidentiahty;

. dispute resolution procedures; and

. termination provisions.

5.10 Under the contracts, contractors who do not meet their performance targets canbe financially penahsed. In particdar, the Agency wi~ aUocate what are knownas defatit points to each observed service failure, based on, among other things:the number of Agency customers affected; the effect of the failure on the Agencycustomers; and the impact on benefit administration. Default points wiU have amonetary value representing the financial remedy available to the Agency.

5.11 The Agency also have the option of non-financial remedies such as injunctiverehef (a court order restraining a wrongfd act) shodd, for example, acontractor be found to be in breach of obhgations to safeguard theconfidentiahty of data.

25

[NFORWTIONTECHNOLOGYSERWCESAGENCYO~SO~CING THE SERWCE DELIVERYOPEMTIONS

5.12 The Agency included clauses in the contracts providing contingencyarrangements in the event of disaster or some other unforeseen circ~stance,These clauses include arrangements for

● the provision of services in the event of emergencies (force majenre);

. ensting disaster recovery and standby plans are documented and re@arlytested;

. transferring work to other sites antior other contractors as appropriate;

. deahng with the conseWences of terminating one or more of the contracts;and

. reconstructing data lost or destroyed

5.13 The Agency ti~ continue to monitor the commercial viabihty of the contractors.For example, the Agency will commission, as necessary, independent expertanalysis of contractors’ financial performance, based on audited accomts.

26

INFORWTION TECHNOLOGY SERWCES AGENCY:

1

2

3

4

5

6

OUTSOURCINGTHE SERVICEDELNERY OPERATIONS

Appendix 1Main recommendations madeby the National Audit Officeduring the examination

These recommendations, wfich were accepted hy the Agency, covered, io

the mti, Wltiatives tieady begun by the Agency

Financial aspects

Work on the calctiation of the Agency’s om costs of delivering the business tobe outsourced should be completed as a matter of regency, and include:

.

.

.

detailed basehne costs for afl the business to be outsourced;

a register of all assets to be outsomced; and

valuations of the assets based on their value to potential contractors and thetider market.

The Agency shotid include in the project management team a fd-time quahfiedand experienced accountant(s) to oversee the work on calctiation and assetvaluations and to advise on negotiations titb contractors and on the evaluationof their bids.

The calctiation of the Agency’s om costs shodd be subject to independentassessment to confirm that it represents best practice.

Tbe Agency shotid include a “clawback clause in the contracts to ensue thatthey share in any profits made by the con~actors from the on-sale of assets.

Tbe Agency shotid make rigorous use of au price control mechanisms on are@ar basis and issue guidance to those managing the contracts on when tocheck contractors’ competitiveness.

Evaluating contractors’ bids

The Agency sbotid require aUproject team members to sign declarations ofdisinterest, in order to maintain high standards h the negotiations withcontractors and in the evaluation of their bids.

INFOR~TIONTECHNOLOGYSERWCESAGENCY:OUrSOURCINGTHE SERVtCEDEL~RY OPEMTIONS

7 The Agency should ensure that draft evaluation criteria for fial selection aresubject to early independent scrutiny by procurement staff, customers, legal andfinancial advisers, and the CCTA.

8 The Agency should consider issuing and explaining guidance to the evaluatorsto ensure that the assessment and selection of final bids is fair, justilable andconsistent between the evaluation teams,

9 The Agency should provide training to the evaluation team members in the

aPP~catiOn Ofevaluation criteria and their relative weighting to help ensureconsistency of approach.

10 The Agency should review the equah~ of information released to theshort-hsted contractors, in case of legal cha~enge.

Customer aspects

11 The Agency should, in the transition phase between the award of contracts andthe contractors assuming fti responsibihty for the business, monitor closely thelevel and extent of service provided to confirm that contractors can dehver thequahty of service the Agency have agreed to provide to their customers.

12 The Agency should ensure that a sufficient number of trained staff are avaflableto monitor contractors’ performance.

13 The Agency should estabhsh performance measures to show that changes to theservice required by customers are introduced in an appropriate level of detafl,in the timescale required, and at minimum cost.

14 The Agency’s Customer Service Managers shmdd re~arly constit customers toensure that customers’ needs continue to be met over the fife of the cOntiactsawarded.

