Oral evidence: Managing and replacing the Aspire contract, HC 705

Oral evidence, 29 October 2014.

Witnesses

Lin Homer, Permanent Secretary, Mark Dearnley, Chief Digital and Information Officer, HM Revenue and Customs, and Andrew Levitt, Chief Executive Officer Aspire, Capgemini, gave evidence.

Chair

For greater understanding, we asked for a Cabinet Office representative to join us this afternoon; I was reading the papers last Wednesday or Thursday when I thought, “This is ridiculous. We need a Cabinet Office rep here.” They felt unable to provide anybody so we are inviting them—without any option to say no—to come at 2 o’clock on Wednesday because we need the two bits of evidence together.

Lin Homer

I believe that they have already written to you.

Chair

Only this morning—a hell of a long letter, which I have not even bothered to read because it is so technical. If they had the expertise to write me a letter, I think they had the expertise to come and be a witness beside you, which would have been better. It is one of those irritating things but we will talk to them on Wednesday. This is quite a complicated issue so I hope that we have our brains around it, and we have some very capable people giving evidence. I am going to start with you, Mr Dearnley; you have now been in post for over a year.

Mark Dearnley

Just over a year.

Chair

Have you looked at the predicted costs associated with the transition to a new, smaller contract regime?

Mark Dearnley

Yes. As part of building the business case for the replacement of Aspire, we are modelling all the costs that go into that.

Chair

So what are the predicted costs associated with a transition to a new, smaller contract regime? What are the costs associated with change?

Mark Dearnley

That is in the business case, which is going through approval at the moment.

Chair

What are they?

Mark Dearnley

We were not planning to talk about the business case in detail today because it still has to go through approval.

Chair

I am asking you. A key issue that we all want to focus on this afternoon is not only what is right and wrong about the existing contract, but the challenges of changing. A big question for us, as the value for money Committee, is: what are the costs associated with that change from Capgemini, Fujitsu et al, through to nobody with anything worth more than £100 million?

Lin Homer

It will in part depend on what we decide to do.

Chair

Then give us an idea of range.

Lin Homer

We are putting together a business case at the moment. We still have a while to go.

Mr Bacon

Sorry, when you say “a while to go”, do you mean a while before you have a full business case, or until the Aspire contract expires?

Lin Homer

We would anticipate being clear about our preferred option in the spring of next year. You will understand that there is a degree of commercial sensitivity about that.

Mr Bacon

Will you just remind us when the Aspire contract expires? It is in 2017, isn’t it, but when in 2017?

Mark Dearnley

June.

Mr Bacon

If you had to retender it completely, how long do you think that would take you to do?

Lin Homer

One thing we will be looking at is the various options, but if you were to ask Mark the question about what he thinks the future should look like, one of our—

Mr Bacon

I think I will decide what questions we ask.

Chair

Richard, I want to try to get an answer to my question.

Lin Homer

I think the Chair wants to get back to her transitional costs.

Mr Bacon

The reason why we are interested in the transition is that we are interested in what happens from July 2017 onwards. The Chair and I are on the same page on this. Therefore, with respect, the question is not what the future looks like. My assessment of this is that it would take more than two years to retender a contract like this, so July 2017 is pretty near, actually, and you should be pretty near being in a position where you are able to retender, but, in your words, you are still some way away. You have been renegotiating the 2012 renegotiation, but without any conclusion so far, for two and a half years.

Lin Homer

One of the issues for us is, in looking forward, we would recognise that the Cabinet Office view about how you manage large IT is something we concur with. We are therefore not looking at going forward for a procurement that is the same as the large-scale procurement that we did.

Chair

I understand that.

Lin Homer

That will affect the costs.

Chair

I want to ask you a whole load of questions about transition. The first is, inevitably—rather than renegotiating or even looking at the sort of contract you have with Capgemini et al—renegotiating to get to where the Cabinet Office want you to get to will cost. That process of transition will cost. I want to have certainty from this Committee meeting. Give me the range of where you think those costs will be—just the cost of transition.

Mark Dearnley

In terms of the duration for transition, we think—

Chair

Sorry, the cost of transition.

Mark Dearnley

We are working through, in the business case, the detailed cost and the transformation that associates with it. For the pure cost of doing the commercial and technical part of the transition for the next two years, we have budgeted £5 million this year and £25 million the following year. I emphasise that those are budget figures at the moment. As we are going through the business case, we are reworking those, looking at the numbers of people and all the things required.

Chair

We will come on to Richard’s point. But that is your staff cost. There will also be costs involved in transitioning staff and equipment, and perhaps offices. Right? So what is the broad range of that cost? I also want to ask you another transition cost question, just on that. I understand that you are setting aside £5 million for your own staffing costs.

Lin Homer

And £25 million.

Chair

Then there will be costs in transition involved in transitioning staff and equipment, and in getting hold of the office spaces that Mr Levitt and his organisation currently run.

Mark Dearnley

I can talk to you about the different areas of cost, but each option that we are considering at the moment has different costs associated with it and different models.

Chair

What is the range?

Mark Dearnley

I do not think I can tell you the ranges today, because we are still working through that part of the business case.

Chair

You must have some idea in your brain of what the range is.

Mark Dearnley

We think that by the time we have done the entire transition and look at the run rate for IT within HMRC, the total cost base will have come down more than 25%. But the actual costs of going through the transition are what we are working through, because, as you say, each option has different bits—whether there is TUPE involved, whether we are bringing people in-house, whether we are moving to other locations, the building element. On top of that, we have the transformation of the applications, because through this transition we need to rationalise applications, as we have too many today. Also, particularly in the area of hosting, just moving what we have today into a different world does not actually satisfy the needs of the Cabinet Office rules or anything we want to do. In that area we have quite a lot of infrastructure transformation work to do.

Mr Bacon

I am going to pursue that for a second. You are saying that because of the £100 million limit and because the current costs of hosting are £187 million, just switching it would not help or work—is that what you are saying?

Mark Dearnley

If I understand the rules correctly, the £100 million is for things other than hosting. The rules on hosting are to re-bid it every two years. But I know that we do not want to move forward with what we do today. Today we have very dedicated infrastructure. We actually agree with what the Cabinet Office says; we need to move it into the cloud and be able to leverage multiple clouds so that we can better manage our peak loads in areas like the SA peak and the tax credits peak.

