Oral evidence: Strategic Suppliers, HC 1031

Oral evidence, 13 June 2018.

Witnesses

Rupert Soames, Philip Chalmers and Sean Haley.

Chair

Good afternoon, everybody, and welcome to the Public Accounts Committee on Wednesday 13 June 2018. We are here as part of our inquiry to look at how major strategic suppliers work with Government to deliver public services funded by the taxpayer. Just to remind everybody, there were 28 strategic suppliers—that’s £100 million or more spent across central Government by that company—and there are now 27. You could sort of count Carillion in there, because it is still just about trading, but it is no longer part of that group, as it is going through liquidation. We are here to talk to three companies today. I would like to welcome our witnesses. Sean Haley is the regional chair for UK and Ireland for Sodexo. Welcome to you, Mr Haley. Rupert Soames is the group chief executive at Serco. I think you have been there since 2014, Mr Soames. Is that right?

Rupert Soames

Yes.

Chair

And Philip Chalmers is the senior vice president for the public sector and health at Atos. Some of your companies have been in front of us before, but, from memory, I’m not sure any of you have been in front of this Committee. Mr Soames, you have—forgive me. I should probably have remembered that. Welcome. We have obviously read the evidence you submitted in advance. Thank you for that. We do not therefore need that repeated today. We will be asking questions and hoping for clear answers. We are planning to produce a report before the end of the summer on this stage of our work, and we will see whether that takes us as far as we need to go. We are keen to see how the Government works with you, how you work with the Government, and what the benefits and disadvantages are to the current set-up. To set some context, can each of you tell us how many people you employ and what your salary is? That is not because we are particularly interested in your salary, but it gives us an idea of the scale of the company. I will start with Mr Haley.

Sean Haley

We employ 34,000 people in the UK and Ireland, and 425,000 people globally. The UK and Ireland is a very big part of Sodexo. Regarding my salary, we are French-listed and comply with all of the regulations we need to in France, but that doesn’t include disclosing my salary. If I could, I propose to write to you with that. I have no issue with disclosing it to you, but I would prefer to do that.

Chair

Could you give us a ballpark figure—the number of digits in your salary—just to give us an idea of the size?

Sean Haley

There are only three.

Chair

It must be more than three. Six?

Sean Haley

Well, six. I’m not trying to be difficult.

Chair

So a six-figure salary. Okay. Well, if you can write to us as well.

Sean Haley

I will. I will confirm that. I have no issue with that.

Rupert Soames

I brought my P60 along in case anybody questioned it.

Chair

Some inside advice, perhaps.

Rupert Soames

Last year, I was paid £2,312,174, on which I paid tax of £1,037,851.

Chair

Okay. How many people do you employ?

Rupert Soames

We employ 24,500 in the UK, and about the same again in the rest of the world. We have worldwide revenues of £3 billion. About half of our revenues are in the UK. We have 60 contracts with central Government, 119 with local authorities, three with the Scottish Government and one with the Welsh Government.

Chair

Thank you very much indeed for your candour.

Philip Chalmers

We have 100,000 people worldwide, with revenues of about £12 billion. In the UK, we have about 10,000 people, with revenues of £1.5 billion. I am kind of in a similar position to Mr Haley. My salary is six figures, and I am happy to write to you to tell you what that is.

Chair

We are surprised that you are so coy. It was not a trick question or a prurient question. It is just that a lot of your work is paid for by the taxpayer. As that is not the main subject of our hearing, I will let it go today, but we are interested in getting the information in writing. I am going to ask Layla Moran to kick off. What we are planning to do—just to warn you—is to start with you, Mr Soames, and Serco. Then we are going to talk to you, Mr Chalmers, then you, Mr Haley, and then we will have a bit more of a general discussion. We will stick roughly to that order.

Layla Moran

Mr Soames, you are in the news today saying that the Government is a bully. Why, then, do you want to work with the Government?

Rupert Soames

Because we work with Governments worldwide. That is our business. I know my language was candid, but on Monday you were asking for candid language. I think this is too important to obfuscate—to use soft language. We believe there are really important issues here. We did an analysis, which I am happy to share with the Committee, when the Cabinet Office challenged us and said, “So where are all these contracts with such heinous terms that you are telling us about?”. We produced a table of the 12 tenders that are either in flight or have recently been decided. Of those 12, eight had the “take it or leave it” clause: “You may not mark up any of these terms and conditions. They are the ones you take—like it or lump it.” Twelve had us being liable if any of the data that the customer had given us was wrong. Serco will be liable for any costs incurred as a result of any errors or omissions in information provided by the authority, including the cost of any remedial work. That was all 12. Seven of them had completely uncapped liability, which enables the customer to bankrupt us if they like. All 12 had the requirement—bearing in mind that a lot of these are 10-year contracts—that we, the supplier, would take the risk of a change of law. So the Government gives us a contract and reserve the right to change the law in any way, and we have to bear that cost for 10 years—and Brexit is coming along when we are going to change all our laws. One of them, which was my particular favourite, said that if as part of the procurement it subsequently turned out that the procurement was illegal—in this case, may have involved state aid—Serco would be responsible for paying any fines or duties, or covering any costs, including repaying up to £800 million of state aid.

Layla Moran

To dive into the bullying aspect a little bit, who exactly is the bully in this context? Is it the Department? Is it the Cabinet Office? Who is the bully?

Rupert Soames

You can say coercive. I use the expression that the Government is a bit like Bindu. Bindu was an elephant in Howletts zoo who successively, over a period of six months, killed two of its keepers. John Aspinall, who owned the zoo, said, “Bindu didn’t mean badly; she just doesn’t know her own strength.” I think the Government is sitting there and its lawyers tell it what it can possibly ask for in the best possible world. The lawyers are told that outsourcing is about transferring risk, so they seek, without any common sense or judgment, to transfer all risk. That is not the Cabinet Office. The Cabinet Office has issued specific guidance to Departments saying, “Thou shalt not do this. Thou shalt go and give accurate data. Thou shalt not go and impose onerous conditions.” The Departments go and gleefully ignore it.

Chair

So it is the Departments.

Layla Moran

How has that changed over time? I note that in 2014 Serco reported that Ministers were improving in their ability to drive a bargain and claimed that the Government has got much more adept at writing contracts. On the one hand, you have a bullying culture or whatever you want to call it now, but on the other is an admission from yourselves that they have got better at it. Can you take us through how that has changed over time, and can you see the logic in their changing their ways?

Rupert Soames

I think it is a pendulum that has swung from Government being probably too soft and too nice and being given the run around. Part of it is that the commercial function has increased and the Government have discovered their power. Their power is that they have a lot of suppliers like us that exclusively supply the Government, or near enough, and the Government can basically can get what it asks for. If you turn round to us and say, when we are dependent on Government, “You take this or leave it,” leaving it means, from our point of view, that I lose my UK business.

Layla Moran

How many of those contracts has Serco won, in the last two years, say?

Rupert Soames

Large? I’m struggling to think of one.

Layla Moran

Is it perhaps clouding your comments at the moment that you are not the one winning?

Rupert Soames

I think we are perhaps more gun shy. Remember, I was brought in after Serco had been through a near-death experience. I think there is a measure of us being more gun shy than others. We are very risk averse. Typically what has been happening on contracts is we have been winning on the technical side, but I hope that you give me some credit for actually having an interest beyond Serco’s own interests. I am interested in good Governments in Britain.

Chair

We were certainly struck by the erudition and enthusiasm of your evidence.

Layla Moran

Indeed, it has been very helpful. On that, is this partly why you made the decision to leave the health and social care sector? Can you take us through what led to that decision?

Rupert Soames

No, we are still in the health sector. We decided to leave the sector that involved needles—the actual provision of healthcare. We are enthusiastic cleaners of hospitals and porters of people—

Layla Moran

It is the human aspect of it that is high-risk. Is that fair to say?

Rupert Soames

No. We felt uncomfortable at the time. We came out of providing healthcare in—

Caroline Flint

Wasn’t it out-of-clinic hours GP services that you came out of?

