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y@) Report by the
NATIONAL AUDIT OFFICE y
Comptroller and Auditor General Department of Social Security
ee
The Cancellation
of the Benefits
Payment Card
project
HC 857 Session 1999-2000
18 August 2000
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LONDON: The Stationery Office
£0.00
Report by the
Comptroller and Auditor General
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Department of Social Security
The Cancellation
of the Benefits
Payment Card
project
Ordered by the
House of Commons
to be printed 27 July 2000
HC 857 Session 1999-2000
Published 18 August 2000
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The Cancellation of the Benefits Payment Card project
‘This report has been prepared under S
‘tion 6 of the National Audit Act 1983 for
presentation to the House of Commons in accordance with Section 9 of the Act.
John Bourn
Comptroller and Auditor General
National Audit Office
24 July 2000
The Comptroller and Auditor General is the head of the National Audit Office
employing some 750 staff. He, and the National Audit Office, are totally
independent of Government. He certifies the accounts of all Government
departments and a wide range of other public sector bodies; and he has statutory
authority to report to Parliament on the economy, efficiency and effectiveness with
which departments and other bodies have used their resources.
For further information about the National Audit Office please contact:
National Audit Office
Press Office
157-197 Buckingham Palace Road
Victoria
London
SW1W 9SP
ret
email: enquiried
Web site address: www.nao.gov.uk
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Contents
Executive summary 1
Part 1: The contract was signed in May 1996, but terminated in May 1999
following continual slippage 16
The Department of Social Security and Post Office Counters Ltd signed a Privale
Finance contract with Pathway to provide a modern, secure method of benefit
payrnent and to automate post offices 16
The project had multiple aims. For Social Security, the project was intended to
deliver savings in benefit fraud and running costs, modernise the delivery of
benefils and improve accounting 20
Post Office Counters Lid intended the project to aulomate and safeguard their
business 23
The timetable for delivery slipped continually, the benefits were deferred and in
late 1997 Pathway requested improved terms 24
The government decided that removing the payment card from the project
offered better value for money than complete cancellation, and was preferable
to continuation 28
The consequences of the cancellation of the Benefits Payment Card project
are substantial 35
The Government now plan an expansion of benefil paymenis through automated
transfers to claimants’ bank accounts 37
Part 2: How well did the purchasers set clear objectives for the project and
manage its benefits and risks to their services to claimants? 40
Key risks io the project and io the Department's business needed lobe managed 40
Setting clear and consistent project objectives 42
Mainlaining a viable business case for the project 44
Maintaining services to benefits claimants 47
Part 3: How well did the purchasers manage the risks of delivering the
project? 49
Understanding and applying the Private Finance approach to procurement 49
Understanding and specifying the Requirement 51
Selecting the supplier 60
Impiementing the Solution 68
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Glossary of Terms 74
Appendices
1. Scope and methodology of the National Audil Office's examination 75
2. Agreements to Agree 79
3. Chronology of events at
4. Key Conclusions and Recommendations by the Committee of Public
Accounts, "IMPROVING THE DELIVER OF GOVERNMENT IT PROJECTS"
January 2000 84
5. The Action Plan for Departmenis and Suppiiers arising from the Cabinet Office
Review of Major Government IT Projects, May 2000 86
6. The availability of the Department's CAPS sysiem to integrate with Pathway's
Payment Card system 89
7. The re-emergence of “cleared” risks in the purchasers’ registers 90
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The Benefits Payment Card System - An overview
Benefits Agency Customer Information flows
Computer Systems Physical movernents —D
Details of
enoashments,
expiries and
responses to stops
and enquiries
Payment
authorisatio
stops and enquiries
Card holder
details
PATHWA
Systems
accounting
Card Payment systems
Management Authorisation liation and
System ‘System
Post Offic
financial and
accounting
systems
Card
production
and
distribution
Transaction Management
System
1.Cards
issued
2. Cards
presented
Cards lost,
found or
stolen
Note: To ensure clarity, other functions particular to Post Office Counters Limited are not shown,
Source: National Audit Office
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The Cancellation of the Benefits Payment Card project
Executive summary
The Benefits Payment Card project was started in May 1996 and
cancelled in May 1999 after continual slippage
Es In May 1996 the Benefits Agency of the Department of Social Security and
Post Office Counters Ltd (the purchaser
subsidiary of the ICL computer services group. The Benefits Payment Card project
was intended to replace by 1999 the existing paper-based methods of paying social
security benefits with a magnetic stripe payment card, and to automate the
jointly awarded a contract to Pathway, a
Great
national network of post offices through which most benefits are paid acro:
Britain and Northern Ireland.
