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Yard's Measure

Yard's Measure

Former UK Inland Revenue Service CIO John Yard has managed one of the largest outsourcing contracts in the world - twice!

Very few tax inspectors can boast a CBE. Nor can many outsourcing consultants. And the number of CIOs thus gonged you could count on one hand. Which makes John Yard more than your average tax inspector, consultant or CIO.

In fact, he is the recently retired director of business services for the UK's Inland Revenue Service, a role that incorporates that of CIO. He has overseen not only one of the largest IT operations in the UK public sector, but also managed the largest outsourcing contracts ever seen in Europe, if not the world . . . twice!

In December last year, the IRS announced it had awarded the contract for management of its IT activities to Capgemini. The contract is massive - £3 billion (approximately $A8 billion at current rates) over 10 years, with an eight-year option. And it brings to an end a 10-year relationship with EDS and Accenture, which in its own right was worth approximately £2 billion.

The decision marks a milestone in the IRS's evolution to a strongly e-based organization, and follows two years of media scepticism (or even cynicism) as to how successful it would be in making the transition.

The First Round

The decision also marks a milestone for Yard himself: a manager who has sent thousands of public servants into the private sector is now making that same transition himself as an IT outsourcing consultant.

A career civil servant who joined the IRS immediately after school, Yard held various positions including that of Tax Inspector, eventually getting into project management as an area of interest.

About 10 years ago he was asked to run the IRS's in-house IT operations while it underwent its initial outsourcing process, and eventually to oversee the transition to EDS. That experience firmly under his belt, he was then asked to manage the relationship with the new supplier.

The project that EDS won was initiated and originally fulfilled during the Conservative Party government's move to privatize many aspects of public sector activity.

Yard is philosophical about the synchronicity of the government's policy and the IRS's decision to outsource. "The interesting thing about that was, people said you've just done this because it's a political move. Actually, we thought quite carefully about how to best deal with our problems with IT before these pressures were coming [from government] about outsourcing. So when that came along to push [services] out to the private sector as a political initiative, it was the catalyst for what we would have liked to have done earlier. It was actually a management drive and the political move was a lovely peg to hang it on."

That "peg" resulted in what was, at the time, the largest IT outsourcing contract in the UK, if not the world. The IRS employs 70,000 people across 600 offices spread over the UK, with 200 legacy systems. The outsourcing contract resulted in the transfer of 2200 IRS IT staff to EDS.

The initial 10-year contract was for £1 billion, and covered all of the IRS's IT activities except for strategy and some in-house expertise. Eventually, as the volume of activity increased in line with a range of e-government moves and the rise of the Internet as a major collection tool, the deal rose to £2 billion by the end of the contract.

This caused some media speculation of a contractual blowout. Yard is more sanguine.

"The deal that we did was on the basis of a certain amount of IT - the volume of IT that was transferred across in 1994 - with a set of unit prices for that volume. If the volume went up, so the price would go up. All that was happening was that over the 10 years the amount of IT that we were giving them went up - more work within the original activities. That's not surprising considering how IT has developed over the last 10 years."

Yard says that at the time they did the original deal, the Internet was not seen as something that would be used by government. Now, of course, he says that it has become "a major, major way of which all organizations do business . . . I think the Internet and 'e-' has become the biggest change around.

"The important point was: did we get another billion pounds worth of IT out of them? And the answer is yes."

To ease staff worries about the transition, Yard made a series of visits around the country, meeting with focus groups of 20-30 staff so they could get their worries off their chests.

In 1999 the outsourcing contract was supplemented when the IRS took over the activities of the Contributions Agency, which required Yard to oversee the integration of a £145 million outsourcing contract with Accenture to cover the national insurance system.

Both the EDS and the Accenture contracts were due to expire in 2004, and despite some media assessments that the suppliers were too heavily entrenched in the IRS environment, they lost out to Capgemini following an intense and expensive 18-month competition.

