Information Age: News, analysis & insight for IT & business leaders

When the Inland Revenue awarded its £3 billion outsourcing contract to Cap Gemini Ernst &Young (CGEY) in December 2003, the decision made headlines around the world. Not just because of the size of the contract, but because the incumbent of 10 years (EDS) was being ejected. The fact that an outsider could snatch such a prestigious contract reflects the effort the Inland Revenue put into the tendering processes, "bending over backwards" to ensure there was a genuine contest, says Alistair Maughan, lead partner at Shaw Pittman, the law firm that advised the Inland Revenue throughout.

The fact is that incumbents are rarely thrown out when outsourcing contracts are re-tendered, largely because they know that any switch will mean hefty costs and upheaval for the customer, because they have access to insider data about how the operation runs and because they have built close personal relationships with the client's staff.

As a result, new bidders are understandably wary of investing the time and money it takes to put together a tender, fearing their function is to merely act as a benchmarking tool for the client's contract re-negotiation with the incumbent.

But it is not always like that. "The biggest issue in the whole first phase is, how do you level the playing field?" says Maughan. "How do you make certain that there is a fair fight between the incumbent, who has all the knowledge and all the people, and the outside bidders? They have probably got more information than you as a client, so how do you get that information out of them and to the other bidders?"

Not withstanding that, the Inland Revenue's original ten-year-old deal with EDS and its partner Accenture, did not contain such provisions and the Inland Revenue therefore had to negotiate a separate end of contract addendum in order to oblige the incumbents to provide the data required. "We had to negotiate a fairly extensive end of contract agreement with the incumbents, all with the idea of levelling the playing field," he says.

Information from EDS and its partners was required at three stages. The first phase was during the procurement process, and was designed to ensure that all the bidders had access to the same info-rmation on which to base their tenders.

The second was to find out what support the incumbents would give to aid any transition in the event of the contract being re-assigned. Finally, there was the need to find out what additional support they would offer after the new provider had taken over.

Love my tender

The next step was to draw up an invitation to tender (ITT). This kicked off the writing of the draft agreement since the ITT contained contractual issues - such as the level of security the Inland Revenue required - as well as service levels, service credits and payment mechanisms.

"We put the ITT out in mid-2002 and we got bids back by early 2003. Then, the Inland Revenue went through an evaluation process," says Maughan. The evaluation process is particularly important in the public sector, he adds, because the National Audit Office needs to be satisfied that it is fair and ensures that the Inland Revenue will get value for money out of the deal.

Of the evaluation criteria, bidders were only given the broadest of details, he says. "There were four particular areas that the Inland Revenue disclosed: service delivery; innovation and ability to innovate; transition; and evidence of partnership."

The fourth area also took into account the track record of the incumbents at the Inland Revenue - including some now notorious IT disasters that occurred. "The Inland Revenue made it clear that those were taken into account to an extent," says Maughan.

However, he also stresses that the track records of the other bidders were closely examined. "Reference sites were taken... both were asked to nominate a site from an account which they had exited and handed over to someone else," he says.

On top of that, the Inland Revenue also reserved the right to identify other accounts run by both the bidders and the incumbents, and to investigate their performance within those too.

One of the most sensitive elements of any outsourcing deal is how to handle the staff. But in the case of second-generation outsourcing deals, clients need to be especially careful because some staff work for the incumbent and not them.

The big issue for the client is to make sure it is not stripped of the best staff if the incumbent looses. Staff departures therefore need to be watched closely to ensure that the overall skill-set remains consistent. "It can be laborious if an outgoing supplier seeks to re-deploy large numbers of people," warns Maughan.

Indeed, he is confident that virtually every angle is covered by the legal agreements that the Inland Revenue has negotiated with EDS, Accenture and CGE&Y - even intellectual property issues arising from the applications developed over the years for the Inland Revenue.