B The project was vast in its scale and complexity, and estimated to cost some
£1 billion in payments to Pathway. It was also one of the first Information
awarded under the Private Finance Initiative. Under such
Technology contrac
deals the supplier receives a contract to design, build, finance and operate an
asset, and is paid for the provision of the service only as itis successfully delivered.
The purchasers, (the Benefits Agency and Post Office Counters Ltd), used the
Private Finance procurement method because they did not expect to have the
capital resour'
ces to develop the Benefits Payment Card themselves, and wished to
transfer to the private sector risks of developing and delivering a working system
and preventing fraud. The Department's business case for the project was based
on achieving the potential fraud savings from introducing the new i
meant that any significant delay in delivery would begin to erode the business case.
i3] The overall objectives of the project were to:
® provide a virtually fraud-free method of paying benefits at post offices that
was ce
process, with continuously reducing overall administration costs year on
year;
automated, had lower end-to-end costs than the current paper-base
#1 extend automation to Post Office Counters Ltd’s transactions for other
customers, its products and its support processes to improve
competitiveness, increase efficiency, and to enable greater commercial
opportunities;
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The Cancellation of the Benefits Payment Card project
@ enable full and speedy reconciliation of benefits payments, with
accounting arrangements consistent with recognised accountancy
practices; and
@ provide an improved service to both purchasers’ customers.
EJ _By October 1996 the contracting parties had successfully implemented a
limited version of the system, which paid child benefit in ten post offices in
Gloucestershire. Development work continued and further functionality was
added through successive soft
But designing and developing a fully functional system proved much more complex
and took much longer than had been expected. The programme at the time the
contract was signed assumed that it would take ten months to start a live trial of the
re releases which were used in 205 post offices.
full system intended to cover 24 different benefits and ail of the 19,000 post offices
then in the network. In fact, this stage had not been reached at the time the
contract was terminated nearly three years later.
a During the second half of 1996 the two purchasers and Pathway became
increasingly aware of the difficulty they f
system. Discussions were opened that led in February 1997 to a “no-fault” replan
of the project. Under this plan, all parti
three months and to bear their own costs in doing so. Subsequently the
Department introduced new customer accounting and payment systems covering
din developing the full payment card
agreed to defer the final delivery dates by
four benefits and holding records of 16 million customers, releasing the software
in time to link with equivalent phased releases of Pathway’s new Card Payment
systems.
KX Despite the replan, the project continued to make slow progress, for
of this
report. Though Pathway delivered intermediate releases of software, by 21°
November 1997 th
demonstrate satis
reasons explained in paragraphs 14 to 24 of this summary and in Part 3
‘ad not completed, as required by the replan, a live trial to
'y, sustained operation of child benefit payments and a
range of Post Office functions in 300 post offices. The purchasers served on
Pathway a formal notice of breach of contract, which Pathway denied and did not
accept liability for, counter-asserting breach of obligations by the purchasers. In
December 1997 Pathway wrote to the Benefits Agency suggesting that if the project
were to continue they would either have to increase their prices by 30 per cent or
extend the contract by five years and raise prices by five per cent.
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The Department were not in a position to take unilateral action, but
recognising the continuing difficulties, sought interdepartmental discussions
involving primarily HM Treasury, the Department of Trade and Industry and the
Prime Minister's office to reach a wider cross-government solution. Post Office
Counters Ltd and Pathway were also involved. In July 1998, an independent panel
of experts concluded that the project could deliver the functions required, but was
unlikely to operate nation-wide much before the end of 2001, three years later
than originally planned. They stressed that successful delivery would require
renewed commitment from the parties and was not without risk. The cost of
continuing was uncertain.
[3 I Discussions between government and ICL in late 1998 failed to close the
gap between both sides’ proposals for continuing the full project. From
January 1999 discussions turned instead to the terms on which the automation of
post offices could proceed without inclusion of the Benefits Payment Card
Els In May 1999 the government decided that removing the payment card from
the project offered better value for money than complete cancellation, would better
protect the early automation of the Post Office, and was preferable to continuation.