Chair

Before you embark on this—I am sorry to pursue this—there seem to be costs associated with doing the work within HMRC. There are costs associated with transitioning people, equipment and property, but there are then other associated costs. I will give you a final opportunity to give us a figure or range. This is all going to be implemented in July 2017, in two and a half years’ time. Are you telling me that you cannot give me a range today?

Mark Dearnley

The range is not accurate enough for me to give you it today.

Mr Bacon

When will your business case be ship-shape?

Mark Dearnley

The business case is going through the internal governance processes at the moment. We then go through a phase of external validation of it, which is just beginning, and we expect to have it ready for Christmas. That includes certain parts of the approval process within HMRC and then the Cabinet Office and HMT. We expect to be talking publicly about it early in the new year—in the spring. We need to do that to give not only contractual certainty but also certainty to the thousands of people involved in this, so that they know what will happen over the next few years and do not feel concerned for their own careers.

Chair

Will you meet the 2017 deadline?

Mark Dearnley

Yes.

Chair

Are you sure?

Mark Dearnley

Yes.

Mrs McGuire

With a major contract like this, regardless of which model you adopt, what is your anticipated lead-in time before you move out and start talking to suppliers?

Mark Dearnley

We expect to be talking in the spring about everything we want to do over the following two years.

Mrs McGuire

Have you factored in the reaction of those you will be approaching to deliver the service to HMRC? What is your anticipated lead-in time from the suppliers’ point of view?

Mark Dearnley

We know that the suppliers are already watching us. They know the dates of the contract. In our modelling, if we can get out in the spring and tell everyone about it, we believe that they have plenty of time over two years—

Chair

If?

Mark Dearnley

When.

Chair

Are you telling the Committee that you will not extend the contract with Capgemini beyond 2017?

Mark Dearnley

We have no plans to extend it.

Mr Bacon

Mr Levitt, is it right that this is 64% of your UK public sector revenues? I have read different numbers—90% and 64%.

Andrew Levitt

It is approximately 60%.

Mr Bacon

And it is 9% of your global revenues?

Andrew Levitt

It is slightly less than that, but of that order.

Mr Bacon

Okay. In two years’ time, you will apparently lose this because it will be given out in smaller chunks to other people. What are you going to do?

Andrew Levitt

The first point is that Capgemini is a large global organisation. It is very resilient and we have been aware of 2017 for a long time. It has all been factored into our plans. The second point, as Mark said, is that the Aspire contract will go out to tender in some form. We are not party to that planning at the moment but we would fully anticipate bidding for work ourselves.

Chair

We have talked about your costs and your inability to tell us about those, but have you factored risk into the costs of transition? If we look at the record of PAYE—that was just after you arrived, Lin, so you will remember that the chaos in transitioning to the new system meant that we effectively lost £1 billion in revenue. There are obviously massive risks in this undertaking. What is your estimate of the potential loss as we move away from Aspire to the new world?

Lin Homer

I do not think that we are anticipating a loss like the one we suffered with NPS in relation to yield. We have expectations—

Chair

You may have expectations. All I would say to you—the realist thing: you are doing a massive thing here. When, just even trying to do PAYE—I do not know if that was part of this contract; presumably it was—you lost £1 billion, I cannot believe that there is not a risk that we will lose money out of the £500 billion we currently collect through the Aspire contract during that transition. I just do not believe it, and I think you have got to have a figure in there for risk.

Lin Homer

We will definitely have, and indeed I think the NAO Report has, areas of risk, and we will definitely have a risk register and look at that. I think the NPS example is not particularly relevant, because I think the evidence that was given to you at the time was that HMRC accepted that that was not a result of technology issues between ourselves and Aspire. The RTI contract, which is more recent and which we have talked to you about on a number of occasions, was something we did together; and that has advanced our collection of tax by bringing more money in-year than the previous system did.

Chair

Listen, so far, according to this Report, only 3% of your IT expenditure you have put out to contract beyond the Aspire contract. I mean, you have got no ruddy experience of this at all.

Lin Homer

That is not true.

Chair

I cannot believe—you ought to, if you were sensible with business planning, put in a risk figure of potential loss of revenue, and you ought to be thinking of strategies to mitigate it, and if you are not doing that, that becomes a criticism from this Committee.

Lin Homer

You might let Mark tell you of the work we already do, because it is not true that it is all done through Aspire.

Chair

Well that is what this Report tells us.

Mark Dearnley

I think there are two elements to both what we do on a day-to-day basis, and also what we are doing to start bringing control of the projects in-house. First, on a day-to-day basis, actually 34% of all tax is brought in by systems that civil servants already run, and that is about to go up to 40% of the in-sourcing of CHIEF at the end of this year. So from the original Inland Revenue merger actually we kept the civil servants that ran that, and they bring in all of that revenue. So we do have a significant number of people—there are 300 of them—who are very experienced in running high-reliability platforms.

Chair

They do the coding.

Mark Dearnley

They do coding, yes.

Chair

Quite. Big deal.

Mark Dearnley

Yes, proper coding. They do proper coding, proper system running and proper administration, and if those systems do not work the ports stop, the ferries stop. It is real stuff. On the projects, I would agree, this is a really important part of our transition. We have, over the last year, started to bring more both design and project work inside to HMRC, under our control. We now have, as of this year—because obviously this Report looks at last year: 40% by volume of all projects are now run by HMRC staff. These are largely in the digital space, because obviously that is our main growth area. Now, as of right now, that is still only 20% of the spend, because a huge proportion of our spend is on infrastructure and the projects around infrastructure, and they are still with Aspire; but that will start to move as we move more infrastructure towards a cloud-based model. The other area that I think comes out very clearly in the Report is getting control of design, because it is the design that drives the cost base, and when we look at what we think will actually reduce costs over time, it is the use of cloud, and better design. We have grown and developed already, and we have more work to do over the next two years, our CTO function—our technical design function, so that more of the architecture is owned by us, more of the designs are certified by us. Those three things: we have got the experience of running stuff, which we have to grow; we have got more and more control we are taking of delivering projects; and on design, which, if we get that right, will be the thing that changes the cost base and the service levels—we are doing more of that ourselves; and digital has been the vehicle that has helped us grow that.

Mrs McGuire

And all this is to be done in slightly over two years.

Mark Dearnley

Yes, we are a year into the project already on that one.

Mrs McGuire

Yes, but at this point, looking forward, you are talking about the spring, and all of that is going to be there.