The relationship with EDS/Accenture had been good, Yard insists, with little in the way of untoward misadventures (despite a reported 100 incidents between 1994 and 1999 and media conjecture that the relationship was not always happy).

"If you're going through a period of change, which the IRS has been going through for the last 10 years or so, there are inevitably a whole set of tensions that crop up. In the course of that relationship there will be ups and downs."

Nevertheless, he has nothing but praise for the way EDS approached the competition for the second phase, and the eventual transition to the new partner.

Competition for a changing climate

The second phase of the IRS's outsourcing contract, this time to represent £3 billion pounds over 10 years (with a possible eight-year extension), involved a great deal of thinking about where the organization wanted to go in the future.

"I think, much as in Australia, there is huge pressure to improve public services in the UK, to invest more of the taxes we collect in public services such as health and education and fighting crime, and therefore there is a constant drive for the Tax Authority to improve its efficiency.

"I think you're ahead of the UK in Australia in the way that you use 'e-' to communicate and do business with government. I think the more that you do that, the more you're able to save employing people in government to do clerical work . . . people [entering data online] correct their own mistakes, which I think is to the benefit of all taxpayers," Yard says.

"We wanted to transform that business, and that's what we were looking for when we went to the market a second time around."

The tender was to cover, again, all of the IRS's IT activities up to but not including the terminals, which would remain in the IRS's hands. It would also involve the transfer, should a different supplier be found, of 3500 people.

The IRS's going-to-market for the second round began in 2002 with Yard visiting the CEOs of the top 14 potential bidders, explaining what was required. He admits that some in the industry, perhaps fuelled by a sceptical media, were concerned that the winner of the second round would be a fait accompli with the incumbents restored for another 10 years.

Convincing them was not going to be easy, particularly considering the high cost of tendering and concurrent media assessments, such as: "What bargaining power can the Revenue realistically muster, given that EDS and Accenture know their position is unassailable?" (Computer Weekly [UK], July 18, 2002).

"Partly because you get such coverage from people who don't know what's going on, you have to make the effort and go out and tell the market what's happening - that this is a win-nable bid. And that's got to carry some conviction," Yard says.

In order to allow the industry to show what it could do, Yard set up a competition (he prefers this term to "tender") that would put bidders through a practical test. The competitive process was given the name ASPIRE, for "Acquiring Strategic Partners for Inland Revenue". This is a title that Capgemini has now taken up, with little regard to the definition, for its IRS team.

Apart from written bids and reference sites, ASPIRE involved a "design and implementation study" using a real business problem. Competitors first would have to describe how they would go about dealing with that problem, and then had eight weeks to deliver the fundamentals of a two-year project to solve it.

This eight-week period was spent in an open plan office with all the competitors there at the same time. The project required some collaboration, so it was seen as a way of assessing how the various teams would go about the project, the group dynamics that evolved and how secretive or open they would be. A live service was provided to actual (though not live) data, which occasionally went down on purpose to further test the reactions of people.

In addition, the IRS set up a couple of one-day seminars for each of the competitors with a particular problem that was given to them in advance to see what their approach would be. "We were less interested in their immediate response - which was a half-hour presentation or whatever - but in the debate that took place for the rest of the day, as to whether they really understood what they were talking about."

Yard admits that some of the judgments made from the various aspects of this process were fairly subjective.

"At the end of the day, you've got to work with these people. When you enter into an outsourcing deal you are fundamentally entering into a relationship. Everyone can get on when everything's going smoothly and swimmingly, that's easy-peasy. It's how you manage the relationship when things don't go so well. You can throw your toys out of the pram and nobody can talk to anybody, or do you say: 'We've got a problem what are we going to do?' Do you bring out a problem early or do you hide it and bring it out late?

"The valid thing is to test the capabilities in relation to what you're trying to do. You don't need to necessarily do something quite as big as we did, but you might want to think about the way that you get some sort of assurance. I don't think reference visits on their own are good enough. You want to relate to the team that will do the work for you, not the team that did the work somewhere else."

