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Public sector could cut £6bn 'unnecessary' IT outsourcing costs

Taxpayers are paying up to £6bn a year more than necessary for IT outsourcing services, says Compass, a consultancy that benchmarks the cost of IT in major government departments.

Compass Management Consulting has analysed the cost of IT outsourcing contracts within central government over the past five years. The company regularly compares the costs of running IT in departments and agencies with those of the private sector.

It says it reached the £6bn figure after comparing the prices paid by government departments for their outsourced contracts with the market prices paid by the private sector for a comparable bundle of services.

Gary Bettis, Compass’s UK president, says the public sector is paying 40% or more above the market rate for outsourced services. It could cut £6bn a year from the cost of IT outsourced services without damaging the frontline, says Bettis.

A government report last year put the total cost of public sector IT at between £12.5bn and £18.5bn a year. The estimate is wide ranging because the government does not collect any audited figures on its annual IT spend.

Compass estimates that most of the IT spend is paid to suppliers of outsourcing services – about £14bn. Up to £6bn a year is spent unnecessarily, in part because value-for-money initiatives are “far too timid”, says Bettis.

Each department has separate IT systems and datacentres. Bettis says that if radical changes are supported by permanent secretaries and ministers, the datacentres and IT infrastructures of departments could be brought together.

As an example of IT-based efficiencies, he cites the Department for Work and Pensions (DWP), where he was involved in a programme that cut IT-related costs by £1.4bn between 2005 and 2010.

The programme reduced five datacentres to two, cut about 1,000 staff and standardised 140,000 desktop systems across different parts of the DWP.

The DWP also renegotiated contracts with IT suppliers to cut costs. At the same time, suppliers had scope to boost efficiencies because contract constraints were removed.

Suppliers were allowed to choose what hardware, storage and other devices to use, and were allowed to let their datacentres be used by other clients.

But Bettis says the DWP could go further – by merging its IT infrastructure with other departments.

Although every department has different systems, “Most have a 90%-plus commonality of need from their IT services,” says Bettis.

He adds: “Standardisation reduces costs dramatically by allowing service providers to deliver economies of scale as they deliver utility IT services to a range of clients using the same delivery infrastructure.”

Compass also argues that poor management of suppliers and contracts leads to large extra charges from IT outsourcing companies.

But ministers who advocate major change to cut IT-related costs could face a battle with permanent secretaries who may resist a merger with other departments, even an IT merger, because removing the engines of their administration could weaken their domains.