In July this year, the Office of Government Commerce (OGC) published figures on the distribution of government spending on IT, networking and related costs for 2009.
The total spend on IT, excluding personnel costs, was £7.57bn. Outsourcing was the biggest single item of spending and accounted for £2.33bn of the total.
An accurate figure on IT and networking is a good start in the current drive to cut costs, but this is only part of the picture. The total spend including personnel costs is much higher. Yet one of the problems central government faces in trying to cut costs is a lack of clarity on the total IT spend to which it is committed.
Having contributed to the 2009 Back Office Operations and IT component of HM Treasury’s Operational Efficiency Programme (presented to the previous Labour government by Sir Peter Gershon and Dr Martin Read), my own estimate is a total spend of around £14bn, although credible estimates of as high as £20bn have appeared. The uncertainty around the measurement of IT spend is indicative of wider challenges in measuring the performance of IT in the public sector and achieving positive and lasting change that will reduce costs.
With outsourced service provision making up such a large part of the government’s IT spend, a reasonable expectation might be that the public sector would have outstanding skills in procuring these services in a cost-effective way and then managing them in a way that delivers ongoing value for money.
The opposite seems to be the case. Instead of asking world-class IT service providers to be creative, innovative and do what they do best – delivering best-in-class standard services on an economic scale – the procurement process often focuses too much on the technical aspects of how the service outputs should be delivered rather than the business outputs.
Wading through treacle
So, for example, instead of simply defining the need for desktop clerical tools such as word processing and email, a procurer might insist on a certain PC specification, operating system and versions of the word processing tools rather than letting the vendor come up with the most cost-effective solution to deliver the same outputs. My Compass Management Consulting colleague, Steve Tuppen, has called this the “treacle” of public sector IT contracts.
Steve is right. The process by which many public sector contracts are procured is sticky at best but there is nothing sweet about it. According to figures from our own analysis of contracts, Compass estimates that the public sector is paying 40 per cent or more above the market rate for outsourced IT services.
That 40 per cent figure is based on analysis of central government contracts over the last five years. We compared the prices paid by government departments with the market price paid by the private sector for a comparable bundle of what are increasingly standard services, in areas such as desktop provision, servers and networks.
This means the public sector could save up to £6bn on its annual IT spend of £14bn on routine day-to-day IT provision without affecting front line services, with the potential for further savings on new-build IT projects.
The first step is for each department to understand how its value for money compares with the market. There is little point calling for 20 per cent cuts across the board if some departments can easily achieve savings of 40 per cent or more. Likewise, for the top performers, a 20 per cent cut may be too harsh and hit front-line services.
Overall, the benchmarks set for cost-saving programmes in the public sector have been far too timid. Instead of setting targets of 35 per cent or more in year one of a transformation project, the hurdles have been set at 5-15 per cent, which is low in view of the excess spend in many departments.
Besides the expensive treacle of flawed procurement processes, the other driver of costs is the level of demand from public sector clients for extra services and customised delivery from their outsourcing providers. The current round of demands for savings will be more enduring and successful than previous attempts if departments work with their service providers to manage their own levels of demand and to adopt standardised services.
Standardisation is the single change that will reduce costs most dramatically. It allows service providers to do what they have done so successfully in the private sector – provide utility IT services to a range of clients at a competitive price, having achieved economies of scale through use of the same delivery infrastructure.
The political will to make radical changes and radical cuts in the UK’s public sector’s IT seems to be in place. The only constraints to savings of 40 per cent or more being achieved are investment in the right capability to understand how good or bad each department is and then the availability of people with the skills, processes and tools to make the change happen.
Gary Bettis is UK President of Compass Management Consulting. In 2004, he led the IT transformation project at the Department of Work and Pensions and ran the service delivery function supporting the CIO’s internal team.