Rupert Soames

That was Cornwall—way before my time, we were out of there. We do not do any of those in the UK—

Caroline Flint

Is that because you could not guarantee to provide the clinical staff actually to do the job?

Rupert Soames

It was before my time. I don’t want to duck with “before my time”; I have been there for four years.

Caroline Flint

I obviously appreciate, Mr Soames, that you came in at a certain time, but it is quite interesting how you have restructured the business, and clearly you must have been influenced by what happened before to decide that you would no longer go into certain areas. And I am just interested: is it between, if you like, facilities management—cleaning, catering and security—and other things in the defence sector that are not necessarily people-related, and then this area, where it is very much people-led? For example, you can think about the DWP helping people to find work. There seems to have been a contraction of Serco’s interest in working in those areas—

Rupert Soames

No—to the contrary. There are some very specific things about medical liability. In terms of Suffolk, it was being caught between a rock and a hard place, the rock being the NHS and the hard place being social care in the community. And we found, being the only people in that chain who had a profit and loss account, limited ability and a firm contract, that we were getting squeezed appallingly badly. So that is the reason why we came out of that sector. But we do people things. We run six prisons in the UK. There ain’t many businesses that are more people-oriented than prisons.

Layla Moran

To the process of bidding, where you could argue that a lot of the problems begin. Do you think the Government underestimate the scale and complexity of the work they are asking companies such as yours to do?

Rupert Soames

No. I think there are two very specific issues. One is, and this happens in the private sector as well, that the Government often does not know what it is asking people to bid for, because it does not have the data. Instead of doing what you would normally do in the private sector—and the CRC contract is a really good example of this—which is running a pilot, of actually going and establishing in a couple of regions how it would actually work, what happens is that a ministerial fiat says, “Thou shalt have it done in two years. Off you go!” A lot of this is not the civil servants’ fault; it is impatience on behalf of Ministers wanting to get the “grand projet” done. We rush into things where there is simply not the data available. The NHS thing that we will be talking to Capita about is a really good example. Why wasn’t that piloted, to go and find out and learn? The answer is that it takes time.

Layla Moran

On that note, do you feel therefore that the contracts are too rigid when they are put out?

Rupert Soames

Yes. One of the questions that you have asked others is this: are there other places that do it better? To which the answer is, “Yes, there are ways of doing it better”. However, one of these things about rigidity is this complete “rabbit in the headlights” issue that Departments have about challenge under European rules, much of it completely unfounded—sometimes. But we were told on a contract the other day—seven years we have been running that contract and we have taken huge losses on it—that they wanted a one-year extension. We were told we could not change any of the terms and conditions of it, because there might be a challenge from one of the original bidders seven years ago.

Layla Moran

Was this PECS?

Rupert Soames

Yes.

Layla Moran

We will come to PECS later, because it is an interesting case. So, when you first take on these contracts and they are rigid, what is the mechanism by which you can go back to the Government and say, “This isn’t working. There’s an unintended consequence.” How do you get that variation?

Rupert Soames

The lawyers take immense care to write out any possibility that you can do that.

Layla Moran

Really?

Rupert Soames

Huge care.

Layla Moran

So you don’t even bother to try?

Rupert Soames

Massive care to say, “Thou shalt not come back. It’s all your responsibility.” My point is that it is not that the procurement system is bad; it has just gone too far. It has become lacking in any common sense. In any common-sense arrangement, contracts have flexibilities in them—they can move.

Chair

But there is flexibility the other way. For instance, with PFIs—you are involved with some of the big hospital ones—the contracts can be varied so that you do more and you get paid for that. But you are saying it just does not work the other way around?

Rupert Soames

Correct. They have been running for 20 years, and they were written at a time when flexibility was allowed. I am talking about the here and now, where the Government tells you, whatever the data is, “It’s your fault.”

Chair

So you are taking it at risk.

Caroline Flint

That goes back to my colleague’s first question: in your opinion, does the Government underestimate the work needed? For example, if there is a cleaning contract and they have not really identified all the places there are to clean, or they think there is a one-size-fits-all solution to finding accommodation for asylum seekers—that Blackpool has the same access to accommodation as Blackburn, or as London for that matter—that is about them underestimating the challenge of the work, isn’t it?

Rupert Soames

I do not complain about the pricing, and I do not complain about the margins; I complain about the non-commonsensical transfer of huge and unmanageable risk. If you take the example of COMPASS, we were told to expect to look after 7,000 asylum seekers in the north-west, Scotland and Northern Ireland. We are now having to look after 17,000, and we are stuck between the rock that is UKVI saying, “Here are 17,000 asylum seekers,” and local authorities, where the Government has decided not to use its statutory power to force local authorities to allow us to provide accommodation. Essentially, in an area that is not far different from when we were looking after 7,000, we are looking after 17,000. There are ways around that, and we work with the Government. I do not complain. It has cost us a fortune—we have lost more than £100 million on that contract—but I am not complaining about that. If we count the number of bricks wrong or get wrong the calculation of the rent that we are going to have to pay on COMPASS, that is down to us, but it is different if things suddenly come in like the council tax doubling or the Government not getting behind us to force recalcitrant councils to act. We have 5,500 asylum seekers in Glasgow and not one in Dumbarton, because Dumbarton will not take any. The Isle of Bute, on the other hand, has 17 Syrians. Lots of people want to have Syrians, because you get much more money for looking after somebody from Syria than you do a normal—

Caroline Flint

That goes to the Government not working with local authorities, doesn’t it? It goes back to the question of whether they underestimate the work needed.

Rupert Soames

It depends—

Caroline Flint

I think it would actually be quite helpful to answer, “Yes,” to the question, “Does the Government underestimate the work?”, but there we go.

Layla Moran

If there are ways to innovate within these contracts, are you able to do that without pushing the cost envelope? That is obviously the issue. There is a set amount of money that Ministers have in their settlement from the Treasury, so they have a limited amount of scope to push costs up, but if you found other, more innovative ways of doing things that kept it within that envelope, would you be able to do that?

Rupert Soames

Normally we have a fixed price, and how we go and deliver that is kind of down—and a lot of the innovation we do is around doing things better, faster and cheaper, and trying to work out ourselves how we can deliver things. Innovation should be part of a package. Again, we tend to run into the thing that, as soon as we go in and say, “Look, we’ve got this really good idea. We could do it differently. I tell you what, if you give us a bit of slack there, we’ll give you some innovation over here,” we might get challenged.

Layla Moran

Very good. Moving on to other places, we note that your ventures in Australia seem to be very well received over there. Is there something you are doing well, or is the ecosystem better in Australia than here?

Rupert Soames

I think the answer you were given on Monday was basically that there is not anything wrong with the UK system; it is about how it is applied. You can take any system, good or bad, and apply it well or badly. On this very specific point, the current system—in which the Cabinet Office’s writ does not run with the Departments, and Departments effectively go and do what they like—is a fundamental thing. The system is okay; it just does not work. I think that there are other countries that do it better and differently. We employ 8,000 people in north America. We provide the eligibility testing for Obamacare. We just won a $900 million contract for providing that. That started off as a cost-plus contract; it has now morphed and been renewed into a thing where half of it is fixed price. They have taken a sort of gradualist approach and I think that that works well. In Australia, what I would say is that they do far less what you might call mechanical scoring—where you go and tot up the scores there, and tot up the scores there, and you get 86.2%, and you win, and on 86.1% you lose. It is more in the round. They check your past performance. They reference you. They take a more rounded view, perhaps. Actually, a lot of them copy what we do in the UK. PFI2 is toute la rage, you might say, in Canada and in Australia, but they maybe apply it with a bit more sense.

Layla Moran

In the past you have described Serco as being an intermediary between Government and SMEs. Is that fair to say?