They devised a new strategy with the following key features:
@ =the Benefits Payment Card element of the project would be dropped,
simplifying and assuring post office automation;
B automation of the Post Office would proceed, for completion by 2001;
® benefits payments would be made by automated transfers to claimants’
bank accounts; starting in 2003 and completing by 2005. Until 2003
existing arrangements would continue;
B people who wished to continue to collect their cash at post offices would
continue to be able to do so. The Post Office would introduce suitable
banking technology and commercial arrangements with banks to allow
this to happen; and
@ for the relatively few people for whom a bank account may remain an
unsuitable option, special arrangements would be made.
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EX] sn June 2000 the S
package of measures designed to modernise the Post Office network by;
retary of State for Trade and Industry announced a
® ensuring that benefits and pensions can still be paid in full, in cash at the
local post office;
setting up a special fund to improve local offices in deprived urban areas;
® providing help for those on low incomes;
®@ providing people with new opportunities to use the internet;
@ encouraging post offices to act as Government one-stop shops;
@ ~~ maintaining the rural network by placing a formal requirement on the
Post Office to prevent any avoidable closures of rural post offices; and
supporting the development of the proposed “Universal Bank”, giving
banking facilities for up to 3-5 million extra people, and allowing
customers, including pensioners, to get cash out of the post office and set
up direct debit arrangements.
EEX The delays to the Card project and its subsequent cancellation affect benefit
claimants, the Department of Social Security, the Post Office and ICL. These
consequences are described in Part 1 of this report.
Scope of our examination
KEI We have examined the conduct of this project to identity:
® the reasons why the Payment Card project failed to meet its objectives;
and
@ ~~ whether there are useful lessons that should be learned for other projects;
particularly in terms of the approach taken towards the management of
risk.
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EE] he project was a tripartite venture, requiring all three parties involved to
meet their contracted obligations for the project to be successful. This report,
how
‘The
Office in central government, were also actively involved in reviewing the project
r, focuses on the role of the Department of Social Security in the project.
asury and the Department of Trade and Industry, which sponsors the Post
and in the decision to cancel the Benefits Payment Card, taking account of the
wider interes
5 a
‘oss government. The Comptroller and Auditor General has no
statutory rights of audit access to Post Office Counters Ltd, but in the interests of
completeness and balance the report refers to the objectives and involvement of
Post Office Counters Ltd in the Payments Card project and the consequences for
them ofits cancellation. The Comptrolle’
access to records held by Pathway for the purpose of examining the value for
money with which the Department of Social Security used its resources, and
and Auditor General had certain rights of
Pathway co-operated with us in our examination. Our approach towards the
examination is described in Appendix 1.
The project was high risk. It was feasible, but probably not fully
deliverable within the very tight timetable originally specified
EEX The project was an ambitious one, and with hindsight, probably not fully
deliverable within the very tight timetable originally specified. It had special
notably its status as a pioneering Private Finance
Project, the need to join up the systems of two purchasers with differing business
objectives, and the need for the development and testing of more new software
than was originally envisaged.
features that added to its risks;
Key Statistics of the Project
mated contract value, (Payments by Deparment £1 billion, net present value over 7 years
and Post Office):
Number of post offices to be equipped Up to 20,000, with 40,000 counter points in
Great Britain and Northem Ireland
Number of post offi in use of the 67,000 staff, serving 28 million customers per
systern: week
Number of social security benefit recipients tobe 17 milion, claiming some 24 different benefits
issued with Payment Cards:
Number and value of benefit transactions: In 1999/2000 some 760 million payments
worth £56 billion were made through post
offices
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The project was procured through an innovative method
EE] As a ground-breaking Private Finance project in the Information
Technology sector, there was little by way of precedent to inform it. There was
limited experience at the time as to the appetite and ability of the purchasers or
potential suppliers to accept important risks, such as the liability for failing to
prevent fraud. There was also a perception that because responsibility for delivery
could be transferred to suppliers, purchasers should be less concerned with
validating the supplier's internal arrangements and had less “need to know” the
detail of the supplier's solution.
The Department and Post Office Counters Ltd had
different objectives for the project. These were not
incompatible but they led to tensions which required a
genuine partnership between the two purchasers to
resolve.