The three competitors that made it to this intensive round of competition were EDS/Accenture, Capgemini/Fujitsu and BT/CSC/Schlumberger, with the third team dropping out in mid-2003 (and BT eventually joining the winning group). Yard admits it was probably a pretty expensive exercise for these companies, estimating that each team may have spent upwards of £10 million on the competition. The IRS contributed something towards their costs - Yard will not say how much, although he insists they did get some practical outcomes they could actually use.

Exits and Transitions

Eventually, in December 2004, Capgemini was announced the winner. The media, shedding their early scepticism that anyone bar the incumbents would have a chance of winning, proceeded to doubt whether the transition would be successful.

Yard, again, takes issue with their analysis.

"We had a six-month overlap [for the first half of 2004] with Capgemini working alongside EDS. When we handed the keys over, despite what the various press articles said, I didn't see any saying that it all went pear-shaped on July 1. The plain fact of the matter is that it was totally successful, to the point that people in the business did not even appreciate that the change had taken place."

It was totally successful with the transition of staff as well, apparently, with 95 per cent of the EDS people making the move to Capgemini. "This was helped by the fact that EDS came to the transition in a very professional and positive way. They could have undermined it, but I think it's to their credit that they looked at this and they were mature about it. They recognized that this is a business where things do change."

Yard stresses the need generally to be prepared for a contract's conclusion from the first days of negotiation. Whether you are going to bring it back in-house or re-compete, the fundamental thing is that you have to "think about your divorce before you get married, like a prenuptial agreement.

"The point is you've got to include the basic arrangements that you're going to have for exiting in the original contract." Then you need to monitor the terms of exiting as you go through, "because the world changes; you've got to keep those up to date".

Yard throws in some additional issues to be dealt with, although these are by no means exclusive. For instance, you must understand how much time you will need to exit the current contract and transition to the next. For this, you will need to build in an overlap period. You must also be clear about ownership of assets, such as hardware and accommodation - do they belong to the suppliers or are they yours? You will need to be clear about what happens with third-party contracts - who are they with and how are they to be novated across. And you must have an understanding of ownership of intellectual property and the rights to use IP.

All of these need to be built into the contract at the beginning, not at the end.

Ultimately, though, Yard thinks the IRS experience indicates that the relationship need not be a slave and master approach, but one that adapts to changing environments and allows the client to move on and make necessary transformations.

"It shows that you're not locked in, which is a good thing for the industry. It keeps everyone on their toes.

"You can change direction. But you've got to make the effort to manage that from day one. There are examples of where things have not worked and sometimes it's the supplier, but typically it's because the client isn't strong enough to manage the relationship and provide the leadership that's required to drive these things through."

So now that he is heading into the private sector, what differences does he expect?

"I don't think there are differences between outsourcing in the public and private sector. On the propriety question, civil servants like myself get questioned by public accounts committees, and that's sometimes an uncomfortable experience. But I don't think that's why there's a fundamental difference. All organizations get scrutinized these days. If you are in the banking sector, you're regulated very closely by the financial regulators. You have to be very careful about what you're doing there as well.

"It is much more that government departments are very large businesses, and they need to be run efficiently. And just like private sector businesses, there are some difficult issues there. Overall, what you're looking at is whether those issues get managed in the right way - and are you delivering the results and giving the public the benefit, if you like, as the shareholders in that organization? I think that's very similar to large private sector organizations."

Partner principles

John Yard lays out what he considers to be "Partnership Principles" - generic methodologies that should make initiating and maintaining outsourcing processes an easier process:

» You need to understand what the problem is, so verbalize what you think the other side is saying.

» You need to be very clear about the mechanisms that you have for governance, such as the authorities held by a contract management team and/or a relationship manager. Always ask the questions: why did we do what we did originally (and that's often quite difficult to recall); and what's changed and why should we do what we are proposing to do?

» Share those thoughts with your partner, and expect the outsourcer to say why they might have some issues.

» Get everything in the contract up front.

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