Mark Dearnley

That gives us two and a half years. That is right. I would say, we have 1,500 people in HMRC in my Department today. There are some really good people that we already have, based on that history of doing things, and we have a lot of work to do with growing the team from the bottom, bringing in a lot of apprentices and graduates; we are growing the team at the top, bringing in experience both from the civil service and from industry, and then the area, actually, we start recruiting in the next couple of weeks, is our middle management layers and our technical experts to actually grow that capability. People are a really important part of this.

Chair

I think we all accept that and we will probably ask some more questions about people, but I just want to get a feel for something before the Comptroller and Auditor General comes in. There is a huge risk here. It is £500 billion of revenue. I cannot believe that in this whole redesign you have not thought about the risk to revenue or how much it is and that you have not thought about strategies to mitigate. Can you answer that bit of the question? You answered the other bit.

Mark Dearnley

We do worry about operational continuity—

Mr Bacon

That’s a relief.

Mark Dearnley

It is very high on the risk register and we are looking at not only the day-to-day, but also the key business events that we have every year and at ensuring the timetable around those. It is one of the reasons why it is very important to us to get out early next year to the people involved in running Aspire today to give them clarity about what is going to happen over the next few years. What we really need is some of the really skilled people in Aspire today to continue working with HMRC, whether still with Capgemini, with other people or with us, depending on exactly how the contract is broken up and who wins it. We need to ensure that those people want to come on the journey with us.

Mr Bacon

It sounds a little like the reorganisation of the health service. There are lots of people whom you need and you make them move around and put different labels on them, but the same skills are still required. It sounds to me like you are doing this because you have to and because the Cabinet Office rules say so. Are you saying that you wouldn’t have to do it if you didn’t want to, Lin? You were shaking your head then.

Lin Homer

No, absolutely. We think it is the right thing to do.

Mr Bacon

That doesn’t answer my question. I didn’t ask, “Do you think it is the right thing to do?”

Lin Homer

We are not doing it because we are being made to do it by the Cabinet Office.

Mr Bacon

If you didn’t want to do it, would you not have to do it?

Lin Homer

Yes. I think we—

Mr Bacon

Yes, you would have to do it.

Lin Homer

No. I think we have a good—

Mr Bacon

I thought this was a mandate.

Lin Homer

There are 19 red lines that are drawn by Cabinet Office. I know that Liam has set some of them out in his letter. There are provisions for—

Chair

We have not had the opportunity to read his letter. We only got it this morning.

Lin Homer

There are provisions for there to be exceptions. We don’t think that we need any or many, because we think that this is what we want to do. I am confident however that our working relationship with Cabinet Office is strong enough that if we made a strong case for an exception, based on Mark’s technical and professional knowledge, that we would get it. I don’t think we would be forced into an area when we were technically and professionally unsure that it was the right thing to do. The reason why I am confident about that is that Cabinet Office and Treasury colleagues are completely built in to the steering-group mechanisms that Mark has put in place to plan the future.

Mr Bacon

Mr Dearnley, you mentioned that you have 1,500 people. The Report says that 95 of them work on Aspire. Mr Levitt, I think you have around 2,500 people in Capgemini working on Aspire.

Andrew Levitt

2,500 at Capgemini.

Mr Bacon

And then other people work for the primes and other smaller subcontractors. Of the 4,000 in total, roughly how many of the other 1,500 are at Fujitsu, how many are at Accenture and how many are at the other 348 subcontractors?

Andrew Levitt

Most of the 1,500 will be Fujitsu.

Mr Bacon

How many of the 1,500?

Andrew Levitt

I would estimate 1,400. If you look at the 4,000 people, the majority are Capgemini and Fujitsu.

Mr Bacon

Then you have roughly 100 at Accenture.

Andrew Levitt

Of that order. I am happy to come back with precise figures.

Mr Bacon

Please do. We would love a note. Underneath that, there are some 350 subcontractors who are employed to do specific things.

Andrew Levitt

Correct.

Mr Bacon

In the management of that process of, first of all, procurement—when one of the 350 subcontractors is asked to do something and it is commissioned and then done—who does that? Is it mostly people in Capgemini or in Fujitsu?

Andrew Levitt

It is both. Within both contracts we have subcontractors that we manage, so there will be a split between the two with probably more in Capgemini than in Fujitsu, but they are directly managed by Capgemini—

Mr Bacon

Of the 3,900 people—2,500 in Capgemini and 1,400 in Fujitsu—how many are engaged in the process of dealing with the subcontracts?

Andrew Levitt

I don’t have that precise detail.

Mr Bacon

Give me a rough idea.

Andrew Levitt

I could not do that.

Mr Bacon

If Mr Dearnley is going to be doing it in the future—he has 95 people working on this at the moment—knowing that number is important. Plainly, the 95 is not going to go up to 3,900, is it, Mr Dearnley?

Mark Dearnley

No.

Mr Bacon

So, is it 96 or is it 3,899 or somewhere between? Presumably it is somewhere between one and the other.

Andrew Levitt

I could not give an answer to that here today. What it does highlight is understanding the plan. We do not have access to the plan, probably for good reasons given the competitive nature, and also the transition. Clearly, the question you have posed is something that needs addressing. It is part of a well-thought-through transition plan, which Mark and his HMRC guys will need to work through.

Mr Bacon

Mr Dearnley, all that management skill currently sits either with Capgemini or with Fujitsu for the most part. In this new world where there are going to be far more suppliers, the need for the management of that skill, which you have effectively currently got outsourced with these two primes, is going to sit with you. Mr Levitt said that he needs clarity on this, and I am not sure from what you have said so far that you have got clarity on it yet.

Mark Dearnley

We have a model that shows exactly—

Chair

If you have got a model, you have got costs.

Lin Homer

And opportunities to make savings.

Chair

I want to know the costs. Why will you not share the costs with us?

Mr Bacon

Are you are prepared to talk about the savings, but not the costs?

Lin Homer

What we would say to you is that the overall ability to run this at a significantly lower cost as we go forward—

Chair

Well, tell us the costs of transition.

Mr Bacon

I would like to come on to costs, but let us stick with the management, the people and the skill. At the moment it sits in one place, and under your new model it will sit in a new place. The Chair wants to know how much it will cost. I want to know how much of it there is. So we want to know about quantity and cost, and then we might come on to another question: quality. You have already said the skills are going to continue to be required, even though they might be rebadged, so let us start with the people. Roughly how many people do you think you will need on top of the 95 you have got already?