EEX The objectives of the Department of Social Security and Post Office Counters
Ltd in undertaking the project were different, reflecting their different business
drivers. They rightly agreed a memorandum of understanding between
themse before signing the contract with Pathway, which addressed their
commercial relationship. But this did not prevent later disputes on matters of
detail. For example, arrangements that the Department wanted to ensure security
for payments to people temporarily collecting benefits on behalf of claimants
proved difficult to balance against Post Office Counters Ltd’s commercial interests
in maximising the flow of customers through its outlets.
We found significant evidence that the Department had shown
commitment to the success of the project. In 1997/98 they employed up to
1100 staff plus consultants in designing and implementing their CAPS computer
systems that were to link to the Payment Card. They also agreed to the system
being installed in 205 offices without the full range of contracted security features.
In late 1997, when the project was clearly in deep trouble, the
contingency planning for a possible implementation of payment by bank transfers,
in case the Benefits Payment Card project should fail. Pathway told us that they felt
sensibly began
that the Department's commitment had reduced from around this time, in their
view because the project no longer had such strong champions within the
Department as before. Argument over difficult issues, mainly to do with how best
to ensure the security of the system, tended to raise doubts among the participants
as to their partners’ commitment to timely delivery of the project. Similarly,
because Post Office Counters Ltd had a lower financial incentive than did the
Department to achieve a quick changeover from order books to the Benefits
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Payment Card, the Department at times questioned their parter’s motivation.
Post Office Counters Ltd insist that they too had a strong interest in playing their
full part in delivering the entire project to time. In our view, such doubts about
partners’ commitment inhibited a genuinely open and participative approach to
tackling the severe problems of the project.
The Department’s initial business case did not adequately
assess the risk and costs of serious slippage
EQ] The Department's business case for the project was based on achieving the
potential fraud savings from introducing the new
significant delay in delivery would begin to erode the business c
order books and girocheques was at the start of the project estimated to cost the
taxpayer over £150 million in fraud each year, though from 1996 a system of
his meant that any
. The misuse of
electronic stop notices implemented in the London area started to reduce this.
Payment fraud losses are now estimated at some £100 million. We found that the
Department’s business case for the project included limited analysis to ensure that
it would remain robust in the event of significant slippage. ‘The Department
accepted that slippage presented a risk to their business case, but were confident
that a large proportion had been transferred to Pathway, who were to be paid only
when the service was up and running. Sensitivity testing was done routinely after
signature of the contract to assess the impact of revised dates.
The purchasers, the Department of Social Security and Post Office
Counters Ltd, established arrangements to manage the risks of the
project, though with only limited success
The purchasers identified most of the risks of the project,
but were less successful in assessing their probability and
impact
EE) The purchasers’ joint procurement team made strenuous efforts to identify
the risks of the proj
t. In March 1995 they compiled a register comprising
224 risks, including virtually all those that could have been foreseen and those that
eventually impeded the delivery of the project. However, this register did not
ments of each risk’s probability and impact, nor did it allocate risks
to “owners” for management, or propose options to manage the risks. We found no
evidence that this formal register was subsequently further developed and actively
used in the project, though some of the risks it contained were identified again in
include as:
subsequent registers later in the project.
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Ea] We found that the purchasers’ proc
s for selecting a supplier was diligent.
siderable resources, effort and care went into the evaluation of bidders’
proposals, and we found no indication of any impropriety. In mid-1995 the
procurement team produced separate risk registers for each of the three
shortlisted bidders based on their detailed technical proposals, demonstrations of
capability and subsequent negotiations. This approach was fundamentally sound
But though risks were assi
act and probability of occurrence, there
were significant risks in Pathway’s proposals that the procurement team’s register
did not address. These included risks to delivery from very ambitious proposed
timescales for system development and testing, to meet exacting deadlines for
implementing the Payment Card, and a lack of information on the resources that
Pathway would apply.
