By Tony Collins
The costs of IT outsourcing at HMRC have soared despite a well-written contract that promised large savings. When, as Inland Revenue, the department first outsourced IT in 1994, annual IT costs were around £100m. Now it has emerged that HMRC’s annual IT spending was running at more than £1bn between April 2011 and March 2012. Only some of the 10-fold increase is explained by new work.
Are there lessons for Barnet, Cornwall and other public authorities as they ponder large-scale outsourcing, given that HMRC did almost everything right and still faces a costly contractual lock-in to major IT suppliers until 2017 – a 13-year outsourcing contract?
HMRC has made some extraordinary payments to its outsourcing suppliers since 2011 – more than mid-way through a 13-year contract.
HMRC figures collated by former Inland Revenue IT employee and now payroll specialist Matt Boyle of Research4paye show that HMRC paid its “Aspire” IT partners £964.2m in a single year, between April 2011 and March 2012.
HMRC paid a further £42.6m of invoices from Serco for one year of website development and support. These figures do not include all of HMRC’s IT costs between April 2011 and March 2012, such as invoices from Accenture for maintenance fees and for work relating to Customs.
IT costs soar
1994. £100 annual IT costs. Inland Revenue first outsources its 2,000-strong IT department to EDS. The annual cost of the 10-year contract is about £100m a year according to the National Audit Office.
2004. £250m annual IT costs. The end of the EDS contract. HMRC’s annual IT costs have risen to about £250m a year (National Audit Office figure).
2004. £280m annual IT costs. Capgemini wins from EDS a new 10-year HMRC outsourcing deal called Aspire (Acquiring Strategic Partners for the Inland Revenue). Capgemini’s main subcontractors are Fujitsu and Accenture. Capgemini’s bid is for £2.8bn, an average of £280m a year.
2005. £539m annual IT cost. Inland Revenue merges with Customs and Excise to form HMRC which takes on £1bn Fujitsu IT contract from Customs. The first year of the Aspire contract costs £539m, nearly double the expected amount. The NAO blames most of the increase on new work.
2007. In return for promised savings of £70m a year from 2010/11, HMRC extends Capgemini’s contract by three years to 2017. There’s an option to extend for a further five years.
2010. £700m annual IT costs. Under FOI, HMRC releases a statement saying that the Aspire annual contract costs are running at about £700m.
2011/12. £964.2m annual IT cost. HMRC’s list of invoices from its Aspire suppliers for one year between April 2011 and March 2012 add up to £964.2m. A further £42.6m is invoiced by Serco for website development and support. This puts HMRC’s IT annual outsourcing costs at 10 times higher than they were when Inland Revenue let its first outsourcing deal in 1994. Some of today’s HMRC systems pre-date 1994 [BROCS/CODA].
Aspire – a good contract?
It appears that HMRC did everything right in its Aspire contract. Indeed the National Audit Office has found little to criticise. Aspire is committed to “open book”, so Capgemini, Fujitsu and Accenture must account for their costs and profit margins.
The contract has some innovations. The suppliers’ margin is retained by HMRC until trials are successfully passed. Even then 50% of the margin is retained until the final Post Implementation Trial about six months after implementation.
Charges under Aspire are split into two categories: “S” and “P”. The former is mainly a commodity pricing arrangement with unit prices being charged for all service elements at a commodity level (e.g. per Workstation, volumes of printed output etc). The charge to HMRC will vary by volume of demand for each service line.
The ‘’P’’ series charge lines are charged on a man-day basis. Application development and delivery is charged mainly on what HMRC calls an “output basis utilising function points“.
Where IT spending goes
There are more than 800 invoices from Aspire covering the year from April 2011 to March 2012. Some of the invoices are, individually, for tens of millions of pounds and cover a single month’s work.
The invoices cover services such as data centre output, data centre operations, systems software maintenance, software coding changes, licences, IT hardware and data storage.
For some of the Aspire invoices HMRC gives a brief explanation such as £57.6m – “June monthly payment for development and support”. But some of the biggest invoices have little explanation:
May 2011: invoice for £24.7m – IT Software. A further invoice of £61.7m – “data output prod”.
June 2011: invoice for £55.8m – “data output prod”. A further invoice £56.8m – “data output prod”.
On top of these payments HMRC paid about 24 invoices of management fees in the year. Typical monthly invoice amounts for Aspire management fees ranged from about £390,000 to £2.9m.
There are dozens of Aspire invoices in the year for IT software changes to support day-to-day HMRC’s business. Quite a few of those invoices for software changes are each for tens of thousands of pounds but more than 30 invoices for IT changes in the year 2011/12 each bill more than £100,000. The biggest single invoice in the same year for software changes to support day-to-day HMRC business is £469, 964 in December 2011.
Matt Boyle collated the figures on HMRC’s IT spending from spreadsheets published by HMRC . All credit to Francis Maude, the Cabinet Office minister, for making government departments publish details of their invoices over £25,000.
And credit is due to Matt Boyle for collating and totalling HMRC’s IT-related invoices. Boyle says he is surprised at the high costs of Aspire. He is also surprised that the contract excludes web development and support.
HMRC appears to have done nearly everything right and still its IT outsourcing costs are soaring, apparently uncontrollably.
It is hard to avoid the conclusion that the department and taxpayers would have been much better off if Inland Revenue had not outsourced and instead spent the millions it pays annually on, say, management fees, to building up an in-house IT force and expertise.
Central government seems now to shun big outsourcing deals but local authorities including Barnet and Cornwall are at the stage Inland Revenue was in 1994: they are considering saving money by outsourcing major IT and other services to one main supplier.
If they learn from HMRC’s experiences – and the sums it has had to pay to outsourcing partners – it may take a little of the sting out of HMRC’s enforced prodigality.
[It may also be worth mentioning that some including Boyle ask how it is possible to credibly justify a spend of £46m in one year on a website.]
£46M for a web site hmm!
Contract not making any savings hmm!
HMRC did everything right Hmm!
Are we nothing but rabbits caught in the headlights of BIG IT? How can a website cost that much? Even if you build / deploy on a state of the art software / hardware platform for application and server it’s going to be sub-£4m with a capability of processing in excess of 200,000 transactions per second (these are a supplier’s figures not mine and I am not going to name the supplier). Ok then you have to host it somewhere; well that little lot will fill two full racks, now double it for resilience that’s £8m for all hardware and software. Nobody in their right mind can think that £38M is what it costs to specify and build a web site for HMRC. At the end of the day what does it have to do over and above provide information? Gather a bunch of data perform some business process logic based on entered values and spit out an answer of some form. I reckon that could be done for a fraction of the cost especially if an expedient approach was adopted.
What controls / penalties were in place in respect of cost savings? I suspect none. If they were in place they have clearly not been acted on.
Who made the claims that these savings could be made? Are they still in post?
If HMRC did everything right and costs still soared the only conclusion which can be drawn is that the processes HMRC went through are flawed or they were not executed correctly. What other explanation is there?
And still we roll on. I have great admiration for your perseverance Tony and co but what can you achieve? You seem to be casting pearls before swine. You present the blindingly obvious and nothing happens. I heard Ed Milliband on Radio 4 yesterday talking about Democracy as being the only way to deliver accountability. I would agree and his father would be proud. However, given this little debacle and that of NPfIT (which seems remarkably healthy ) we must be living in a dictatorship.