(Less) taxing times for EDS

Big, 10-year outsourcing contracts do not come round very often, and when they do, procurement contests for them frequently turn nasty.

And so it was in late 2003, as UK government officials mulled over which bidder should be awarded the £300 million-a-year ‘Aspire’ contract to run the Inland Revenue’s computer systems for the next decade. Fearing things were not running its way, the incumbent provider, EDS, opened up a new front in its campaign. EDS sources (the unnamed kind) briefed journalists against the bid of a rival consortium led by France’s Cap Gemini Ernst &Young (CGE&Y).

Among the more dubious claims that dripped into the public domain: CGE&Y and its main partner, Fujitsu Services, lack experience of big government contracts (wrong); the pair lack the financial strength to pay hefty penalties if things go wrong (unlikely); and, apparently, that a French company (albeit listed on the London Stock Exchange) should not be running the UK tax system’s IT infrastructure anyway (far better to give it to a Texan firm, presumably).

Unusually, EDS also took out a series of full-page advertisements in The House magazine, a weekly political publication circulated to more than 1,500 civil servants, 659 Members of Parliament and about 300 Lords.

The ads urged the magazine’s small group of influential readers “not to take unnecessary risks” when deciding which company should win the Inland Revenue contract. They were not impressed. “An act of desperation, kind of like appealing to the crowd and the umpires to override the scoreboard in a sports match,” was the reaction of one observer.

The campaign failed, of course. The choice of artwork for The House ads – a mountaineer climbing a sheer rock face – was always likely to prove an unwittingly appropriate metaphor, for EDS had been fighting an uphill battle for much of the year. Yet when the contract first went out to tender, EDS was such a hot favourite that some potential bidding rivals had to be persuaded to bid by the government.

Most experts initially thought that disentangling the systems and responsibilities of the Inland Revenue, EDS and Accenture (which handled some of the social security systems) would be too difficult and costly.

Sentiment turned against EDS when the Inland Revenue failed to pay thousands of people the tax credits they needed. In May 2003, Sir Nicholas Montagu, chairman of the Inland Revenue, publicly criticised EDS for the problem.

Six months later, Revenue officials told a Commons committee that the department may have overpaid up to £2 billion in tax credits because of IT problems. EDS should come with a “health warning”, said committee member Frank Field. By the time the contract had been awarded to CGE&Y, there was a tangible sense that politicians, if not civil servants, were keen to turn their backs on EDS.

That left EDS – a company responsible at one time for running most of the UK government’s non-military computer systems – with only a couple of health service deals and a long-term defence contract to bid for.

But, as the dust settled on the announcement, many respected analysts began to doubt whether the loss of its biggest European customer was necessarily bad news for EDS.

Judging by the flat performance of the company’s share price after the announcement, EDS investors were not unduly concerned, although Wall Street analysts rushed to amend downwards their already gloomy estimates for EDS’s 2004 revenues.

A veteran follower of EDS, Bob Djurdjevic of Annex Research, went as far as to suggest that some good might even come of the defeat. “It leaves them in a fairly good position,” he said.

His argument: Instead of relying on big government contracts for its core UK business, EDS might now be forced to focus on less risky, shorter and lower-profile IT outsourcing and business process outsourcing deals.

Certainly, CEO Michael Jordan, who only took over in March 2003, is far more wary of ‘mega deals’ than his predecessor Dick Brown, reasoning that fixed price deals, risk sharing, performance penalties and delayed payments can all cause havoc with cash flow and margins. But whether EDS executives want it or not – and some are forecasting management changes here too – a new UK strategy has been forced upon them.

Avatar photo

Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

Related Topics