Signed sealed and undelivered

Pssst - wanna make some serious dosh? What about a public sector contract? Double your money overnight, no obligation. Start as a loss leader then massively hike the cost. Deliver three years late - working or not - the choice is yours. Only previous applicants need apply.

The IT industry's track record for reducing costs and increasing service levels in the public sector is a disgrace. According to Tony Collins, author of Crash - 10 Easy Ways to Avoid a Computer Disaster, #5 billion have been wasted on failed or abandoned projects over the past six years. Sixty per cent of those that were started came to nothing.

Collins says too great an emphasis is being placed on unproven technology rather than specific business needs. Those in the channel with public sector experience say the fault lies in the process where IT companies and the public sector become contractually bound. Complex protocol, rigid guidelines and expensive preparatory requirements add to their difficulties.

Traditionally, the public sector is an important market for IT companies.

Its size and diversity, coupled with the fact that central and regional governing bodies are often early adopters of technology, have ensured that channel players of varying size and make-up have invested considerable resources in this market.

Add to this New Labour's pledge to deliver more public services through electronic channels and it's easy to see why. The administrative processes of traditional services such as education, health and social security are being formalised and automated through the development of regional and national databases and electronic communication networks.

The pickings are rich. But what are the objectives? Greater efficiency and accountability, reduced levels of fraud and fewer cases of maladministration, or so we're told. In short, a better, cheaper service.

Large UK resellers, such as Computacenter and Compel, have formed high-profile alliances, with Microsoft and GlobalServe respectively, to target government contracts. But while they continue to build on their success in these markets, the complexity of the competitive tendering procedure means the large majority of channel firms avoid public sector opportunities altogether.

Laurie Mascot, corporate sales director at UK accountancy software vendor Systems Union, says typically, most Vars are automatically excluded from public sector contracts, regardless of their expertise or ability to respond to the needs of customers. He adds that the strict tendering guidelines which govern the way companies compete for public sector work make it virtually impossible for newcomers or smaller players to make a successful bid.

'The procurement process is complex, time-consuming and costly,' says Mascot. 'It also carries a high degree of risk, which some companies are just not prepared to take on. In fact, only two or three of our resellers are involved in government work because of the high cost of sale.'

Currently, any contract worth more than #84,000 has to be advertised in the European Journal. The prospective bidder has to put in a request for information in the form of a comprehensive specification of the client's needs and the proposed budget. This is the basis on which the bidder decides whether to continue with a full proposal. Demonstrations and a 'best' and 'final offer' follow before the client makes a decision - often on the advice of an independent third party.

Explains Mascot: 'The whole process is based upon a set of standard procedures.

It is supposed to be impartial and is designed to distance the supplier and the client, the objective being to achieve value for money. But on a regular basis, the tendering process might last up to three years and cost up to three times as much as a commercial bid.'

According to Mascot, who has worked both in channel sales and as a public sector accounts manager, it's not just the high fixed cost of placing a bid that works against Vars. The standard procurement model used by the public sector, based on a template originally designed by the US Department of Defence, does not take into account the added value that defines most channel players' business models.

'The government model does not have the flexibility to recognise the potential added value that could be brought to contracts of this kind,' adds Mascot. 'It will only allow companies to construct their bids around the defined functional requirements of a project.'

He adds: 'The government does not like doing business with suppliers it hasn't used before. It would prefer to take on a company it has worked with in the past.'

This approach is artificial and almost certainly ineffective. As a result, time and again, national and regional contracts are being won by the same bidders, regardless of suitability or past performance. It's a vicious circle. Systems integrators and Vars, which have little or no experience of public sector procurement procedure, typically avoid lucrative contracts because of the associated costs. If they do decide to risk pitching, they find themselves outbid by companies which have learned to exploit the rigid system to their own advantage. The most common and controversial method involves placing inordinately low bids, calculating that once the contract has been won, terms can be renegotiated on the basis that the work cannot be completed within the original budget or timeframe.

This is what happened at EDS after it won a contract to supply IT support to Wandsworth's housing and council tax benefit payments system. In October, following EDS' consistent failure to deliver an adequate level of service, the council decided to terminate the contract and seek damages. EDS responded by claiming it was impossible to do the job within the specified budget, despite having pitched for and won the contract on these financial terms.

Following a high-profile break-up and make-up, the services giant retained the contract but agreed to pay undisclosed compensation to the council.

Mascot says: 'We have seen this happen time and again. Companies, such as EDS, will deliberately pitch very low, just to win the contract. They treat it as a loss leader in the hope that they can make up for it further down the line. It's a game we've refused to play. We regularly walk away from a potential contract if the budget is unrealistic.

