Paragraphs 3.17, 3.23-3.24, 3.27-3.29, 4.5-4.16, 4.19-4.21, 4.24-4.26, Figures 12-15
17 Although the Agency and CMG agreed prices in the absence of competition, the Agency expected that the contract for the delivery of IT services, worth £51.5 million on the basis of discounting the cash flows to 1998 prices, would generate savings of £10.7 million compared to the Agency continuing with their existing arrangements. These savings were in the range of £10.3 million - £12 million targeted by the Agency before negotiations commenced. Financial savings arise mainly because the cost to Radio Spectrum International of IT staff is about 30 per cent less than the Agency were previously paying to contractors. These savings may be overstated because the Public Sector Comparator - the benchmark drawn up by the Agency on the basis that the IT services would continue to be provided in-house by the Agency and against which the cost of the partnership was compared - assumed the same high level of development work continuing throughout the period of the contract. CMG's bid, which was compared against the Public Sector Comparator, assumed that the demand for development work would decrease. We estimate that if, in CMG's model, the charges for development work are increased to reflect the level of work estimated in the Public Sector Comparator the potential level of savings reduce from £10.7 million to between £4.9 million and £8.0 million.
18 During the first two years of the partnership IT developments were implemented more rapidly and smoothly than prior to the partnership, including a successful relocation of the Agency's headquarters. The Agency attribute this to a co-operative working relationship with Radio Spectrum International. Reports from the Agency's monitoring unit suggest that the quality of service provided has improved significantly. Service improvements are difficult to quantify because detailed information about cost and service levels was not kept prior to the partnership. The Agency told us that this was a consequence of how the Agency's systems had evolved, often being developed in-house by their own staff and without the controls they now expect in terms of project definition and service delivery criteria. An important benefit of the partnership is that, with the setting of standards by the Agency for the levels of service to be provided, they are now able to measure improvements in service over time.
19 Radio Spectrum International made a profit after tax of £1.3 million (about seven per cent of turnover) in the first 18 months of operation from the delivery of IT services to the Agency. As a percentage of turnover this profit was higher than the six per cent estimated by the Agency in their business case for Radio Spectrum International. Concerned about this level of profit and that profits for later years would not reduce to the notional levels anticipated in the business case, the Agency entered into negotiations with CMG to reduce the level of desktop charges. The Agency were successful. CMG agreed to reduce the charges levied by Radio Spectrum International to the extent that the Agency should save on average about £1 million per annum, in cash terms, over the remaining five years of the contract.
20 The Agency were able to react to the higher than estimated profitability of Radio Spectrum International because the way the partnership deal was structured made Radio Spectrum International's profits transparent. In a typical outsourcing of IT services responsibility is contracted to the private sector and the profits made are not disclosed. The Agency also share in profits through dividend payments in proportion to their share ownership of 30 per cent. The Agency have so far received dividends of £241,000.