Mark Dearnley

I will do this from memory. As I say, there are different options, different ways. Because of hosting changing and moving to cloud, the Fujitsu bit would not necessarily be included in this. What we see is a model where the number of people goes up significantly during the transition, and then post-transition comes down, but to about 50% more than we have today. We will repurpose a lot of people because they will not be managing the Aspire contract.

Mr Bacon

In other words, you might end up with 150.

Mark Dearnley

We might.

Mr Bacon

But you expect that there might be a bit of a peak before you drop down.

Mark Dearnley

There is also a different skill set as well that we will take through. From managing contracts to actually doing what is essentially post-merger integration works—repurposing all the contracts and renegotiating with all the suppliers—and then the ongoing work are quite different things.

Mr Bacon

Which all has a cost attached to it.

Lin Homer

It has a cost currently as well.

Mr Bacon

You have an ongoing maintenance cost, but you do not have a repurposing-the-contract cost. Changing the state is by definition a more costly exercise than maintaining the state.

Lin Homer

In-transition costs.

Mark Dearnley

So it is a one-off. Essentially, you have to novate all the contracts from Capgemini to us at a point during the transition.

Chair

What is the range of costs for that? You obviously have them. You are just not sharing them.

Mr Bacon

When you say it will shrink back to about 50% more than there are now—just prior to the Chair’s point—we established it will fall back. It is 95; it will go up, and then fall back to 150. Roughly, what do you anticipate it will go up to before it falls back to 150?

Mark Dearnley

I think it goes up—

Mr Bacon

Don’t worry; you do not have to sign your name in blood. If it is slightly wrong you can write to us.

Mark Dearnley

It goes up to circa 250. A lot of people are needed. Novation per se, hopefully, should not cost us anything. That is not the plan, because it is a contractual exercise of repurposing contracts instead of being aligned to a Capgemini—

Mr Bacon

You do not pay it there; you pay it there. And preferably a bit less.

Mrs McGuire

The Chairman of the Public Administration Committee said: “It would be a mistake to run before you can walk. Unless there are people in HMRC with the...skills in managing a number of smaller contracts then you will be jumping out of the frying pan into the fire.” Bernard Jenkin is an experienced politician. I think he was a Government Minister at one point, and he is Chairman of the Public Administration Committee. They are flagging up, in terms of public administration, that the model might be very difficult for you to manage, given that it has been difficult to manage the current contract. How are you going to do it with up to 100 different suppliers? How are you going to create cohesion? This goes back to the risk. It is not just the cost; it is the risk-factor, and I do not think you are giving us confidence that you have thought it through.

Mark Dearnley

We are starting to do this now. In the past year we have changed the organisation, so that we have got clear accountability, particularly for operations. We are now starting to do this with more contracts, where we have been out to the market. Admittedly, it is not a large number yet, but we are starting to manage things operationally and in delivery more directly ourselves. One piece of transitional work that we have to do ahead of migration is to redesign our business processes and all our systems, so that we can move from a world where there is one very large broken-down bill every month with Aspire, to a world where we can manage 400 suppliers and a supply chain for those.

Mrs McGuire

So you challenge the Chairman of the Public Administration Committee when he said it would be difficult unless you are effectively teeming over with people in HMRC to manage these contracts.

Mark Dearnley

We are starting now to do exactly what has been suggested there, which is to get it right.

Chair

Mr Dearnley, how many new people have you brought in, since you have been there in the last year? New people at the various levels, so take the top development level and then the others. How many have actually started?

Mark Dearnley

I have refactored my whole leadership team since I arrived, with a couple of exceptions. I will go through it. I brought in a new director of development, test and operations, who has come from Marks & Spencer, where he used to run all of operations. We have done a cross-Whitehall selection and selected a new head of IT delivery.

Chair

Who hasn’t started yet.

Mark Dearnley

No, he is in.

Chair

He’s in. Any shes?

Mark Dearnley

I am struggling with shes. I would love to but I can’t; it is really hard.

Mrs McGuire

It is hard when women are not good enough for top jobs. I am being sarcastic by the way, just in case that was taken literally.

Mark Dearnley

Over 40% of my staff are women, which for an IT organisation is high.

Chair

But down the chain, not at the top.

Mark Dearnley

Yes. That is something we have got to work on and work through.

Mr Bacon

Have you got a scholarship programme to help?

Mark Dearnley

We are doing a number of things, particularly at the apprentice level, and throughout the organisation.

Chair

So that is two new directors that you talked about.

Mark Dearnley

Yes. I will come on to the digital side in a minute. You will have to forgive me—starting on 1 November, if that is allowed, is a new director of transformation for digital, so he will arrive. We have got an existing director of security who runs the whole Government security profession, so I could not find someone better than that. On top of that we have appointed a CTO, who had been at HMRC for a number of years, but also has external experience. We have been working very hard to get the top team right. As I said earlier, we are now just starting to go out at the senior civil service level and grade 6 and 7 level to start to fill the skills.

Chair

But you have not recruited to those levels yet.

Mark Dearnley

I think we have brought one or two people in, though I couldn’t tell you names. We have to do some serious recruitment in that area. At the lower levels, through our apprenticeship scheme and through setting up our digital delivery centres in Newcastle and London, we are starting to bring in a lot of new development talent.

Chair

How many?

Mark Dearnley

So far we have recruited—let me get my numbers right—26, and made 13 job offers last week. That takes us to 63 civil servants in those centres.

Mr Bacon

Has that sped up a lot since the publication of this Report in July?

Mark Dearnley

Yes, it has.

Mr Bacon

Funny, that.

Mark Dearnley

It is the timing. We have just got going. We kicked off the Aspire replacement programme in January, and by the time the Report came out, it was unfortunate that we really had not got it motoring. We did not want to say to NAO that we had when we hadn’t.

Sir Amyas Morse

I understand that. As we listen, you would not think it unreasonable, I guess, for us to say that this a very big change. I don’t regard that as a difficult point.

Lin Homer

Yes, I agree.

Mark Dearnley

Yes. I think I would agree.