Contractual matters

15 The Agency should include provision for non-financial remedies in the contracts.

16 were contracts are let to subsidia~ companies, the Agency shodd obtainguarantees from parent companies, before the handover of business, that theservices will be maintained.

17 To minimise any disruption to continuity of service which may occur if acontract is terminated early, the Agency shotdd devise a plan to cope with sucha “catastrophic”’ event, The plan woutd include the arrangements fortransferring business to other contractors and other locations.

28

INFORWTIONTECHNOLOGY SERVICES AGENCY:OUTSOURCINGTHE SERVICEDELIVERYOPERATIONS

Appendix 2The risks involved inoutsourcing

Duriog the course of their examination the National Audit Office assessed theAgency’s management of the outsourcing against the foUowing key questionsrelating to value for money

Planning the outsourcing

.

.

.

.

.

is the business to be outsourced ade~ately scoped and defined?

are the objectives of the outsourcing correctly identified?

are the in-house costs of dehvering the business to be outsourced adequatelycalcdated?

W adequate competition be generated tiom credible contractors?

does the outsourcing management team have the right numbers and mti ofSkius?

The short-tisting of potential contractors

. are there appropriate evaluation criteria?

. are there adequate safeguards against corruption or bias in the evaluation?

. is there sufficient expertise on the evaluation team?

Negotiating the contracts

.

.

.

.

are customers’ needs translated into business re@ements?

are measures of contractor performance defined?

are appropriate penalties for unsatisfactory contractor performance includedin the contracts?

is the Agency outsourcing protected against the contractors making excessiveprofits?

29

INFOMTIONTECHNOLOGYSERWCESAGENCYOUTSOURCINGTHESERWCEDELIVERYOPEWTIONS

c are the contingency arrangements that wotid apply in the event of disastersdefined?

● are there adequate safeguards against the commercial failure of thecontractor?

. are termination arrangements specified?

. are there adequate safe~ards to protect tbe confidentiahty of dati?

. are there appropriate arrangements for the control of assets?

. are there plans for transferring staff in an orderly fashion?

. is adequate audit access protided for in the contracts?

The evaluation of best and final offers

. have the evaluation criteria been tested thoroughly?

. have the contractors’ price proposals, and their experience in dehveringequivalent business, been tested thoroughly?

. are there safeguards against corruption or bias in the selection ofcontractors?

. is there stilcient expertise in the evaluation teams?

. are there safeguards against the possibih~ of legal cha~enge by thecontractors?

Contract award

● are there adequate skills in the negotiating team?

. is the significance of contract terms properly assessed?

. are there safeguards against disruption to existing business prior to thehandover of business to the successfd contractors?

Contract management after the handover of business

. are there adequate arrangements to manage the contracts after award,including performance monitoring and price control mechanisms?

30

INFORWTION TECHNOLOGY SERWCES AGENCY:OUTSOURCINGTHE SERVICEDELIVERYOPERATIONS

1

2

3

4

5

6

7

8

9

10

Appendix 3The criteria used by theAgency to evaluate potentialsuppliers’ final offers

Comphance with minimum business re@rements

Functional characteristics of the bid (does the potential suppher understand therequirement? Is the proposal complete, practical and flexible?).

The potential suppher’s track record in providing similar semices.

The potential suppCicr’srecord in absorbing an estabhshed informationtechnology facihty, and their plans for doing so in this particular case (withparticdar emphasis on effecting a smooth transfer of staffl.

The potential suppher’s record in respect of cost effective change management(how wiU the contractor cope with any changes in business requirements thatmay prove necessary, and at what cost to the Agency?).

The Eketihood of continui~ of supply for the Agency’s present and future needs(do the potential supptiers have business and financial stabihty, do they haverelevant registration to accepted quahty management standards, are theirmanagement structwes acceptable?).

The potential suppher’s record of working effectively in a multi-suppherenvironment (does the contractor work effectively with other contractors?).

The abihty of the potential suppher to offer future benefits through theexploitation of new information technology,

The potential suppuer’s Hkely contribution to competition (what are thesuppher’s range of products and services, and its pohcy for growth?).

The overaU balance betieen services and potential supphers (are the suppherssensitive to the Department’s and Agency’s business needs? Were do theDepartment and Agency stand in relation to other customers of the suppliers?).

31