Rupert Soames

I think that the idea that SMEs are going to enjoy the process of dealing with a Department red in tooth and claw— I mean, they look up and say, “God, if all the big companies are losing hundreds of millions, why would I want to do that?” Actually, it works very well when you use companies such as us. We have 3,200 SMEs in our supply chain; 22% of our Government income goes through to SMEs. We do not put on them the terms and conditions that the Government put on us.

Layla Moran

Oh, I see. My next question was, what is the value that you add? If the Government went directly to the SMEs and asked them to deliver some of these services?

Rupert Soames

Do you know what? I would not dare look an SME in the face and say, “I expect you to put your house on the line for this job.” I have shareholders, who put their money on the line, to the tune of £750 million that we spend, raised to go and fulfil our obligations. I cannot ask an SME to do that.

Layla Moran

My last question is about the inclusion. How aware are you when your RAG rating changes?

Rupert Soames

They tell us.

Layla Moran

Are you confident that you know how to get from red to amber to green and so forth? Are you very clear?

Chair

How good is the dialogue?

Rupert Soames

We have been through all colours of the rainbow, pretty much, including infrared.

Chair

But not black.

Rupert Soames

We have been, in the words of the song, “Back to Black”. We have struggled up the ladder to green, which we are really proud of.

Layla Moran

What struck me from your written evidence was that you wanted to include the RAG ratings a bit more formally in the bidding process. However, you can tell me whether there were times when you were red that you were awarded big contracts. Do you think in hindsight that that was not a good idea?

Rupert Soames

No, what I am arguing for in my written evidence is that it should be taken into account. If you are marked out of 100, give somebody who is green 2 points, somebody who is amber 0 points, and if somebody is red, you take 2 points off their rating. The idea that you would buy something from somebody with no reflection at all on their prior behaviour—who would do that?

Chair

The Government always say they can’t do that. Repeatedly, over at least a decade, they keep repeating that they can’t take that into account.

Rupert Soames

They can. Sorry—I am sure they are right.

Chair

You are very emphatic. It would be interesting to hear why you are so emphatic one way and they are so emphatic the other way. Can you give us a bit more information?

Rupert Soames

As long as you publish what your criteria are in a bid, RAG ratings are there and they are arrived at, I don’t see what is to stop the Government saying, “We will include an allowance for your RAG rating in all your tenders.” It would be the one thing that would give the Cabinet Office heft with its suppliers. As I said, the point about the supplier management system is that it is an oversight system, not a management system, because they have no heft.

Caroline Flint

Earlier, Mr Soames, when my colleague was asking about what contracts you had bid for in the last couple of years, I think you indicated that that had not happened and it was unacceptable to bid for those contracts. If you found it unacceptable to bid for those contracts, do you think others, who accepted those contracts, are doomed to fail?

Rupert Soames

A contract was awarded recently where the other contractor was tens of millions of pounds cheaper than us. We will not know who was right and who was wrong on that for two or three years. It takes time for these things to come out. It is more than possible that we were wrong and that it could be done cheaper. That is the point of testing in the market. Bear in mind that, other than Carillion, I do not know of a single large supplier that did not stand its corner and take its losses when they were given to it. We have spent £443 million more on providing services to the taxpayer than we have been paid over the last four years, because we have a simple thing: “If we went and made a mess-up, we shouldn’t have signed the contract. It may have been unfair, but we’ve done it and we stand by it.”

Caroline Flint

In your evidence to the Committee, you mention that you think there is too much emphasis on the Crown representative. Will you say a little more about who scares you most? Is it the Crown representative or the person in the Department who is meant to oversee the contract?

Chair

I am not sure Mr Soames is easily scared.

Caroline Flint

Who causes you more sleepless nights? You might sleep very soundly.

Rupert Soames

I do not do scared, but—

Caroline Flint

Who makes you answer the phone quicker? Whose texts will you take, and whose will you ignore?

Rupert Soames

I never ignore a text. My answerphone says, “Rupert Soames from Serco. How can I help you?” They do different jobs. The Crown rep is, as I said, there to do a different job from the commercial head of the Department or the permanent secretary. I just think you have to treat them that way. But in my view it is certainly true, as I said in my evidence, that the Government is not getting value out of the considerable strategic investment it has made and the considerable investment that we make in servicing this system, except in times of crisis, when it works really well.

Caroline Flint

I had a look through the RAGs from about 2014 to date, and it struck me that quite a lot of the information in them is in the public domain anyway. There are quite a few references to FT articles, I have to say. I am sure that is the case for other strategic suppliers as well. I just wondered what weighting you give to these reports. Does it worry you if you have a red-red?

Rupert Soames

We do not get to see them. I know what our RAG rating is, but I do not get to see them. I would prefer to, but I think a customer is entitled to have a private conversation among itself—

Caroline Flint

Do you think it would help your relationship with the Government if you were able to see these reports?

Rupert Soames

Marginally. I think it would help our relationship more if the Government were able to deliver on what it said it had done.

Chair

If you were able to see them, wouldn’t the danger be that your lawyers would just argue the toss on them?

Rupert Soames

That is the difficulty with my proposal, if there is a difficulty—it is pure and brilliant in every respect. The answer is that if you tell people, “If you get a green rating, you get plus 2 on your tenders,” the lawyers may come and argue the toss. I think the Government should be big enough to take that. We have a view. They are a customer, so they are entitled to a view, but it has to be a transparent view.

Caroline Flint

During this period, there were a number of reports from newspapers suggesting there were concerns about your share price falling dramatically and problems with a number of contracts, which were costing more than anticipated. One of the things about the Government Departments overseeing these contracts is how much they are on top of that and how much they should alert you and, more widely, other Government Departments that may have contracts with you about their concerns. How much do you think the Government should be on this? Also, how much more transparency should there be with the Government about the financial decisions that you are making and your overall financial position, and whether that information should be shared with others in the procurement chain, who may not have sight of some of those issues?

Rupert Soames

I bear the scars of close Government invigilation of a crisis, like what has happened, because people thought that Serco might go bust. The Cabinet Office brought everybody together. It was incredibly impressive. When the fish all turn and point in one direction, the Government have enormous power and enormous heft and work really well. It is when it is all sort of not situation normal that it all becomes a bit chaotic, but they were absolutely on top of our refinancing, when we raised money. They absolutely put the word out. There is, anyway, a Government day once a year where they go and share things. The commercial people in Government get together and share stuff, so when we were red rated, everybody in the Government knew it, and—guess what?—we didn’t win so much.

Chair

You say they are on top of it, but if you had looked them in the eye and told them a barefaced lie, or been economical with the truth, or had been a bit more bullish about your position than was the reality, would they really have been able to see through that? Would they have had the evidence to get to the truth? Obviously, if you have shareholders, you have to be as bullish as you can. Part of your jobs, the three of you, and part of the reason you get the salaries you get is because you have got to protect that reputation.

Rupert Soames

No. Would I have been able to hide from sight?

Chair

Serco is perhaps not the best example, because you were in a pretty bad state at that point.

Rupert Soames

Anybody can hide anything, but why would you?

Chair

Carillion was quite bullish that it was in a better position than it was.

Rupert Soames

Until it all happened and it had a big profits warning. To expect the Government to see through that is really hard, which is why I propose as part of our four principles that there should be a living will. The Government need to be on top of what they are going to do if they want to get out of a contract and transfer it to somebody else, so it runs more smoothly. As we are on Carillion, I don’t know if there has been a single floor that hasn’t been cleaned or a meal that hasn’t been delivered, because they got their act together on the contingency planning. It could have probably been done a bit better, but that is why I want to have living wills, so that the Government have some protection against that.

Caroline Flint

Have you ever been in a situation—perhaps not yourself, Mr Soames, but Serco—where it has leant on the Government not to do something because it puts the overall company in a precarious position?

Rupert Soames

I came in when all the sort of political stuff had happened and the tagging contract had been taken away from us and everything like that. I came in to try to establish how we were going to get on to firm ground. No, I never asked them to do something. I think they are quite sensitised to this; that they are in a position, when a company gets into trouble, of damned if you do and damned if you don’t. They have got to be, because they have access to inside information that is highly valuable. Everybody knows that. My own reading of the situation on Carillion is that everybody was watching the Government really, really closely—the banks and everyone were waiting to see, because if the Government started going and shaking that tree, everything would go off very quickly. That is why when it did go pop, it went really fast.