'If you asked me: "Does the process achieve the best value for money?" I'd have to say no. "Does it lead to the best system being adopted?" Again, no. Moreover, it restricts competition and limits fresh entries into the market.'

Andy Boyle, senior sales consultant at systems and services reseller the Knowledge Group, accepts there are problems with the system but says Vars should not be dissuaded from breaking into what he sees as a progressive market. Last November, the Knowledge Group won a contract to supply Hewlett Packard palmtops to Barnet Healthcare Trust in north London, in a #2.5 million six-year deal that includes installing and maintaining a voice and data network.

Boyle believes increased investment in financial and human resources, together with a more flexible approach to each contract, are the keys to success: 'We are not a charity but we do try to make the most of the money this type of client has to play with. You also have to be prepared to answer stupid questions that might have nothing to do with the job in hand. For example, one local authority with a strict Green policy insisted on knowing how we disposed of our office rubbish.'

Boyle advocates flexibility in relation to training public sector staff and service charges. He says: 'On a contract with Dudley Metropolitan Council, we spent two weeks on a test bench teaching their in-house staff networking skills. By the end, they could maintain the system themselves, bringing down our fee for ongoing services and the overall cost of the contract.'

Unfortunately, higher investment requirements are becoming the norm as the Private Finance Initiative (PFI) becomes the preferred method of commissioning council services. PFI requires IT firms to stump up the initial investment for a project and receive payment when the system is up and running. Often, the Treasury or a funding bank will actually supply hard cash in the form of a loan. If the system doesn't work or is delivered late, the contractor receives no payment. The idea is to form partnerships between the public and private sector, sharing risks and rewards.

The 'buy now, pay later' approach sounds good, but it reinforces the barriers to entry for smaller or less experienced resellers.

The practice has also produced some costly failures. In October, the government scrapped a national insurance database being set up by Andersen Consulting. The collapse of the 440Gb system, which contained 62 million names, resulted in thousands of pensioners being underpaid. Andersen invested millions in the scheme but received nothing for its trouble.

Elsewhere, ICL's Pathway project, designed to automate welfare benefit payments throughout the UK's 19,000 post offices, is another PFI scheme that appears to be in trouble. According to a leaked memo from social security secretary Harriet Harman in March, the #1.5 billion project, which is based on the NT platform, was two years behind schedule and ICL was demanding more money to continue. To date, just 205 post offices are piloting the scheme.

In April 1997, the Child Support Agency shed a #600 million system built by EDS halfway through a 10-year PFI-funded contract. But EDS, which takes more than half its UK revenue from public sector work, will get a second bite at the cherry.

Two months ago, Affinity, an EDS-led consortium, was appointed by the government as 'preferred service provider' for Accord, the biggest IT contract this decade. The project, worth an estimated #7 billion, aims to integrate the databases of the Department of Social Security (DSS) over a 10-year period. IBM, Cable & Wireless and PricewaterhouseCoopers make up the rest of the consortium.

Although a public service is at stake, all parties are forbidden from discussing Accord in any detail. EDS and the DSS both refused to comment on why a company that has already demonstrated its inability to implement an adequate system should have its contract renewed. What seems clear is that EDS' success may be largely due to the company's unrivalled level of experience in the bidding process.

Ian Cockburn, director of the PFI unit at systems integrator Data General, says a number of issues have to be addressed to make the public and private partnership fair and effective. He says as well as simplifying the procurement rules and procedures, the channel of communication between government bodies and the private sector needs to be improved. Negotiating the precise commercial terms of a contract and reconciling the diverging interests of the parties involved is also high on his agenda.

The role of the government authority or trust, the Treasury and the IT supplier will need to be scrutinised, as will the proposed funding method.

Cockburn says: 'The level of co-ordination of this strategy leaves a lot to be desired. As PFI becomes the standard in local as well as central government contracts, a pragmatic approach to risk transfer has to be developed.'

A representative at the Information Technology Services Agency, part of the Cabinet IT Unit - the government body responsible for procurement policy - declined to comment on criticisms of the current system but said important changes were under discussion.

Cockburn also concedes that some headway is being made. This month's European Commission consultation paper on competitive dialogue procedures will propose making changes to allow dialogue between the private and public sectors prior to tendering.

All parties involved in the project appear to agree this level of communication is a necessary step towards making PFI more accessible and increasing the level of trust and understanding between the different parties and interests. Who knows, it might even improve the scheme's poor success rate, saving the UK government and, ultimately, every one of us a few quid - give or take a billion or two.