When the contract was signed key parts of the detailed
specification had not been finalised
BE] All high level specifications were agreed ahead of the issue of the Invitation
to Tender. However, a deci
sion not to complete the documentation of both
purchasers’ detailed requirements before contractor selection and contract award
was a major contributor to the later problems of the project. The decision
agreed by the joint project board and by the shortlisted bidders, and recognised
Ministers’ legitimate interest in proceeding with implementation of their policy for
the payment of benefits
vas
EEL When the contract was
and operation of the Card was to be provided had not been agreed between the
signed much of the detail of how the development
purchasers and Pathway. From the records it seems that there were some
289 agreements to agree the detail of the service contained in it, of which
38 remained to be agreed by Pathway with the Department of Social Security,
124 with Post Office Counters Ltd, and 127 with both client:
matters
jointly. Some of these
rd,
whereas others, examples of which are shown in Appendix 2, were more
significant. Pathway told us they had expected them to be cleared within three
months and that when this did not happen they obtained a contract amendment
exonerating them from liability for any dela
failures to agree. The number of outstanding agreements to agree reduced greatly
during the implementation phase. But vital issues, such as the precise nature and
specification of the system’s security procedures and reports, particularly how
these would adapt to changes in patterns of fraud, remained unresolved when the
Card project was cancelled three years later. The Department agreed to Pathway’s
s were relatively minor, suc sign of the logos to appear on the c:
s that were a direct consequence of
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request to defer full implementation of these security procedures, providing they
were fully in place before rolling out the system for higher risk benefits than Child
Benefit, such as Income Support.
More rigorous demonstrations by bidders might have
better highlighted the risks to deliverability and the extent
to which new software had to be developed.
Els One reason why risks to delivery were not properly assessed was the
limited scope of the demonstrations mounted by the shortlisted suppliers to show
the viability of their proposed solutions. In the case of Pathway this was a
demonstrator system based on one already operating in the Republic of Ireland but
meeting a requirement much simpler than the Benefits Payment Card. The other
two bidders constructed mock-ups of new systems. Though the purchasers had at
one point considered a fully-fledged pilot stage, this was not done for reasons of
cost and time. There are limits to how much further work bidders will do in such
circumstances without funding from the purchaser.
EJ This project initially proceeded on the basis of proposals from bidders that
it would involve mainly the integration of existing software packages. In the event,
the greater than expected complexity of the service requirement obliged Pathway
to develop much more new software than they had planned. The Department's
view is that Pathway knew what was required but had intended to fit the
requirement to match a system they had already implemented in Eire. The extent
of new software development had major implications for the degree of difficulty of
the proj
since this is a high-risk activity with high failure rates, especially in
large organisations
Pathway submitted narrowly the cheapest of the three
bids, but the purchasers ranked their proposal third on
eight of eleven technical and management criteria
Eis‘ help them decide which bidder to select, the procurement team ranked
the proposals of the three shortlisted bidders in terms of their proposed technical
solution and management arrangements. Pathway ranked third against eight of
the eleven criteria where a ranking was awarded, including areas where the
project later encountered problems such as security against fraud. Pathwa
proposals were nevertheless considered deliverable. Their proposal ranked a
narrow firstin terms of direct price, and a clear firstin terms of risk transferred.
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A decisive factor in the selection of Pathway was their
acceptance of greater risk, making their bid compliant
with the Private Finance Initiative
EQ] The purchasers awarded Pathway the contract despite their ranking on
technical and management criteria. Pathway’s bid included only £20 million to
take on the contractual liability to pay up to £200 million in damages to the
purchasers in respect of direct losses if their system failed to operate or to prevent
fraud. This was deemed to represent transfer of fraud risk, which was considered
essential for the project to quali
as PFI and not count against public sector capital
expenditure. The other bidders had priced this liability into their bids pound tor
pound. The choice the purchasers felt they had was therefore either to accept the
Pathway bid or to not proceed with the project at all. The purchasers did not in the
end demand damages from Pathway when the project began to slip. They felt this
would not encourage Pathway to succeed and could deflect the firm’s attention
away from delivery to a legal battle. When the Card element of the project was
subsequently cancelled in May 1999 the government again chose not to claim
damages, as part of the agreement with ICL in which the Company also agreed not
to counter-claim. Another major consideration was ensuring the successful
completion of the continuing project to achieve post office automation. Currently
the platform has been installed in around 8,000 of the 18,300 post offices and is
planned to rez
ch the entire network by Spring 2001.
The purchasers found monitoring and controlling risks
very difficult
During the procurement stage of the project, risk monitoring and control
involved mainly discussion between the pure!
ers’ joint procurement team and
the bidders about how to mitigate the risks identified in their proposals and
demonstrations. By the time that the contract was awarded in May 1996 the
register for Pathway still carried six risks that had either high probability or high
impact. The procurement team downgraded several major risks because the risk
of late delivery was seen as falling on the supplier through the payment terms of
the Private Finance contract. In fact, delay, whether caused by a
pul
the taxpayer, some £15 million each month in terms of continuing fraud and
additional administrative costs. It is evident from subsequent events that certain
risks the purchasers team had identified in Pathway’s proposal and demonstration
and declared as cleared in their final risk register for the Pathway proposal in
upplier or by a
er, would cost the Department of Social Security's business, and therefore
March 1996, remained areas of difficulty. Risks to the timely delivery of the CAPS
programme, also identified at that time, were subsequently addressed by the
February 1997 re-plan. The key risks are described in Appendix 7 of this report.