Caroline Flint

Can I spend a little time focusing on one contract? I would like to focus on the PECS contract, which is escorting prisoners from place to place. On average, Serco transports 24,000 prisoners per month. I think there are 1,200 people involved in facilitating that, as well as a fleet of nearly 200 specialist vehicles. In 2013—I know this is before your time, but it is an ongoing issue because the contract is up for renewal in 2020—the Government called in police to investigate claims of fraud involving the contract. Evidence was found that prisoners had been recorded being delivered ready for court when they were not, which was a key measure of performance for the contract. Could you take us through how that happened?

Rupert Soames

What—how an unsubstantiated accusation of fraud was put to the company?

Caroline Flint

I don’t think there is any denial that there was misreporting, or missed entry, of prisoners being escorted, because the company paid back some money on it. The firm said in 2013 that it would repay its profits on the contract for transfers in London and East Anglia since 2011 to the value of £2 million. It also chose to give up future profits on the contract, which was due to run, I think, at that time until 2018. Although, I think, the case for the City of London Police has been dropped in terms of fraud and criminal proceedings, there clearly was a problem on this contract. Do you agree with that?

Rupert Soames

I never spent five seconds looking at that. I was interested in picking up a contract that was not delivering enough prisoners on time to court. We were having dock failures where courts were sitting and the prisoners were not there. It was relatively rare, and we have significantly improved the performance contract. When I arrived in this company, we had endless numbers of failing contracts, which we were failing to deliver on. If I may say so—this is tribute to my colleagues, not to me; I have just sat on my bottom and done nothing—we now do not have a single failing contract with the Government. We are green rated, and on PECS we are delivering despite—

Caroline Flint

Obviously you have come in, and it is evident from things that I have read about your management that you have changed some approaches to the company’s work. You are not necessarily vying for as many contracts as Serco, as a company, did in the past. You have divested yourself of a number of loss-making businesses. Clearly you have taken a different approach. I am interested in what you have learned about how Serco was approaching public contracts in the past that was leading to significant failures in the delivery of those contracts and, quite frankly, in some cases an underestimation of the costs involved, leaving Serco out of pocket.

Rupert Soames

I think that the problems in Serco pre-2014 were quite widespread. The hamster was being made to run round the wheel too fast. There was a management team that had promised to have very rapid growth, and it was a perfect storm because the management team was promising ever-growing profits, and the Government was getting ever-better at writing contracts. The two came slamming together. When I came in, I bought the equivalent of my year’s salary in Serco shares at £3.46 a share. When people say, “Did you know what you were getting in at?” £3.46 a share says no; the share price is now at £1. I don’t think the board knew exactly how things were running, so the first thing to do was to make sure that the board knew—that operationally we were much more on top of it. I think you have to decide when you are coming in whether you are going to spend endless time worrying about what went wrong, beyond analysing it to say, “What do we have to do better?” I have concentrated on doing the latter. One of the things I thought was a problem was that you got punished for producing bad news. My colleague Angus Cockburn and I went up the Serco High Street saying, “Bring out your dead.” There was a frightful twitching of lace curtains as people decided whether they were going to tell us, and then suddenly all these coffins came flying out through the roof. We had a great moment where we took £1.5 billion of write-downs, where we were able to go and create a new thing. The important thing is that we have never stepped away from a commitment to our customers.

Caroline Flint

I think in July 2017 you said it would place an undue significant strain on the group if you were to continue to want to rebid for the PECS contract, but I think there has been a change in approach on that. I think Serco intends to rebid for the contract.

Rupert Soames

I do not know where you got that quote from me. I would never have said that extending PECS would have put the group in danger. It results in us continuing to lose money, and I would be trying to persuade the Ministry of Justice of the wisdom of not extending the contract and making us take another £10 million of losses, but hey, we’ve taken £443 million of losses so far. They have the right to extend. They will extend. They have extended, and it is their right to do that. We will put our shoulder to the wheel—or, rather, to the prison van.

Caroline Flint

Looking again through the Crown representative reports—I am not saying you are necessarily alone in this as a strategic supplier—there is quite a lot of this extending of contracts. I understand some of that is because contracts are often offered for five years but at the three-year break point there is a discussion about moving forward. That is not necessarily a bad thing, but is there anything you would like to say about extending contracts? If that becomes too common, it might actually contribute in some ways to pushing out competition and potentially innovation in those areas.

Rupert Soames

One of the imbalances is that this right to extend the contract is one-sided. I would like to see that change. It is perfectly reasonable for the Government to say, after five years, “We’re enjoying this. Can we have another five years of it?”, but you, the supplier, do not get any choice in that. The rule is if we, as a supplier, are losing money and the Government know it—and they do, because they get the accounting—they know that it is going to cost them more if they go to the market, so they will extend it. A better balance on that would be good.

Chair

You talked earlier about a living will. Were any contingency plans being put in place when you were going through your rights issue?

Rupert Soames

The Government went round to every major Government contract and said, “What will you do if Serco goes bust?” They did it twice. They did it when I arrived, which I thought was slightly insulting, and they did it again when we had a rights issue.

Chair

How much did Serco co-operate in that? Obviously they can talk to other suppliers, but if you are running the services, you would have to co-operate in a handover if something had gone wrong.

Rupert Soames

The law in the UK is very clear on this. I got talked to by some very senior Government people who were worried about this, and I said, “Listen, the law is very simple. The people will TUPE back to the Government. The Government will get them back. We would co-operate in any way that you wanted in order to facilitate that transfer.” I just think that it would be helpful if that were formalised.

Chair

We will probably come back to this a little later. You talk about the losses that you are making—you just mentioned the PECS contract. Does that threaten your future in your position? How long can you keep making losses and stay in post?

Rupert Soames

We went to our shareholders and said that we had to write off £1.5 billion and take about £480 million of contract losses, and asked, “Could you please give us £700 million to go and refinance the company and allow us to stand by those losses?” That was four years ago. We are, as we speak today, within 3% of that original number. They have not got worse; they have been a bit of a mix and match around the place. Our balance sheet now is one of the strongest in the industry. We have no pension deficit. From that point of view, we are in a very sound place.

Chair

We are going to come on to pensions a little later.

Sir Geoffrey Clifton-Brown

A very quick question, Mr Soames. You complain about Government bullying and unfair contract terms, but it is a free market. In your time, how many contracts have you declined to bid for?

Rupert Soames

Quite a few.

Sir Geoffrey Clifton-Brown

Can you quantify that?

Rupert Soames

No, I cannot, but I can think of one that we have just been excluded from, which was an MoJ one for education work in prisons. We have dropped out of that one. We look at maybe two or three a year on the terms and conditions. There is another that we are about to go and no-bid. As you say, it is a free market, but it should not be the objective of the Government to make the terms and conditions so penal that small companies dare not go anywhere near them and even big companies like us turn around and say we don’t want to bid for it. That is not because we can’t do it or don’t have the capability, but because the terms they are asking for are completely unreasonable.

Chair

You made those points very clearly in your evidence, which was obviously picked up by the media, and again today. Given that, do you have any conversations within Government when you are pulling out, and are you able to feed that back through the system?

Rupert Soames

Yes.

Chair

Do you think that anyone in Government is listening to your concerns?

Rupert Soames

As I said, I raised these concerns with the Cabinet Office, who said to send them a letter with examples, which we have done. As I say, it was on 12 contracts and their terms. I think that the dialogue or narrative is that this isn’t a problem because they had issued a prior information notice. We are saying that it is a problem, because the Departments are just ignoring it.

Chair

You have made your points again, here and in the media.

Sir Geoffrey Clifton-Brown

Mr Soames, would it be a problem for you if I asked you to write to the Committee with all the contracts that you have declined to bid for since you have been in your position and the reasons why?