Sir Amyas Morse

As we listen, we are trying to understand how aggressive the critical path you have committed yourselves to is. As I am thinking about this—there is not an awful lot of data—I am thinking, okay, they are going to want to run these things and trial them at the end. They are going to have to go through a process of contracting with all these providers and getting them all lined up, and find a way of talking to them all effectively, and you have just told us that you are going to redesign a lot of your internal processes and have new systems—and, and, and. And by the way, you look to me like a key man risk. So taking all that, all I would counsel is that you think very carefully about what level of risk you have. You made an absolute statement at the beginning about how you would not possibly go past the end date of two and a half years or whatever it is. I know you don’t want to sound like you will go past, but are you really that sure of your ground, or are you pushing it? If you had started with a clean sheet of paper, would you have given yourself longer than you have got to get all this done? It sounds like a pretty tough time scale to me.

Mark Dearnley

There is a lot to do, but I think pace is really important in this because we are talking about a lot of people’s lives. One of the really important things to do is to give them clarity and certainty as we go through. I don’t think I would sit here and ask for more time. We are fortunate in that we can leverage certain other frameworks that already exist from the Cabinet Office, like the G-Cloud and the digital services framework. Some of what would traditionally be very long procurement cycles we are able to work in a much more agile way.

Sir Amyas Morse

So if at some point in the period leading up to this we start hearing about you extending the Cap contract, it will tell us it is not going according to plan. Is that a fair judgment? I am not saying you are doing that, but if that happens, it would be a fair conclusion for the Committee to come to that that meant that things were slipping.

Lin Homer

I think sooner than that. We are not deliberately not sharing with you. It is just not the right stage. I would be more than happy for both of us, or just Mark, to come back and have a full conversation with you in the spring and to talk about our emerging planning, some of the detail of that and why we have confidence. I am sure some of the individual milestones we end up setting will shift. One rarely has a project when nothing does, but I think we have confidence that this is doable, and the spring would be a very good time to have a more detailed conversation with you.

Sir Amyas Morse

Finally, what about key man risk?

Lin Homer

Yes. I have nailed his feet to the floor.

Chair

What risk?

Lin Homer

The risk I would lose Mark.

Sir Amyas Morse

If you lose Mark, how much trouble are you in? I am not trying to polish you up; I am just asking a question.

Mark Dearnley

Two things. First, I have hired a great team and I am really pleased with it so far. This is never about one individual. Secondly, I genuinely believe there isn’t a more interesting job in technology and digital in the UK, so I am probably in control of that risk.

Mr Bacon

You seem like a pretty good egg, but we have seen in many projects a huge turnover of chief information officers. Universal credit has had five or six. The national programme for IT in the health service would have a great new broom come along and announce that everything that would change, but in no time they were off and someone else came in on a white horse and all would be fine, but then they disappeared and someone else came in. Finally, because we had the armour and the white horse and the sword, we thought we had gripped it, but they then turned out to have feet of clay. I am not saying that you have feet of clay. I don’t think you have. You have a very good record from your background—I think you were in Vodafone. This is not you. You are obviously one of the factors, but it is really about building a team around you. You say you have a great team, and it is great that you have been hiring people at a rate of knots—it sounds like you have done that—but it is just that this is a very big change and it is being mandated from outside at a particular pace. You said pace is important, and pace is all very well—I am not against getting things gone—but it was certainly the case with NPfIT that the single biggest problem was the absolute insistence on its being done at a very high rate without the suppliers knowing what they were expected to supply, and frankly without the Government knowing what they were expected to buy. The person who urged that pace is now the chief executive of the national health service—he was working in Downing street at the time. We have been here before. It is nothing personal, and I suspect that your track record commends you very well to this job, but it is a question of getting the bricks in place and not succumbing to absurd political timetables, which we have seen many times.

Lin Homer

When I first appeared in front of you in this role, one of the conversations we had was about the overall strength of the top team. We have been building a team that is both highly competent and collegiate. One of the other dependencies Mark has is that his DG colleagues need to be part of this planning. I think we both feel confident that—

Mr Bacon

One of the obvious signs that would have given us confidence was if the Cabinet Office, with which you are working closely, had turned up with you today. That would have been an index of confidence, mutual co-operation, partnership, joint working and all the rest of it.

Lin Homer

Far be it from me to say, in fairness to the Cabinet Office—

Chair

The Cabinet Office are coming on Wednesday.

Lin Homer

And I think you did ask them only last week.

Chair

Lin, can I ask you some questions? If this is all true, you signed the original memorandum to replace Aspire in January 2012. You were already there by then, weren’t you?

Lin Homer

I was, but I was not the signatory. It was literally the week I arrived.

Chair

Okay. Well, it was signed.

Lin Homer

It was, yes, and I take responsibility for that.

Chair

You appointed Mr Dearnley more than 18 months later in October 2013. By February 2014—if you look at page 37, which contains a whole load of “I should have done this by then” type things—not a lot had happened. Another feature of this Committee’s work is that we always get promises about the future. I think it is page 37—it is there somewhere. Rob, is that the right bit?

Lin Homer

“Conditions for success”, page 39.

Rob Prideaux

Page 38.

Chair

The four phases. If you look at the section under the heading “Phase One: Feb 2014 to Jul 2014”, you can tell me whether all that has happened. For instance, you do not have a business plan because you are still negotiating, but you should have had it. You have not managed to remove Fujitsu’s right to exclusivity. You may have been acting on those negotiations, but there has been no result. You have recruited a few top people, but you have not recruited down throughout the organisation the sort of capability you will require to manage hundreds of contracts, have you? All I am saying is that it is always promises—mañana, mañana—with very little evidence to us that you are delivering.

Lin Homer

The MOA that I inherited from Lesley and Phil Pavitt was a good base for the period from 2012 to 2017. There are elements of that memorandum of agreement that I wish had gone a bit faster—Andrew knows that—but we did a significant number of things under the MOA, both while Phil was still with us and since Mark arrived, that are important prerequisites for the change. I accept that I would like to be a little further on with the novation, but we are aiming to complete it by the end of this year. We have made several important steps under the agreement of January 2012, which will be the platform on which we go forward.

Chair

But you can see why we are sceptical about your 2017 delivery.

Lin Homer

Absolutely, which is why—this is a genuine offer—I would really like us to come back and talk when we are a little further forward. We have a duty to the commercial world from which we will be procuring to go out properly and cleanly. It is nothing other than the fact that we are at a phase at which we are assessing a number of options, which we will then bring out.

Chair

We will think about having another session in March, when we are winding down.

Lin Homer

We would welcome that.

