THE BLOG

The Outsourcing Age: How the Government Wasted £10Billion

13/02/2014 09:51 GMT | Updated 14/04/2014 10:59 BST

Launched in 2002, the national programme for IT in the NHS (NPfIT) was designed to reform the way that the NHS in England uses and delivers information. Then Prime Minister Tony Blair promised that it would produce a paperless care system and reshape the NHS.

The Labour Department for Health, eagerly signed lucrative contracts with Japanese firm Fugitsu, US IT solutions powerhouse CSC (computer Sciences Corporation) and British Telecom, who all promised ambitious deliverables and short time frames.

Twelve years later and we are still nowhere near an adequate IT system for our health service.

Suffering from rushed and ill-managed contracts NPfIT has instead been entrenched in legal action, spiralling costs and contractual failings for the last decade.

The extraordinary incompetence and debacles of the project - which amongst other things saw Fugistu's senior management abandon the contract, and a rare criminal prosecution against four former iSoft (the company partnered with CSC in the UK) directors by The Financial Conduct Authority - would almost seem comedic was it not for the gargantuan waste of public funds involved:

Originally expected to cost £2.3bn over three years, the total cost is now estimated by the National Audit Office to be over £10bn. Worst of all most systems will likely remain undelivered.

It's an amazing set of circumstances, that nearly four years after the entire programme was decommissioned the Cabinet Office is still negotiating its contract dispute with CSC.

Meanwhile CSC is experiencing bumper profits, has recently signed a £400m contract with another government department and is busy selling its NPfit software (specifically its Lorenzo programme) in other countries.

So how did such a situation unfold, and what are its implications for the future of large public sector outsourcing projects.

Lack of contractual accountability

Despite the initial optimism surrounding NPfIT it is now clear that the programme was doomed from its conception.

There is a sense that CSC knew that they would not be able to live up to their contract. The deadlines and deliverables were extraordinarily ambitious. However a culture seems to exist within the outsourcing industry that encourages reckless pitching.

Where mammoth sized contracts are at stake. Teams are put under considerable pressure to secure the contract before rivals step in. The mantra is clearly 'sign first and then worry about the details'.

Exactly the same situation emerged for G4S at the 2012 London Olympics. As with CSC the company jumped at the enormous size of the contract and then turned around several months later unable to fulfil its obligations.

This clearly needs to be addressed. It is surely a ridiculous system that large-scale contractors are not properly scrutinised before beginning public sector work.

Not only does such lack of scrutiny and accountability mislead NHS stakeholders and taxpayers but it also misleads shareholders of companies like CSC.

Blissfully ignorant CSC shareholders watched with glee as share prices rose on the back of the Lorenzo contract, only in 2011 to be stunned when the company admitted that it would miss its first payment milestones. Shares fell 14.3% on the back of the revelations.

We must set better regulation and improve scrutiny before handing out public sector contracts the size of NPfIT, so that no company is able to dupe our government and its shareholders into thinking it is capable of contracts it is not.

Systemic failures within the Department of Health

The failure of NPfIT was not just a fault of its contractors. It is now clear that the Department of Health suffered an equal dose of delusion and over-ambition when it concocted the contract.

One of its major failings was not appreciating the complexity of the tasks it had set.

The Public Account Committee (PAC) have conceded that the DOH failed to:

"recognise the difficulties of persuading NHS trusts to take new system that had been procured nationally, and to get people to operate the systems effectively even when they were adopted".

In the case of NPfIT the departments demand that 220 trusts be made contractually available turned out to be a woefully unrealistic number and one seemingly dreamed up out of thin air.

The main problem with creating contractually unrealistic demands is that it undermines your negotiating position should you wish to exit the contract:

In the case of NPfIT, The Department for Health was unable to make 160 of the 220 trusts available to CSC, this meant that they were unable to honour their end of the contract weakening their negotiating position.

According to The House of Commons Committee of Public Accounts in a recent report on the Dismantling of NPfIT, The Departments demands were "completely unrealistic" and are largely responsible for the on-going costs of the Lorenzo system of £572m.

NPfIT should provide a stark warning about creating such enormous single contracts, and sticky contractual obligations in the future.

Go forth and outsource

Despite the scare of NPfIT the UK public sector outsourcing market continues to thrive.

As the UK government looks to improve value and streamline costs they will continue to embrace outsourcing as a practical and efficient mechanism for improving public services in an age of austerity.

According to recently released figures from the ISG the UK is now the biggest outsourcing market outside of the United States, with the number of outsourcing contracts taken out in the public sector increasing 47 per cent year on year since 2010.

Should we blacklist CSC from future contracts as Margaret Hodge would like. No, the failures of NPfIT were as much the Department of Health's fault as they were its contractor. Better regulation and contract scrutiny should be our focus moving forward.

But neither should we ignore the £10 billion our government(s) have managed to waste over the last decade.

So let NPfIT be a lesson as we go forth into this brave new outsourced world. Otherwise far from streamlining costs we may achieve the opposite.