Rupert Soames

No, I don’t think I would—if you will excuse me, you may wish to put me on a rack and pull me, and eventually I will—

Chair

It is a genuine question.

Sir Geoffrey Clifton-Brown

We are here to learn, and improve the Government’s procurement system.

Rupert Soames

It is a letter that we have sent to the Cabinet Office, detailing the contracts on which there were terms that we consider are just—

Chair

You have repeated some of those concerns.

Rupert Soames

You would have to ask the Cabinet Office for that letter. We would have no objection if you asked them for it.

Chair

There is no commercially confidential information in there that you would have a problem coming out?

Rupert Soames

Presumably, you would undertake to keep it confidential.

Chair

On that basis, we may well seek to obtain it.

Rupert Soames

I think you would find it quite informative of the widespread—

Sir Geoffrey Clifton-Brown

Thank you very much.

Chair

You have made your points again very firmly. Anne Marie Morris is going to move on to Mr Chalmers and Atos, so you will get a break, Mr Soames; we will come back to you shortly.

Anne Marie Morris

Mr Chalmers, I am going to focus very much on the Government’s perspective, in terms of what they did, why they did what they did, and how you see that. My colleague, Mr Graham, will then look at your side of the contracting—what worked, what did not and so on. You are, so far as I can see, primarily a systems and IT business. The Government’s window, if you like, was looking for something quite different. That is certainly true of some of your contracts with DWP. Those contracts, with regard to PIP and ESA, involved quite a bit of people management, including of some very vulnerable people. I am slightly surprised that the Government had criteria broad enough to consider you for those sorts of jobs. How did Government spec the potential bidders and limit the inappropriate ones?

Philip Chalmers

You are quite right to spot that. We would probably look at it a bit different from the other companies. In the UK, we are about 80% technology services and digital transformation and about 20% the kind of outsourcing that you have been talking about today. In fact, globally, we don’t really do much of that outsourcing; it tends to be just in the UK. The origin of it was in Benefits Agency Medical Services, which was in 1998. That was outsourced in totality to what was then Sema, which was taken over by Atos. We were doing that from 1998 through to 2008, when incapacity benefit, the assessment for which was the main one carried out, was replaced with work capability assessments for ESA. So, we were in that space from 1998, when PIP came in.

Anne Marie Morris

While I appreciate what you are saying—you are in that space—from the Government’s perspective, the contracts for ESA and PIP were a bit different, in the sense that you really were dealing with some very vulnerable people with a system that had just changed, and which, to be honest, I suspect not everybody fully understood. I am still surprised by that. My question is, how did they look at your track record and your ability to deal with these sensitive, people-based issues when dealing with these vulnerable people?

Philip Chalmers

I come back to the original point. We had been doing work with a similar group of people from 1998 to 2012—for 14 years—so we had the experience and we had the people. We had TUPE-ed across all the people from Benefits Agency Medical Services, so we had a lot of the healthcare professionals. As we went through the natural procurement process, we clearly convinced the Government that we had the necessary skills and capabilities.

Anne Marie Morris

Just so I understand what the Government were looking for, what criteria did they set, which you then met?

Philip Chalmers

Oh, goodness. Is this for PIP in 2012?

Anne Marie Morris

I am looking specifically now at PIP and ESA.

Philip Chalmers

I will try to recall the specific area. It was about whether you had the right number of people and whether those people were in the right locations. Bear in mind that PIP was split into four geographies, and you had the opportunity to bid for one or more. The way that you intended to do it was also put forward. There are three types of assessment: you can assess on paper, or you can ask people to come into assessment centres, or you can carry them out at home. Those were the criteria for how you manage that mix. It was about whether you had the right people.

Anne Marie Morris

After you put forward your proposal, to what extent did the Government scrutinise your bid to make sure that what you said was actually true? Did they do any due diligence on it?

Philip Chalmers

Again from memory, they talked to people that we had been working with on WCA and its predecessor—IB.

Anne Marie Morris

That sounds fairly cursory to me. So they did not do formal due diligence. They didn’t turn over the stones and look across the piece in a constructive way at whether or not you had the skill and the resource to deliver on the project.

Philip Chalmers

It was a very lengthy procurement. In fact, it was two procurements. The procurement started, then it fell before the election, and then it started again. So when you say due diligence, you are talking about weeks of face-to-face competitive dialogue, where procurement professionals and professionals from DWP drill down into every aspect of what you are proposing. So I wouldn’t characterise it as a lack of due diligence.

Anne Marie Morris

Okay, but what you are saying is that the due diligence is about what is on paper and what someone says to you, as opposed to actually going out and having a look.

Philip Chalmers

You say going out and having a look, but bearing in mind that PIP was a brand new policy and had never been there before, it wouldn’t have been possible to go and have a look at where somebody was doing that already. All they could do would be to look at where we were doing something similar. DWP was able to do that, and in fact knew us extremely well from the work we were doing with them.

Anne Marie Morris

Surely they must have needed to look at the new elements in what you were offering. If you were saying, “This is the resource we have got. This is the physical resource, and this is the people resource,” surely there should have been some auditing of that.

Philip Chalmers

As part of the procurement process, they would have satisfied themselves that that evidence was there; yes.

Anne Marie Morris

By doing what?

Philip Chalmers

I do apologise—it was 2012, so I can’t remember the process exactly.

Chair

I was a member of the Committee in 2012, and your company appeared before us. There were promises in the bidding documentation—a promise, for instance, of premises that never materialised, and it turned out that they had never really been signed, sealed and delivered as an option, and yet they were something that the Government expected. So we had people travelling long distances, people arriving at buildings that were inaccessible. There had been over-promising on the bid by quite some margin. I remember it being quite an uncomfortable hearing for the representative of your company at the time.

Philip Chalmers

I remember what you are talking about now. There was a debate about whether they had a complete list of supply chain members, because we do deliver some of the work ourselves, and we deliver some of it through SMEs and some through NHS trusts. There was a question raised by you as to whether these supply chains were fully signed up at the time, or whether it was an intention to sign up.

Chair

To pick up on Ms Morris’s question, can you remember—or tell us—what due diligence Government put in, to ensure that the promises that you made were concrete and deliverable? Surely, it cannot simply go on trust.

Philip Chalmers

I genuinely cannot remember what went through in 2012, but normally the analysis and scrutiny of large-scale bits of that is pretty intense.

Chair

It is often of the contract itself, but what about visits and so on?

Anne Marie Morris

It is not just about the contract; it is about whether you have the capability, the skill and the resource to deliver. I sat on the Work and Pensions Committee at that time, so I looked at it as well, and there were some glaring errors in terms of properties that did not have lifts in for disabled people, who then lost their benefit because they could not attend their interview, through no fault of their own. It seems to me that before you get to contract, the Government should have been asking, “Have you thought through what you need to deliver on this? Do your properties have facilities for lifts?” and so on. Those are the bits that, at the moment, I am not satisfied happened.

Philip Chalmers

Okay.

Anne Marie Morris

Okay, fine.

Chair

There must be somebody in Atos who remembers that time. Will you send us a note about what due diligence was taken?

Philip Chalmers

Taken by the Department in 2012?

Chair

Yes, because we gave you a hard time in 2012, but we are also keen to see what Government’s role was in that. There is a tendency, which we see often on this Committee, for Government to focus on the detail of the wordings of contracts—every dot, comma, if, but and maybe—but perhaps not to look at the practical reality of delivery. That is not always the case, but we see enough of it to know that it could be an issue. So it would be helpful if you could go back, look at that and provide us with information.

Philip Chalmers

I will do that.

Anne Marie Morris

To take you to the next stage, how did you go about negotiating contracts and establishing KPIs? I am particularly interested in the comparison, because Mr Soames paints a picture of “take it or leave it.” I am intrigued: what did you get by way of “take it or leave it”? What did you get in terms of, “These are the KPIs; like it or lump it”? Or was there a genuine negotiation?

Philip Chalmers

Again, are you talking specifically about PIP?

