Thursday, 21 April 2011

How a £2.5 million project ended up costing £21 million - Why we need to learn the lessons.

This is a complex story that started back in 2003 but has huge relevance for the decisions being made at the moment on outsourcing. It started with an estimate of £2.5 million and today it has clocked up costs of £21 million and that is not the end of it. I have tried to assemble the facts correctly but if they are wrong I apologise. However, trying to get information out of Barnet Council has been exceptionally difficult and some of the information remains locked in exempt reports.

Back in 2003 it was identified that the core financials IT and HR/Payroll systems needed to be replaced. They estimated that the core financial system replacement would cost £2.5 million and that was the figure approved by the Council in March 2004. As they looked into this further they decided that this should now be treated as a business change project not an IT replacement project. Warning bells are starting to ring!
They put it out to tender in 2004 giving bidders three options:
• Option 1: A core financials system without HR/payroll
• Option 3: A HR/payroll system operated by the ‘bureau mechanism’
• Option 2: An enterprise-wide system with HR/payroll module included

Interestingly the Cabinet Resources report of 8 July 2004 states that “the response to Option 1 had been poor with no Best of Breed finance providers bidding for this option. The market response thus played a major role in informing the decision process”. So surprise, surprise the leading providers didn’t want to supply a basic and low cost solution; they wanted to sell their more expensive enterprise wide solutions. This is what happens when you let the market tell you what they want to provide. Sound familiar with what they are saying about the current outsourcing programme?
Right from the start it was clear there were problems. A memorandum from Audit in May 2004 (page 15) said,
“The Council is in the process “of modernising its core systems” with the aim to use the opportunities provided by the new system to modernise working practices.
Overall: at this stage no assurance can be given that the above objective will be achieved in an efficient, effective and economical way. Although a recognised project management methodology (Prince 2) is being used to manage the project, the initial stages of good project management have not been strictly followed and implemented.
In that report it also identified that cost estimates were now £8.3 million which included both internal and external staff costs. The risk register also identified the lack of a business case.
“As Pointed out by the Gateway review team there is a need for the Business Case to be developed by the Core Financials Project, to determine the project costs and viability”.
In July 2004 a business case was prepared and you can read it here (starts at page 26). I have read a few business cases in my time but the brevity of this one is nothing short of indecent. All the details may be locked up in the exempt report, which I have not been allowed to see, but to have 2 pages for costs and benefits without a single number being mentioned leaves me with a feeling that it was not one of the most thorough assessments. I may be wrong in which case, if Barnet Council care to provide me with a copy of the exempt report, I may change my view. However it also notes in the business case that they haven’t concluded negotiations with the suppliers yet. Again this has an all too familiar ring with the current outsourcing project.
So the Cabinet went ahead and authorised a company who we now know to be Logica to install and support the SAP system for five years with the option to extend for a further three years.
One year later in September 2005 the Cabinet ICT committee set out what was the budget in 2004 (someone with a black pen must have missed that). It shows that the capital budget was now £8.16 million and there were anticipated annual costs of £1.1 million with savings from the old system of £662,000.
Now six years later people are still talking about SAP and what else needs to be implemented. Through an FOI request I have been informed that the cost of installation was £7.8 million and the annual payments to Logica amount to £13.2 million. In addition there are a further two years to run on Logica’s support contract.
So what does all this mean?
• We started with a budget of £2.5 million and we ended up with a cost of £21 million.
• We started a process and got a long way down the track before a business case was prepared.
• We gave the market the option to tell us what they wanted to provide.
• The market chose not to provide us with the cheapest option.
• We have been locked into a support contract for 8 years which has consistently run at double or treble the initial estimated costs.
Now the SAP system may be great and it may be delivering all sorts of benefits but it has cost an awful lot of money. It’s a bit like the man who says a Porsche is wonderful value for money but most people can’t afford to run it let alone buy it. We need to learn lessons from the past to make sure we don’t repeat them in the future.

At the minute I am hugely worried that the current outsourcing programme is in danger of repeating all the old mistakes and it will end up costing us all a fortune. I have asked questions at numerous committees only to be fobbed off. The first contract being outsourced has an estimated value of between £270 and £290 million. This are not small amounts we are talking about and if these contracts do go wrong the financial consequences could be immense. Please Barnet Council, re-open the debate and open up the books. Give the rate payer of Barnet some comfort that this will not end like another SAP project.


  1. The residents of Barnet are a hostage to fortune now that we are so committed to outsourcing. Firstly we will only get contractors wanting to take on the most profitable services, which will benefit them rather than us, and secondly before we even get to the point where such arrangements are up and running, the examples we have already such as you have so tellingly described above indicate clearly that this authority is incapable of managing the proper hand over of such contracts.

  2. A great post. One that our councillors would be well advised to read and take note of. I look forward to a response to the points raised.

    Maybe the tooth fairy will deliver the response to me as I sleep