Chair

Can I ask you another question? You are doing this massive in-house recruitment, but I don’t get how that fits in with your headcount constraints, financial constraints and administration constraints. I don’t see how you square that circle.

Lin Homer

Overall, our spending review required us to make efficiency savings, like other Government Departments. I think the NAO’s work with us will confirm that we are on target to deliver those savings, and that we are slightly ahead of target. We will have reduced our spend by about 30%, but we have also had the benefit of investment in certain areas—you will sometimes say we should have asked for more. One part of that overall investment has been about things that generate additional yield and many of those lead to investment in technology. In addition, a £200 million figure was agreed with us to generally invest in digital. We are reducing numbers in some places and increasing them in others. In this area, we may need to come to an agreement that in working out what efficiencies we are making, you do not just look at headcount. If some of what has been outsourced comes in, you are going to have less contract spend, but more people. We may just have to ensure that the maths can be followed through. We are confident that we are achieving the savings we were required to, and we are confident that these changes will give us the platform for making significant savings in the next spending review. I want to emphasise that there is a big transition, it is risky, and we will pay serious attention to the risks, but it also a significant opportunity for us to serve the country better and at a lower cost.

Mrs McGuire

So some of the recruitment will be from inside the civil service and other elements will be from the market.

Mark Dearnley

It will be a fair and open competition across both.

Mrs McGuire

Can I ask how you anticipate recruiting in what is a very competitive market where young, smart IT people cannot quite name their salary, but are certainly earning significantly more than anyone around this table—certainly on my side of it? How are you going to recruit in that market and get the brightest and the best to deal with what is becoming a really complex IT management issue?

Mark Dearnley

That worried me when we started this, because I had that concern. What we have found as we have gone out to the market is that because of the scale of the digital transformation we are doing, and the scale and enormity of IT within HMRC, we are extremely attractive. We are not going to build everything in London, which is an overheated part of the IT industry. That is why we have opened a centre in Newcastle, why we are doing things up in Manchester, why we will keep working in Telford, which is the main area where our teams are, and the same in Southend. As I say, we had the recruitment last week in Newcastle and we are actually finding that we are becoming a go-to place. We are looking at how we keep that sustainable, because this working for three years is not the right answer; it has got to be sustainable over five to 10 years. That is part of the planning we are doing in the business case.

Mrs McGuire

Is that your opinion on the market, Mr Levitt—that HMRC is such an attractive prospect that bright-eyed and bushy-tailed young IT experts will be flocking to it?

Andrew Levitt

First, it is fair to say that the IT market is fiercely competitive and we all have our challenges. It is equally fair to say that what HMRC is doing is ambitious and interesting.

Chair

And doable?

Andrew Levitt

Are we talking about the whole transition? I think from our assessment base and what we know, it is doable—

Chair

In the time frame?

Andrew Levitt

I think rapid progress is absolutely needed. Is it doable in the timeframe? We think it is, but there needs to be a very aggressive and ambitious plan to drive that.

Mrs McGuire

Can I deal with the issue of sustainable staffing? My impression of the IT industry is that people move around it. They chase the salary and they chase the challenges, as Mr Levitt has pointed out. What is going to be the sustainability of working with all of these smaller contractors for a project that needs some element of cohesion and sustainability in terms of the public finances—the money we are going to pull in?

Mark Dearnley

It is a mixture for both the HMRC staff and the third-party staff as well. We need to plan for a world of staff turnover over a number of years. What we will end up with is a number of people who join us and stay with us their whole career, which up to now has been a very high percentage—

Mrs McGuire

But you are going into a different market now.

Mark Dearnley

We are planning for that to be a much lower percentage in future. We will have a graduate recruitment process and an apprentice recruitment process, and we will need to overstaff and build the front-end pipeline. We will create skills that will be useful in the rest of the IT market, too. So we will lose 30% or 40% of our people after three or four years, and we have to plan for that. I actually think that that will create healthy turnover within our teams.

Mr Bacon

When you say “We will have a graduate recruitment process,” do you mean that, hitherto, there haven’t been any graduate recruits going into HMRC IT?

Mark Dearnley

We use the civil service graduate recruitment process, and we also have our own apprentices, but the volumes that we need to put through are much greater.

Chair

Give us the figures again.

Mark Dearnley

This year we did 17 apprentices, and next year we will do 35. I think it will go to three figures as we go forward—I see us going over 100. On the graduates, we will look at the relative benefits of apprentices and graduates.

Mr Bacon

Are these domain-specialist IT graduates?

Mark Dearnley

Yes.

Lin Homer

Part of going for some of the big city bases is that, bluntly, we will work with the universities in those areas. I would like to see us not only waiting until they work for us but thinking about whether there are projects that they can be doing with us. We think it is exciting work, and I think that the change that Mark is talking about is a change whereby we would accept that, for some of the young people who are working with us, doing a good job with us is career-enhancing, but we would hope and expect that others will follow and that, indeed, some of those people will come back to us at a later stage of their career.

Mrs McGuire

Are you expecting turnover to be about 40%? Is that what you are saying?

Mark Dearnley

For the new recruits. I don’t think we would get to that level across the whole patch, but we will for the new ones that we bring in.

Lin Homer

Not literally every year will 30% of those who join us go, but we will expect a much higher degree of churn in this area, and we will plan for it.

Sir Amyas Morse

You said earlier that this is a risky transition, and of course I accept that it is. Is it one for which there is really no way but to keep going until you get it right? We have discussed real-time information, and we had that discussion about PAYE, too. I think the Committee supported flexibility by saying, “You have to go on until you get this right.” Is this so central to your undertaking? Of course, I am not suggesting that we are at a stage where we don’t think anything will go wrong, and I appreciate that, but suppose that it does go wrong at some time in the future. You will still have to hack it out, won’t you? Is that fair? You will have to go on until you get it right.

Lin Homer

We don’t envisage this as a single hit.

Sir Amyas Morse

Right, but it’s a new way of providing the systems infrastructure. Having changed to that new method, you are going to have to make that work. I don’t consider that a fault. I am just trying to understand.

Mark Dearnley

We will move to a model, but I would be very surprised if, three years later, the model is identical. I think this is a model that will iterate and iterate, develop and change. Some will be about how technology moves, and some will be about the needs within HMRC.

Sir Amyas Morse

Given that there are risks, what would you say they are? What are the primary risks that you face in this very extensive project? That is just so we understand what you think they are.