Anne Marie Morris

About all of your contracts. By all means highlight differences. It would be useful to know, if there were differences between how different Departments addressed it.

Philip Chalmers

There has been a tendency in the last two or three years for “take it or leave it” to be more prevalent in contractual terms. The way that procurements have been structured is that at the early stage, when you have multiple, maybe 12, bidders—I am mostly talking about technology services contracts—they will put out a draft contract with Ts and Cs, and try to nail that down at that early stage, but you will lose marks for any significant mark-up that you do on it. You are at the very beginning of the procurement process. You are keen to get to the next stage, when you will start seeing the meat of the detail, because so far you have only had a high-level view. You have not spent very much money at this stage, so you are keen to continue, but you are effectively being asked to just sign off what is there and it is then effectively frozen. When you get further down the line in the procurement, you have the ITN and detailed specified requirements—everything is there—but you do not get to go backwards, and basically it is done. From the Government’s point of view, it seems like a smart thing to do.

Anne Marie Morris

As a commercial businessman, would you think that is a smart thing to do?

Philip Chalmers

We take a lot of pain in our Government contracts, but we now regard that as a ticket to entry.

Anne Marie Morris

Effectively, it sounds like the Government are adopting a tick-box approach. It is cutting out the way back. You are all then forced by the fact you have this contract. You have almost said, “Well, we can do it whatever it is and we don’t mind what you put us with.” Did you never think, “I won’t be able to renegotiate that when I actually have the information from Government as to what they really want”?

Philip Chalmers

I think Mr Soames put it well. There was a pendulum swing from 20 to 25 years ago. The contracts were seen as being too heavily in favour of the private sector. It has swung the other way. Now, we see terms that we have to sign up to if we want to do business with Government. We try in vain to get rid of things such as uncapped, liquidated damages, but they are always put in there.

Anne Marie Morris

But is it good business to operate in that way—to sign up knowing full well that you will be shown a bag of tricks that is actually a very different prospect for delivery?

Philip Chalmers

The detail of the delivery itself will be in additional schedules later. What we are talking about sits in the commercial and financial Ts and Cs that are done right at the beginning. As I say, they are tough; they are onerous. I cannot remember the last time I had a public sector contract that did not have a termination for convenience, for instance—not a termination because you have done something wrong, or a termination for a breach, but a termination for convenience, which is, “We would like to terminate you.” It is only one-sided. That is there. We are now used to that within the company, and I take that to our legal department every time we bid for a contract or win a contract and they say, “We expect to see that now.”

Anne Marie Morris

Are pricing and penalties also nailed down at that early stage, or does that come later?

Philip Chalmers

That comes later.

Anne Marie Morris

So you then have some flexibility, once you have seen what you are actually being asked to do.

Philip Chalmers

In terms of the price?

Anne Marie Morris

Pricing and penalties.

Philip Chalmers

Yes. Some elements of the service credit regime may be in the early stages, but the majority of the detail around the service delivery itself would come later.

Anne Marie Morris

In terms of performance management once you have entered into the contract, what did the Government do to try to look at whether you were delivering, and whether you could continue to deliver, given what you were doing?

Philip Chalmers

Contracts across the board are pretty detailed—sometimes you have 200 KPIs, and you have detailed service level agreements. They differ slightly from contract to contract, Department to Department, but there is usually a fairly strict and robust performance management regime in place. We have a contract manager who meets weekly, fortnightly or monthly depending on the contract. You are held to account on the SLAs and the KPIs and you are penalised if you do not meet them. That is fairly standard.

Anne Marie Morris

Do you always get penalised, or are there times when the Government just wants to get the job done?

Philip Chalmers

If we have agreed to a service credit regime that has penalties and we do not meet it, we expect to be asked to pay them and we pay them.

Anne Marie Morris

Given the process of RAG rating, has there been a time when you have been in red?

Philip Chalmers

Yes, we had a period in 2014. It was the very early stage—it was two things at once. We were exiting WCA, and it was the early stages of PIP and the performance challenges around PIP at that early stage.

Chair

I am letting you get away with acronyms, but forgive me for interrupting—that’s the work capability assessment, and you mentioned IB, which is incapacity benefit, to be clear.

Philip Chalmers

Yes, and PIP is the personal independence payment.

Anne Marie Morris

I am curious as to why, with the RAG rating of red, the Government still carried on and you carried on. You ultimately exited the ESA contract, and I was surprised that you did not do that earlier. What is it about how the Government manages the contract that means that when it sees something that is not working and you get a red rating, you pay the penalties but you carry on none the less, which means that there is actually no improvement in the service delivery—you have just paid a chunk of money?

Philip Chalmers

Work capability assessments were a difficult service. I remember my colleagues using the phrase that, “It wasn’t working for the claimants, it wasn’t working for the DWP and it wasn’t working for us,” but we could not just walk away from it. We do not walk away from anything. We had to ensure that there was a smooth and orderly handover of that business to another supplier, which took a period of time and of negotiation. I think this Committee praised the fact that it was an orderly handover and that the service continued. We would never just draw down the drawbridge and stop delivery—that would be unacceptable.

Anne Marie Morris

Are you not surprised that it was you who drew down the drawbridge, rather than the Government?

Philip Chalmers

I think it was mutual at the time. It was agreed that we needed a change in that service.

Anne Marie Morris

Why did you think that you could not make that change? What was it that made you realise that you could not carry on and that it needed to go to another contractor?

Philip Chalmers

It had got to a place where publicly it was a very difficult service to deliver. There was great reputational damage to our name around that. That caused difficulty in, for instance, recruiting people to be able to deliver the service. At that time, we were struggling with a backlog building up for those very reasons.

Chair

So it was the reputational damage that made you walk away.

Philip Chalmers

I think it was also the fact that we wanted the service delivered as best as it can be. One of the things that you need to understand is that a third of the people in Atos have TUPE-ed in from public sector organisations. There is a really strong public sector ethos within the company, and that flows through. Nobody wants to see public service delivery going badly. In that instance, it was not going as well as it needed to.

Anne Marie Morris

In terms of the Government’s position on all this, you said earlier that they did not like the get out of jail clause, but you wanted to get out of jail because the contract was not working. How did they react to your request to get out of jail, and did they penalise you very heavily for leaving them with the problem of finding somebody else?

Philip Chalmers

I thought it was a really constructive process. I was not involved in it, but I am aware of it. It was difficult, but it was constructive and it got to a conclusion as fast as it could. Yes, we were heavily penalised.

Anne Marie Morris

In terms of the ability of the Government to then find somebody to replace you, presumably that was quite difficult, given the mess it was then in.

Philip Chalmers

I don’t know how difficult they found it. Maximus came forward. I am not privy to the conversations that went on between the Department and Maximus and how that played out. There was not a big gap.

Anne Marie Morris

Let me ask you something on a slightly different tack before I hand over to my colleague. Corporate governance is clearly a big issue. I was slightly surprised to find that your pension scheme is where it is and your shareholders are still getting dividends. The shareholders are getting dividends, but your pension fund is increasingly going into deficit. From a corporate governance position, you know that you need to be looking at this not only in terms of what is in the best interests of shareholders, but also in terms of the employees and the community and all sorts of other public aspects that you need to look at. Your pensioners are effectively having a smaller and smaller pot while the shareholders are still getting their dividend. That does not sound like good practice to me.

Philip Chalmers

Like a lot of companies that have grown by merger and acquisition, we have brought in a number of pension schemes. Some of the ones that we brought in were running deficits, and we have to fix that. We have got a long-standing funding plan for that that has been approved by the shareholders and the board. We have run that past the Pensions Regulator, as well. The group at the global level has stood behind that. We do not regard the funding issue as an issue at all.

Anne Marie Morris

We will touch on corporate governance more generally later.

Luke Graham

To build on some of my colleague’s comments, one of your comments that I picked up on straight away, Mr Chalmers, was that you take a lot of pain in your Government contracts. Why does Atos want Government contracts?