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Pathway told us that they had not seen the purchasers’ risk registers after the
award of the contract, and they were surprised that the purchasers had assessed
these risks as being high. The Department confirmed that while ris
not exchanged, joint discussions around risks were a continuing and regular part
of the project management process.
EQ] After the contract was awarded in May 1996 the purchasers assembled
new risk management arrangements by building on the earlier work of the
procurement team. The contract was not specific about the reporting obligations of
Pathway to the purchasers and vice versa. For example, there was no requirement
on Pathway to supply their own risk registers or other internal project
management documentation. Reporting took the form of summary presentations
and discussion at the Project Board, and further joint planning and progress
meetings at working level. The information that the purchasers required for
assurance was not defined in the procurement phase or reflected in the
management arrangements. Consequently the Department felt under-informed
about progress, while Pathway told us that it felt subject to interference.
NAO Conclusions
EE] There may be a temptation to think that the Payment Card project failed
solely because it was large and complex or because it was a pioneer for the Private
Finance route. This is not the case. Various factors contributed to the project's
failure and their effects are difficult to disentangle. Looking to the lessons that can
be learned by Government, important reasons for the project's failure were:
@ divided control. The project was run by two organisations, the
Department and Post Office Counters Ltd, with different objectives.
Although in theory projects can be run by two or more organisations, in
practice this is a recipe for dispute and delay, which is what happened in
this case. A key lesson to be learned is that it is usually better to let one
purchaser take the lead with proper arrangements for information flow;
@ inadequate time for specifying the requirement and piloting. To save time
and money, insufficient work went into specifying the project and for
demonstrations by bidders. The result of skimping at the start was vast
delay and as it turned out, wasted money. A key lesson is that allowing
rea)
tic timescales for early planning and detailed sp.
dividends in time, cost and quality; and
‘ation will pay
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@ a shared, open approach to risk management across the whole
programme was not achieved. A key lesson learned is that contractual
obligations must be underpinned by recognition on all sides of the need
for openness about risks identified and emerging
EG] Mistakes of this kind are made time and time again. A Report by the
Committee of Public Accounts “Improving the Delivery of Government IT Projects”
published in January 2000, shows that government has found learning from and
applying its previous in project management very difficult. And the
experie
Government is not alone in encountering problems with such projects. Questions
of culture and training arise - here, as with other projects, those with
responsibility too often get immersed in details of procurement and negotiation
and lose sight of the effects on the wider business. And if there are fundamental
flaws in the design ofthe management of the whole scheme - as here - the impact of
this organisational myopia is compounded. In their report, the Committee of Public
Accounts called for the training of more skilled project managers and a high degree
of professionalism in the definition, negotiation and management of IT contracts to
help address this. And a wider perspective must be maintained. Decisions about IT
are crucial to the development and success of the business of public bodies, and
cannot be treated in isolation from other aspects of their work.
EM = A report by the Cabinet Office in May 2000 has produced recommendations
for improving the way in which the government approaches and manages major
Information Technology projects. These recommendations are summarised in
Appendix 5 and in our view should, had they existed and been implemented in the
case of this project, have substantially reduced the risk of it failing to meet the
Department’s requirements. They may alternatively have led to the project not
proceeding in the way it did without changes in terms of its scope and planned
timetable. There are lessons to be learned from the project for all three parties
involved and for the wider IT community. The Department of Social Security told us
that they were seeking to apply the good practice recommended in the Cabinet
Office Report, in taking forward their major ACCORD programme to provide new
computer systems to underpin their business.
12
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Lessons learned
The lessons learned fall into three main areas; risk management, the
procurement of complex Information Technology systems, and procurement
by more than one purchaser.