Lin Homer

We have already talked about the fact that we need to improve our own capability. We also accept that we need to ensure that we manage a wider range of procurement activities. The approach when we put this procurement out in 2004, and indeed the EDS approach before then, was a huge effort for 10 years, and then not very much. This is about procurement as we go forward, so we have to increase not only our technology skills but our commercial skills. We also need to ensure that we are better at designing what we need. We have taken a long time to scope and build some things, but we have then been locked into them for quite long periods. Some of that has meant that we have not been able to take advantage of changes in the market, not only in the way that things are done in HMRC but in the way they are done in the market. We have to have the kind of designing and architecture skills that we do not have. There are opportunities and risks throughout, and I suspect that, as we go forward, as with all risk management, we will not avoid all of those risks—you probably should not—but anticipating and mitigating them will be a big part of the shift.

Chair

Lin, I’ve got to say to you, that list is so cross-Government. You need commercial skills, IT capability—

Lin Homer

Which is why they’re all in there—

Chair

No one else has solved it. Why on earth do you think you can do it within this very tight time frame, with so much at risk? We will come to Mr Levitt and how he manages the current contract, but it is £500 billion-worth of revenue that we depend on him to get. How you think you can do it astounds me. I don’t believe it, because we have not seen a bit of Government where they have got the commercial risks; we have not seen it. I sat down with John Browne the other day, had a cup of tea and said, “Which project has gone better?”, and the only one was one he could not talk about; it was GCHQ. Getting the commercial skills, the IT skills, the design skills—we have failed across Government. Why should you do better?

Lin Homer

I would put RTI down as a good example of a major project that we have run recently, with Aspire —

Chair

Yes—they did it for you.

Lin Homer

No. It would be wrong to suggest that we’ve literally sat back. Indeed, if I may say so, Chair, I don’t think it would have just been Aspire you would have asked to come to the Committee if something had gone wrong with RTI. I think you would have had me sitting here—

Chair

Because you are accounting officer.

Lin Homer

Yes. We have also done a number of smaller but very innovative projects. Mark could perhaps tell you about what we have done in relation to tax credits, where we have stood up a new digital offering in very short time, which was entirely built in-house and which within eight weeks delivered services for 400,000 people. So I reject the—

Chair

To a value of what?

Lin Homer

Well, the value of that one was 400,000 people who got their renewal done in time.

Chair

Actually, it is a different figure, because 85% of this is big projects that get money in—

Lin Homer

But some of the things that secure the £500 billion are NPS, which, although there were issues with serving people well, was a good basic system; and RTI, which has taken that further and is proving to be very adaptable and effective. Some of the big bits of kit are in place; this is not a greenfield site.

Austin Mitchell

Just having read the Cabinet Office paper, I know that it wants smaller contracts and more competition, to cut down the profits made by the companies. As I read about the profits, I think it is a good job for me to go into when I retire. There was about £1.2 billion profit for the two companies, which is about double what you estimated at the start of the outfit and about 60% of the revenues, so very high profit. However, is that a profit that you consider worth paying? Have you inquired into the contract, and why it is so high? And is it a price worth paying for what has been a fairly efficient operation?

Lin Homer

The contract has increased in a number of ways since it was originally started back in 2004. Obviously, it was initially identified as a contract vehicle for Inland Revenue. When the merger became planned, Customs and Excise came in; that bought about an additional £1 billion into scope. Technology has just become a bigger and bigger part of our business, and I think that has brought another £3 billion into scope. And then we agreed an extension to 2017, which has brought about another £2.3 billion in. So—

Chair

You agreed that three years into the contract, which seems madness to me.

Lin Homer

I am just trying to articulate the elements—

Chair

It was mad, wasn’t it? Three years into a contract, to agree an extension on a 10-year contract is madness.

Lin Homer

We would say that large contracts of this nature are not the right way to run the business in the future, but Mr Mitchell asked me—

Chair

So it was madness?

Lin Homer

Mr Mitchell asked me a question, and what I would want to say is that I think this has been a fairly expensive contract, but it has given us high quality and stability, and those were the things that were asked for when this contract was set—

Chair

Mr Dearnley, it was madness to extend the contract three years in.

Lin Homer

We have already said to you that we believe the changes that the Cabinet Office proposes—

Chair

Was it mad?

Lin Homer

I think it would be wrong to contract in that way again in the future.

Chair

Was it mad?

Lin Homer

I don’t think it was at the time. I think this was the way IT was done. I don’t think any of us understood how much technology was going to drive our business.

Chair

Three years into a contract. Even I, who am not the greatest IT expert, would not extend a contract three years in with another seven years to run, at a cost of £2.3 billion. It is madness.

Lin Homer

You always accuse me of jam tomorrow, but I would not envisage running another major 10-year contract.

Chair

Would you have done that, Mr Dearnley?

Mark Dearnley

I am with Lin on this. If you are here today looking at it, you would not do that now, but if you go back to then—

Mr Bacon

There are many things we would not have done if we had known then what we know today. Getting the chief executive of HMRC to admit to lunacy is a tall order, Chair; perhaps we should stop that line of questioning. You said something interesting. You said that you thought it was quite an expensive contract, but that it had produced stability and high quality. Those are precisely the two things that are potentially at risk now.

Lin Homer

We don’t think so.

Mr Bacon

You don’t think the stability or the quality are at risk?

Lin Homer

No.

Mr Bacon

Are you saying that neither stability nor quality is on your risk register?

Lin Homer

No, I am saying that I don’t think—

Mr Bacon

They are on your risk register?

Lin Homer

Of course they are.

Mr Bacon

So they are at risk.

Lin Homer

No. With a risk register, you look at the things you must avoid, and—

Mr Bacon

Indeed. I am not just being pedantic about this. The fact that it is a risk does not necessarily mean it will materialise.

Lin Homer

Exactly.

Mr Bacon

But plainly, quality and stability are big issues and big risks. They are at risk. You can mitigate that successfully, less successfully or unsuccessfully, but they are plainly big issues. In the environment that you are creating, other things being equal, instead of nice Mr Levitt there with his big balance sheet—he can take a lot of the heat and a lot of the pain if necessary. Mr Levitt, can you just remind us what the annual global revenues of Capgemini are?

Andrew Levitt

They are in the order of 10.5 billion euros.

