Written evidence from PCS Union

Introduction

1. PCS represents around 190,000 members in the civil service and related agencies, bodies and contractors.

2. PCS represents members working in all government shared service centres and welcomes the Public Accounts Committee’s inquiry.

3. In light of the recent National Audit Office (NAO) report in May 2016 which has identified serious problems with the two Independent Shared Service Centres, ISSC1 and ISSC2, PCS is concerned that some of these mistakes may soon be repeated in the Ministry of Defence (MoD) shared service organisation, Defence Business Service (DBS).

4. This submission therefore focusses on some of these concerns over the future of DBS.

5. Though the current review is focussing on ISSC1 and ISSC2, PCS would ask that the inquiry extends its scope to include what lessons MoD has learned from ISSC1 and ISSC2, and whether the operation of gain share as a contract incentive ensures contract probity, compliance and value for money.

Background

6. DBS undertakes and manages a wide range of defence business critical services, including; MoD HR, payroll and finance; security clearances and vetting across government, the MoD and private sector; defence management information; the armed forces compensation, war pension and pension scheme; the MoD’s Medals Office; veterans’ welfare; and casualty notifications administration.

7. Not only does this make DBS one of the largest shared services organisations in Europe, but it means that it also carries out a far wider, complex and more sensitive function than other shared service organisations within the UK.

8. The MoD announced on 11 February 2016 that DBS would face the market under a new model called ‘corporate services integration and innovation provider’ (CSIIP), where MoD would bring in a contractor they can transfer their responsibility to in running DBS as a whole.

Repeat mistakes: poor contract design and use of gain share mechanisms

9. The CSIIP contract model is new and untested. It will allow the market and contractor to decide and define the MoD’s future corporate services delivery model, rather than the MoD.

10. The recent NAO report on shared services highlights some serious concerns regarding the outsourcing of public sector shared services, concluding that the shared service centres had not delivered anything like the predicted savings and, therefore, “the programme has not achieved value for money to date.”[1]

11. Some of the problems that the NAO identified were costly delays linked to the contract model being poorly designed:

“When the independent shared service centres were established, the government had not agreed on the process models for back-office functions. This meant it could not confidently specify the single operating platforms that the suppliers were to design.”[2]

12. This lack of specificity in the original contracting has also been exploited by companies as a means of generating extra profit through charging for contract changes:

“The government has incurred some unexpected extra costs because of ambiguity in the definition of new services and existing services. SSCL classed some activities as a ‘request for change’. Departments considered these activities to be part of the basic contracted service, which should not result in additional cost.”

“Without clear definitions, there has been an increased opportunity for suppliers to classify actions as changes.”[3]

13. The NAO also reports problems with developing the right performance indicators to hold private companies to account:

“There are problems with the key performance indicators (KPIs) for both shared service centres which has meant that the KPIs have not always helped the government to hold suppliers to account and provide incentives for the right behaviours.” [4]

14. It is concerning then, that the MoD seem to be repeating these mistakes. Instead of going to the market with a clear understanding of what service is required, the CSIIP contract is being shaped by what the private sector proclaim they can deliver.

15. The prior information notice issued by the MoD in February 2016 (to generate private interest in the CSIIP contract) said:

“Through market testing, MOD wishes to explore in detail the prospective role for the private sector, test the commercial principles being considered and understand likely interest from industry in any subsequent competition centred on the CSIIP option. MOD is therefore primarily interested now in seeking views from organisations that may have an interest in the provision of the CSIIP capability….”

“MOD would also be interested to hear from organisations that may have innovative approaches or technology that could be applied to this role.”

16. In addition, the CSIIP contract will enable the private sector to shape the future model of DBS. The prior information notice also states:

“The approach has been chosen as it has the potential to offer greater flexibility and agility in service delivery by enabling the incremental introduction of new services into DBS, and the potential outsourcing of current and new services on a service-by-service basis through further discrete contract action(s) in the future.”

17. Furthermore, the MoD is looking to use “gain share” as a contract incentive where:

“The CSIIP will also be contracted to identify and manage transformation opportunities within the entire DBS scope, as well as seeking out broader efficiency opportunities, progressively delivering savings to MOD whilst ensuring effective service delivery and continuous improvement throughout.” (Prior information notice)

18. Past experience of the use of gain share mechanisms in DBS highlight some serious concerns. In 2012, the MoD let a four year contract with Serco and Accenture as management partners, running DBS on a gain share basis where they were paid for running the organisation but additionally received 40p for every pound saved via ‘efficiency gains’.

19. The use of ‘gain share’ generated perverse incentives with savings calculated on a cumulative basis, original contract performance measures amended during the contract and jobs cut to generate savings and gain share payments, only to see some of them reinstated at a future point.

20. The CSIIP contract model therefore hands an alarmingly high degree of control over the future of MoD’s corporate services to a private company, which, taken with the previous experience of a private management partner in DBS, begs the question as to how value for money can be measured, change costs controlled and delivery risk managed.

Risk to DBS future level of service

21. It is difficult to see how savings could be made in DBS without sacrificing the level of service.

22. The NAO report states that shared services centres can generate savings through merging the back-office functions of different departments, stating “multiple customers are required to generate economies of scale”[5]. In DBS, however, there is as yet no proposal to merge any functions with other departments’ shared services, nor would this be appropriate given some of the unique characteristics of DBS.

23. It is difficult to see, then where savings would be generated through outsourcing, if not by cutting the level of service or off-shoring some of the work.

24. Off-shoring is viewed as a particular risk, given the sensitive personal and security information held and processed by various elements of DBS.

25. Therefore the DBS CSIIP contract shares many of the potential pitfalls of past privatisation of shared services, yet few of the advantages.

Conclusion

26. In light of the National Audit Office’s damaging report and MoD’s own experience of private sector involvement in DBS, PCS believe MoD should urgently halt and review all plans to outsource or privatise any part of DBS.

27. PCS would also welcome further scrutiny of the plans for future MoD shared service delivery and the risks inherent in privatising DBS using the CSIIP contract model and gain share mechanisms.

20 June 2016