Philip Chalmers

We operate in multiple markets, and one of the things is to not have all your eggs in one basket. Within the private sector, we work in manufacturing, retail, transport, utilities, media and telecoms. Even within my bit of the public sector in health, I do not regard that as a single market. We have central Government, health, defence, police and education. As a business in the UK, we want to have a presence in all those markets because at various times some of them will be growing and some will be declining.

Luke Graham

It is not about a desire or a big love for this certain type of business; it is more about spreading risk.

Philip Chalmers

There are two elements to it. You do want to spread risk, I think that is absolutely right, but as I said a minute ago, we have a bit of a heritage in the public sector.

Luke Graham

You say heritage, I say legacy, and we can go into some of your performance in terms of that legacy. What I am trying to understand is—we have looked at some of your figures. You get 13% of your revenue in the UK and Ireland. In your area of the public sector, what is the revenue figure and the operating profit figure that comes just from the public sector side?

Philip Chalmers

There is a slight confusion, if you will just let me explain. The bit that I run is the technology services—digital transformation. The bits that you were talking about there—about PIP and WCA—that outsourcing sits separately, even though there is public sector in it. Between the two of them, it’s just over half of our business in the UK.

Luke Graham

So half of the 13% is what we’re saying—so 6.5%?

Philip Chalmers

The £1.5 billion is our revenue in the UK and just over half of that would be from the public sector.

Chair

So, technically paid for by British taxpayers?

Luke Graham

Got it. Fine. And of that, what is the kind of operating margin that you are at on that?

Philip Chalmers

We don’t split it out for those markets, but if you look at our annual reports you will see that our operating margin is about 10% or 10.5%.

Luke Graham

You talked previously about the heritage—and obviously the involvement since 1998. But I think we have seen, and I in previous hearings as well, some of the issues. As a constituency MP, I have come across some of the historical issues. There is also the NAO Report about some of the issues that Atos has and certainly was having, especially on PIP and ESA, when you look at the delay on delivering reports, the backlog that was built up and the backlog for assessments. So why is it that the DWP turned to you? I mean, other than being kind of the only one standing, why did the DWP go for Atos? You say you have heritage—I say it’s a pretty poor legacy—but what was strength, other than being there and having an existing relationship, that made the DWP go for you, in your opinion?

Philip Chalmers

For which contract?

Luke Graham

For ESA and PIP.

Philip Chalmers

For ESA, it was a competitive tender that built on the fact that we did 10 years of delivering its predecessor. So I think they had strong confidence there. On PIP—I mean, the description you give is not current today. We have spent the last two and a half to three years working really hard, frankly, with the Department and with the Cabinet Office fixing that. So, if you look at PIP performance today, you will be looking at 70,000 assessments carried out per month, with no notable backlog—94.5% customer satisfaction from the claimants.

Luke Graham

We can drill into PIP then, because that is the example you used. When you are looking at the subsequent reports that have come here, I wouldn’t say it was a strong record. But I’ll come back to it, because I’m not really understanding why DWP went for Atos. That is what I am saying. Also, with the subsequent reviews—and you had the problem with ESA—you basically got out of that contract and it went over to Maximus. If you were trying to sell Atos, to say, “What’s our strength?”, you have technological strength and that’s clearly what your company stands for. You had your previous experience and obviously it’s a mixed record, certainly over the last decade. What would you say, appearing here today, is your strength? Why is Atos good and why should it continue to have contracts with the DWP?

Philip Chalmers

In this particular case that you are highlighting, I think the answer is that even when that went into difficulties, we stood behind it. We invested hugely in it; we are still investing hugely in it. And we’ve got to a point of delivery that the customer is happy with. We do not fold when things go badly.

Luke Graham

You did on ESA.

Philip Chalmers

We jump in and we fix things. So, we fixed PIP.

Luke Graham

Okay. We will come back to PIP, because I would be interested to know the numbers if you think PIP has been fixed. But for ESA specifically then, you say you don’t jump ship, but obviously you did pass that contract on. You got to a point where Atos took 29 weeks to deliver reports and over 40% of assessments did not meet required standards. To start at the beginning, before we hear how you got to that point, what due diligence did you undertake when taking up that ESA contract, to understand what the Department needed and how you could fulfil it?

Philip Chalmers

Honestly, you are talking about a contract that was let in 2008 and I have no memory going back that far.

Luke Graham

Okay, fine, bring me more up to date—some of this information has come from 2016. It was run for a number of years. So bring me more up to speed. When you were inheriting some of the legacy issues, what do you think went wrong? Where do you think Atos didn’t have it quite right for ESA?

Philip Chalmers

I didn’t have ESA in 2016.

Luke Graham

Sorry—you came out of the ESA contract. What I am asking you for is—you weren’t around when the original contract was signed, but I’m sure you were aware of the issues why you had so many performance problems with the ESA contract. So I’m asking you why you think Atos wasn’t able to perform and continue with that contract?

Philip Chalmers

I have a view—I am not entirely sure how widely it will be shared, but I will tell you what I think went wrong with ESA. There was a change in the assessment of incapacity benefit. If I simplify, the assessment used to ask, “What is wrong with you?”, and then people would list all the things that were wrong. We carried out those assessments for 10 years. There was a difference with work capability assessments that said, “I know there is something wrong with you, but what are you capable of doing?” There was a very fundamental shift. When we started rolling it out for new claimants, it went pretty smoothly. The volumes were relatively small, but there wasn’t any uproar, as it were. When we started reassessing—a part of the contract was to go back and reassess the 2 million people who were on incapacity benefit—people were challenged by the fact that they had not expected, particularly if they had been on incapacity benefit for some time, people to suggest that they should be capable of some work, and I think there was a mass rejection of it from people that were going through the process. If you had been on incapacity for 10 years and you had built an entire lifestyle around picking up your grandkids or whatever, and then somebody comes along and says, “You’re fit for work”, that is a difficult thing to take on board, so I think there was a big reaction against it at the time.

Chair

So you are saying the clients were the problem.

Philip Chalmers

No, I am saying we did not manage it properly. We had not understood that. We had had 10 years of delivering a different assessment.

Chair

Just to be clear, are you saying Atos is taking responsibility?

Philip Chalmers

I think there is a responsibility across the board.

Luke Graham

Again, I think you will say you cannot answer this, but to go back to that due diligence piece at the beginning about having a change in ESA and the work assessments related to it, it sounds like Atos did not undertake the due diligence to go through and say, “This is what we now need to deliver. It is a functional assessment. There will be additional problems. The questionnaire will be x questions longer and this is why we have a backlog of 29 weeks and the assessment did not meet the required standards.”

Philip Chalmers

I can’t remember. Sorry.

Luke Graham

Okay, that’s fine. To come back to PIP, DWP contracted Atos to assess claimant needs for PIP. Again, on the work on the backlog assessments and the work volumes, you say you have fixed the problem now. In the same way that you have spoken to ESA about how you think the problem came about, how do you think the problem came about for PIP?

Philip Chalmers

I think the main problem was that there was an assumption at the start, which was given to us, that the length of the assessment would be 60 minutes. It takes two hours, and that pretty much from the start blew our model away. We did not have enough people—

Chair

Did you not think to try it and do assessments or tests yourself? You trusted the Government information.

Philip Chalmers

That was the assumption that was given to us and we based it on that.

Chair

Did you test the Government on how they had made that assumption and what they had built it on?

Philip Chalmers

We may have at the time. We may have asked them. There might have been some carried out by the DWP.

Luke Graham

You have your public sector pledge: improved transparency, better collaboration and improved focus on the system experience. In relation to ESA do you feel you broke that pledge?

Philip Chalmers

We created our public services pledge in the last couple of years. I still think we tried to do our best in ESA. You might say that we did not get up to the mark, but we tried to do our best. We deeply regret any difficulty that people experienced.

Luke Graham

We are looking at some of the measures that were used by DWP and yourselves and how some of these assessments were performed on the ESA and the PIP side. Do you think they took into account the people side of the equation? Some of the measures that we have seen seem to indicate it was very much about the time taken. It is a tick-box exercise, a compliance exercise rather than a values-based exercise. How much thought did Atos put into considering the customer and the people, given how vulnerable the people are that you deal with?