Mr Bacon

Not to be sneezed at. Instead, you are going to move towards a new environment with lots of much smaller suppliers, so other things being equal, stability must be at increased risk compared with now, although admittedly the contract is expensive, and the quality will be at more risk of varying more up and down. You might find some brilliant supplier who can do something twice as reliably at half the price; of course that is possible, but the reverse is also possible. How you will mitigate those risks and control them is the interesting question, to return to what the Comptroller and Auditor General was asking you earlier. It is not yet clear to me that you are across how you will manage all these risks. That is my concern.

Mark Dearnley

You are quite right that both of those are on our risk register, and if you look at our risk score, it is currently very high, for exactly that reason. What we are doing as we produce the business case is working through how we will mitigate those on an ongoing basis and through the transition. A lot of this will be down to the way we manage and transition and the changes in our delivery model. We are moving away from longer waterfall projects to shorter agile projects, so that when things go wrong, as I am sure they will, we will be on top of them more quickly and can react to them more quickly, and they will not be huge things but smaller things.

Mr Bacon

Lots of small, early, cheap failures, in other words.

Chair

The difference with HMRC is that you say “as I am sure they will”. If it were a bank sitting there—we will come to some of the mistakes you make—I do not think you could say that. Some of your back-office stuff might go wrong— I can understand that—but all your front-office stuff, the collecting and giving out of money, should never go wrong. There is far too much of an attitude here that it doesn’t matter; it’s only a 100,000 people here or 200,000 there. If you were running a bank, you would be sacked on the back of that.

Mark Dearnley

It matters enormously—

Chair

It should never go wrong. Mark Dearnley —that every day, everything works. That is what we get out of bed to do each morning: to make sure, not only for customers but for our staff, that it works. As Lin said, a lot of this is not about building shiny new things. This is actually about building on and improving the things we already have.

Q117Chair

But you said some things will go wrong. If you were running a bank, you wouldn’t accept that, and I think if you are running HMRC, any of the front-facing stuff should never go wrong.

Mark Dearnley

I wouldn’t feel it fair to say nothing will ever go wrong, because I think that isn’t true.

Lin Homer

Nor would the sectors you mentioned. What I would accept, and what we absolutely want to emphasise, is that the purpose behind making some of the changes we are making is to deliver improved customer service while ensuring continued security. We have mentioned our security function. Ensuring that we can give people online opportunities, but safely, is a big part of our forward planning. Right at the heart of this is better customer service. It is not necessarily about locking everything down and not changing it. Part of what we believe we will be able to do is adjust as the market produces new opportunities that are better for customer service. We have got lots of current examples of doing some of that. We have got apps for small businesses, generated in-house and with our providers. We would not have dreamed of having them available a few years ago, but they are becoming really important in giving small businesses the ability to thrive. Customer service lies right at the heart of this and is on the same page as bringing in the money.

Chair

I look forward to you telling us that, if anything goes wrong.

Guto Bebb

As it happens, the last answer touched upon the question I was going to ask. I have been listening carefully, and my concern is that we are moving from a one-size-fits-all policy, which was the case with IT contracts, to a decision made centrally that we have to have smaller contracts, because the centre says that that is the best way forward. I am not yet convinced on the reasons you have given on why the smaller contract profile will be a better way forward. You touched on some examples of new options being offered. Do you think that those new options for small businesses are more likely with smaller contracts and what you described in management speak as a more agile way of doing work than with the current deal that you have in place? In other words, has the current deal been less flexible than it should have been?

Lin Homer

I think innovation and the use of SMEs is something that we want to do. Perhaps I will ask Mark to give some examples.

Mark Dearnley

We are just rolling out a new telephony contract, which is one of the first ones that we bid independently. That was with a small firm called Kcom, a relatively small telco. By working with them sat with our front-line staff and understanding what it means for all their solutions, they have not only been able to implement more quickly, but implement in a way that means our staff satisfaction has gone up. The contract also means that we will bring in more innovative solutions, such as online chat and secure messaging, much more quickly than we would have done. This way will allow us to do a lot more and more quickly. It is just a different mindset with how people are working.

Guto Bebb

On the answer you have just given, you are doing that with the Aspire contract running in tandem. You have the ability to be very flexible with a small contract on a specific issue, but you also have the stability that Mr Bacon was talking about with the deal with Aspire.

Mark Dearnley

I think that the way to look at it is that when Aspire breaks up, there will still be quite large chunks. There will not be lots of situations where four or five people are working on things; these will still be large contracts. I am not sure they will be big enough for them all to get to £100 million, but they are still significant pieces that will need to be run by people who understand service management.

Lin Homer

Names that you will know and recognise.

Mr Bacon

Mr Levitt, do you think that some of your people will go off and form start-ups to bid for some of this work? Is that something you are anticipating? It might not be good for you, but in the environment—the landscape—do you think that that is likely to happen?

Andrew Levitt

I would have thought that that is more unlikely.

Austin Mitchell

If the prospects for the big contracts are damaged in the way the Cabinet Office seems to think by being turned into lots of small contracts, have the prospects for big contracts not been damaged by the inordinate level of profits on this?

Andrew Levitt

I am not sure I agree that it is an inordinate amount of profit.

Mr Bacon

It is 15.8%, Austin; it is not inordinate.

Austin Mitchell

It is high.

Andrew Levitt

It is entirely the industry norm. If you take the NAO’s benchmark with comparators across public contracts, the Aspire margin was actually lower. We are confident that it is an industry norm margin. Coming back to your points, I think that all these models can be made to work. There are benefits, and a long-term deal such as Aspire very much satisfied HMRC’s ambitions. We have a rock-solid service on which to collect £500 billion of tax. That needs to be considered very carefully, as I am sure everybody has mentioned today, but equally, organisations such as ourselves understand how to run contracts that have been broken up, which includes multiple SIs, or systems and service integrators, and SMEs as well. The critical factor is understanding what the objectives are and looking at the model that best fits that, and then having a credible plan to make sure that when it all goes across, we do not leave anything that does not work, because there are not many organisations that collect £500 billion a year through systems. If you look at the Cabinet Office guidelines, it is not for us to agree or disagree; it is policy. Those models can be made to work. There are organisations out there that are making those models work. They bring with them different levels of risk and complexity and I come back to my previous point—it all comes down to the planning and transition, and frankly, from a Capgemini point of view, we have always sought to be a responsible partner to HMRC, and we would see ourselves playing a critical role as we work through that transition. I think that it is not in anybody’s interest for the outcome of 2017 to be anything other than a success.