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Sir John Bourn, head of the National Audit Office, reported to Parliament today on the £635 million contract awarded to Siemens Business Services (SBS) to process transactions and provide a service to National Savings’ 30 million customers. The partnership forms a vital part of a programme of modernisation and transformation which aims to provide better value for the taxpayer and National Savings’ customers. An intensive investment programme should enable National Savings to be competitive and relevant in the highly competitive and fast moving retail savings market.

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The deal price of £635 million, obtained through a competitive process, represents better value to National Savings than the alternative of keeping the operational service in-house at an estimated cost of £792 million.

From 1 April 1999, SBS took over some 4,000 National Savings staff based in Blackpool, Durham and Glasgow. National Savings’ remaining 130 staff, based largely in London, are fully responsible for the overall business performance of National Savings and for the design, management and marketing of products to customers, liaison with the Treasury on funding requirements and managing the relationship with SBS.

Sir John considers that this deal broke new ground. Not only did National Savings transfer the risk of modernising business processes involving IT solutions to a private sector partner but also the staff who will be responsible for implementing those solutions. National Savings also required a private sector partner to make proposals for alternative work for their new employees. SBS saw the acquisition of the operational service as a strategic asset which provided an opportunity to develop services for other customers and create new jobs for former National Savings employees.

Sir John concludes that government departments could learn a number of lessons from this deal. These include:

  • it is unwise to rely solely on risk transfer and appropriate incentives on the private sector partner to ensure that required services will be delivered. As the transformation of operational services is central to achieving the benefits expected by each partner and the ultimate success of the partnership, National Savings is not only monitoring progress by SBS but has also engaged independent IT consultants to help it act as an intelligent customer;
  • departments should ensure that poor performance by a service provider will put the contract at risk of termination. National Savings has avoided being “locked-in” to the contract and can terminate the partnership if performance standards agreed with SBS are not achieved;
  • in entering into a long term partnership, departments must ensure that the underlying contract reflects changes which will occur over time. National Savings and SBS have agreed detailed procedures to facilitate the agreement of changes and incorporate them in the contract. The contract should be varied using those agreed procedures so that the provisions for handing back staff and assets remain workable whenever the contract is terminated;
  • departments should ensure that they have appropriate management resources to monitor the performance of a private sector partner. National Savings has increased the resources it devotes to monitoring SBS performance and aims, through effective business judgement, to incentivise performance improvement rather than apply a mechanistic formula of penalties;
  • senior departmental management should be closely involved. As a substantial part of its operations would be transferred to the private sector, National Savings senior management took control of the project and, with the support of professional and experienced staff, committed a large amount of time to planning the procurement and agreeing the terms of the contract with SBS; and
  • departments will be in a much stronger negotiating position if the content and scope of the deal is made clear to bidders. National Savings clearly defined its own responsibilities and those of a private sector partner at the Invitation to Negotiate stage of the procurement process. There were considerable benefits in sending out a properly constructed Invitation to Negotiate and it is questionable whether National Savings would have got such a good deal if the document had been issued on the date originally intended. Throughout the procurement, pre-determined criteria were used to evaluate bids. To avoid any drift on price, risk transfer and value generally, competitive pressure was maintained on two final bidders by negotiating a draft contract with each of them before recommending a preferred bidder to the Treasury.

"This is one of the most remarkable PFI deals we have seen because it has resulted in the transfer to private sector employment of all but some 130 staff of an entire Government department. The number of staff employed on National Savings work will fall but the deal has been structured in such a way that SBS is incentivised to find alternative work for its new employees. There are a number of lessons that other Government departments can learn from this partnership, particularly how National Savings procured the deal and the framework established to manage the partnership with SBS."

Sir John

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