MoD aims to share risks in £5bn deal

The Ministry of Defence (MoD) last week started the formal purchasing process for its £5bn, 10-year IT infrastructure overhaul with the specification that a Public Private Partnership (PPP) arrangement would be developed to deliver the programme.

By setting up a more complex partnering agreement rather than a straight-forward flat-fee outsourcing contract, the government hopes to share the risks and insure against another high-profile IT disaster.

'Partnering differs from conventional contracting relationships in that effective communication amongst partners leads to trust, better and earlier identification and management of risks, and to better value for money,' says the MoD document sent out to prospective bidders.

Payment will be dependent on performance and a gain-share mechanism will ensure the contract winner has a stake in the project's success. The supplier will also be required to use 'open book accounting' so the government can be sure its profit margins remain within reasonable bounds.

The approach comes down to minimising the risk for the government, says Ovum Holway analyst Tola Sargeant.

'The highest risk for the buyer is in a straightforward outsourcing deal where they pay out a lump sum and don't have much control. PPP gives the MoD more control and they will be working much more closely with the supplier in terms of both specifying what they want and delivering it,' said Sargeant.

Partnerships deals also help share up-front costs, says Stuart Payne, director at outsourcing advisors Morgan Chambers.

'The MoD is looking for a major transformation of its IT systems, requiring lots of capital up front. The contract will not be an easy win - suppliers will need to put skin in the game as well as payment being based on business results further down the line,' he said.

But mega-deals pose considerable risks beyond the question of delivery, says Liberal Democrat IT spokesman Richard Allan.

'The question raised is whether these enormous contracts end up with the tail wagging the dog - with so much dominance by the supplier they effectively have more control over the business agenda than the client,' he said.

There is also the danger of being tied into working with the supplier, regardless of its performance, because no others will risk spending millions of pounds bidding against an established incumbent, says Allan.

Many suppliers were reluctant to bid in the re-procurement of the EDS-held Strategic Partnering Contract with the Inland Revenue because of fears they would be unable to unseat the incumbent.

The Treasury admitted last week it has paid £2.5bn to EDS so far for the contract managing the Inland Revenue systems. This is expected to rise to £2.9bn over the total life of the 10-year project.