Philip Chalmers

That is at the centre of everything we do. To give you an example, 75% of the healthcare professionals we use are nurses, most of whom come from the NHS. The average length of tenure is 14 years, so they are experienced. Caring for people is in their DNA. The functional assessment needs to be the same everywhere, so it needs to be carried out in a specific way. That functional assessment was designed by DWP in order that it would give them the evidence and the justification to make a decision; but when you are asking about how we put people at the heart of that—that is all our people think about.

Luke Graham

How do you check to make sure that that really is the case? I will be honest: from a constituency point of view I just don’t find that to be true. The amount of time I have seen assessment reports come back and the assessors have not done the individual checks—someone says “They have fine hearing” and actually the person was wearing a hearing aid. How do you actually quality check that people really are at the heart? Going down to the individual assessor area, how do you performance manage that person to make sure people are really at the heart of everything they do?

Philip Chalmers

One of the improvements that we have made—there is a quality measure, for instance, which we have not met, which is a really difficult quality measure. You need to be 97% and we are currently 95%, so we are getting there; but I think in previous Committees it has been pointed out that it used to be a much bigger gap. We are determined to get to that point. One of the things that we have done is we have brought in more clinical leads—so we used to have 1:40 clinical leads and we now have 1:12. We have invested heavily. These are people who do one-to-one training with our healthcare professionals, essentially around how they deal with people—how they make sure that that assessment is as gentle and as kind as possible, because there is a recognition that these are vulnerable people and this is a potentially stressful situation. We have put all of that in. We have tried to improve our communications at the start, so that people know exactly what it is they are going through. We try to encourage people to bring family members or carers with them, as part of the process; and at every step of the way we try and engage and get feedback. So if you say that you have a comment from a constituent we desperately want to know about it; because if there is something that we can fix, we want to be able to fix it.

Luke Graham

Again, I think the number of cases that we see that come through to our offices—we clearly have a problem with the individual assessors, and certainly the varying standards. You speak about reaching for a standard, and you have been doing it for quite a few years now, this assessment process. There just seems to be a lack of urgency to it. You know what happens when people fail their assessment: they lose funding support. They in some cases have their livelihood threatened. They have living condition issues. All these things you understand: it is not like being a retailer, and it is customer service and “We really aspire to be x% and we haven’t quite met it.” It means “If I don’t get this assessment right this person loses money.” My question is: when are you going to hit the 97%?

Philip Chalmers

The straight answer to your question is we hope to hit that this year. If we can get the momentum that we had in 2017 through to 2018, when we have improved, then we should be able to do that by the end of this year; but can I just take a little minute to explain what that quality measure means? It does not mean that the evidence within that report is not sufficient for DWP to make a decision. There are 12 activities that are listed on it, and each of them has a number of descriptors. A report can be deemed as not meeting the quality threshold if one of those has not got the evidence that quite matches up to it. We do an audit and we then take that and make sure that it gets fixed. Essentially, between ourselves and DWP every single report will be fixed. Just so you understand the driver—because we are a commercial organisation—if we miss 3% we don’t get paid for 3% across the board. If we miss 5% we don’t get paid for 5% across the board. Yet all of those will come back to us to be reworked, which we will fix without being paid for, and we have to do it within two days.

Chair

We do not need to get into the weeds of how PIP is administered; so if we can move on—

Philip Chalmers

But there is very much a driver for us: you were saying “Where is the urgency?” There is a huge urgency for us to do it.

Luke Graham

For the benefit of the Committee, and everyone watching as well, just how many years have you been undertaking PIP assessments, again?

Philip Chalmers

The contract was let in 2012 and we started in 2013.

Luke Graham

Five years. Do you get any feedback on how many recommendations from your healthcare professionals are overturned at tribunal—and what do you do with the feedback?

Philip Chalmers

The appeals process is very much on the DWP side. We do get high-level numbers about it. The evidence that we get from the DWP is that the majority of cases that are successful on appeal are because of additional evidence that comes through.

Luke Graham

And it is often medical evidence. I am conscious of the time. What is the percentage at the moment?

Philip Chalmers

I think it is 80%.

Luke Graham

So 80% are overturned?

Philip Chalmers

Yes, but it is good that there is a process in place. We ask people to bring as much evidence as they can. Once they come along, we try to send out for more evidence to GPs and specialists.

Chair

We are all quite familiar with the process.

Philip Chalmers

If additional evidence comes in, that is a good thing.

Luke Graham

Absolutely, but 80% is a shockingly high number for something that has been going on for five years. I would expect that in the first 18 months, not five years later. Again, that puts stress on people. I know the Chair is pushing us on time, so I will move on to the last couple of questions. When you had the crossover for ESA—obviously, you knew who was going to carry out that contract; it was going to be passed over to Maximus—what consideration was there of your customers in terms of extra delays or handover timing costs? What preparation was made to make sure that the customer experience was as seamless as possible in that handover?

Philip Chalmers

We put additional resources into that contract—again, at our own cost—to make sure that the handover was as smooth as possible. If it is important to you, I can see whether I can get a detailed exit plan for you. Would that help?

Luke Graham

Yes, I would be grateful for that; it would be good to get the details. In your experience to date, has Atos ever received a green RAG rating from the Government, or from the DWP specifically, while underperforming on its targets?

Philip Chalmers

We do not get that level of detail. The only information I have about RAG status is that, having put in place our performance improvement plan and executed it on PIP, which, as you said, was the reason we had gone to red, we were green from August 2015, and we are green to date—from then to now.

Chair

Just to get an answer to Mr Graham’s question, did you ever go green while you had underperformance on major parts of contracts or whole contracts?

Philip Chalmers

Not to my knowledge.

Chair

So all the while you have been green, you have never had any underperformance on any of your contracts?

Philip Chalmers

I suppose my first question is, how do you define underperformance?

Chair

Well, contractually. We have been hearing a lot about the details of contracts.

Philip Chalmers

On our KPIs?

Luke Graham

On your KPIs—exactly. We know we are not up to 97% yet on the quality side—we are at 95%. While any of those KPIs have been missing their targets, have you received a green RAG rating?

Philip Chalmers

If you mean do we have to be 100% green on every KPI on every contract—if one of them goes amber, do you think the RAG status of the Cabinet Office should go amber?

Chair

We are just asking you whether it has ever happened.

Philip Chalmers

I would say that it is almost certain that some of our KPIs were amber, given the vast number that we have, during that period. I don’t know, but I can assume that to be true.

Luke Graham

You can try to find out—fine. My last question is, does Atos want to continue in this market?

Philip Chalmers

Yes.

Luke Graham

So when we go to the contract renewal, there will definitely be bids in?

Philip Chalmers

We will qualify it like anything else. I don’t know what shape it is going to come out, but depending on the shape, we will absolutely look at it.

Chair

We are going to move on to Mr Haley and Sodexo. Thank you for your patience.

Lee Rowley

In the note you submitted to us, you state that there are 156 contracts that you operate on behalf of the Government. What is the value of those contracts?

Sean Haley

It is 52% of our UK and Ireland revenue, which is £1.6 billion.

Lee Rowley

So about £800 million?

Sean Haley

About £800 million, yes.

Lee Rowley

Has there been a growth or a reduction in either value or numerical terms over the past few years?

Sean Haley

It is reducing.

Lee Rowley

By a significant amount?

Sean Haley

Yes. We took a significant hit during the Hestia defence programme. We only retained one of those contracts, and we lost £100 million in revenue as part of that programme.

Lee Rowley

How would you describe the performance of the 156 contracts you have at the moment?

Sean Haley

We have no red-rated contracts, but of course, across a portfolio like that, we have some challenges. Specifically, there are challenges in our prison portfolio—Northumberland prison is a very challenging contract for us—and the CRCs. Of course, all those contracts will have their individual performance management systems.