Risk Management
s should maintain from th
4 For all projects, purchas
stage an assessment of the inherent risk of late delivery, and analyse before
signing contracts the sensitivity of their business cases to major slippage and
cost overrun.
start of the procurement
2 Risks identified should be registered, assessed for impact and probability,
assigned to a risk manager and used as a basis for subsequent management
and contingency planning. Closed risks should be retained in a closed risk
register and reviewed at regular intervals for “re-incarnation”. Risk
identification must be an ongoing activity, as new risks will occur throughout
projects.
ce
Departments should appoint a permanent “risk scrutineer”, independent of the
project team and ad hoc input from consultants, to monitor how the project is
handling risks and to report to senior management at regular intervals. This is
a feature of the PRINCE 2 project management system widely used in
government and in the private sector.
4 Contracts with supplie
s, including Private Finance contracts, require detail
and clarity about the reporting obligations of suppliers to support risk
management and contingency planning by the purchaser. Contractual
obligations must be underpinned by a recognition on all sides of the need for
openness, extending beyond oral reporting to sharing their risk management
documentation.
a
fhe project illustrates the importance of being able to clarify, quantify and
allocate responsibility for risk very clearly if the Private Finance approach is to
be a suitable contractual model. In the case of IT development projects in the
public sector, this is particularly difficult. Ministers and officials cannot transfer
responsibility for the overall service for which they are legally responsible and
accountable to Parliament. Some risks, such as the delivery of benefits
payments, on which many people depend, are too great for private sector
suppliers to absorb and departments therefore must retain a direct interest and
involvement in how the service is to be delivered.
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6 It is vital that all bidders, and if necessary their parent companies, are clear
about the extent of risk transfer proposed by the purchasers at the start of
procurement rather than towards the end. Purch. 's must ensure that the
extent of risk transfer they propose is viable, and must evaluate the extent of
risk that they retain. Difficulties in this area can result in the loss of otherwise
valid bids.
The procurement of complex If systems
7 There is often understandable pressure on purchasers and potential suppliers
to conclude a deal and to seize as soon as possible the benefits of the project.
But it is never acceptable to sign a contract with fundamental “agreements to
agree” the detail of the service in the future, even if as in this
se, they are
intended to be resolved quickly. Allowing realistic timescales for early planning
and detailed specification will pay dividends in terms of overall project delivery
and cost.
8 Departments undertaking IT procurement projects should fully understand the
quality and quantity of resources available which actually will be committed by
the supplier to deliver the agreed services. This is particularly important where
new software development is required. It should be agreed during the
competitive proce:
s how resource requirements can be achieved and
measured, and the agreement should be drafted into the contract.
$ For major, mission-critical, tailored and bespoke projects, there should be
proper piloting of technical solutions to address the full service requirement,
rather than reliance on part-functional demonstrations. Departments may
have to consider part-funding such pilots and should also consider awarding
separate contracts for the design and development of systems before
contracting with the developer for full implementation of the successful pilot.
This approach also allows keener pricing of the later service implementation
and operation stages by suppliers because the risks to them are reduced.
48 There must be agreement between purchasers and suppliers at the outset of
information technology projects on the extent to which new systems will either
replicate the purchasers’ existing systems, or re-engineer and simplify them.
14
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44 After examining the scope to simplify their business processes, and given
certainty as to the detailed requirement, Departments should examine with
potential suppliers the
ope to use generic and widely
components where available. This process may in turn suggest modifying the
initially proposed solution. A major risk of the Benefits Payment Card elements
of the project turned out to be their “bespoke” nature. Building bespoke
‘tems adds to the development costs and the longer-term vulnerability of any
solution.
s
42 Where there are major project developments which involve more than one
system being developed in parallel, as was the case here with the Benefit card,
CAPS and new Post Office systems, it is sensible to plan and monitor these
jointly.
Procurement by more than one purchaser
43 Joint procurement is always difficult, especially where purchasers have
divergent objectives. It is better to let one purchaser take the lead with proper
arrangements for information flow and reporting to the other. This requires a
clear agreement, embodied in the contractual arrangements as well as in a
memorandum of understanding, as to roles and responsibilities.
44 Incentives to deliver should pull the same way for both parties to a project: for
example, financial and timetable incentives should be mutually supportive: and
the parties should agree common objectives and “must-haves” at the outset, as
these will influence future behaviour.
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Part 1: The contract was signed in
May 1996, but terminated in May 1999
following continual slippage
This part of our report describes the objectives that the Department of Social
Security and Post Office Counters Ltd sought to achieve through the project, the
severity of the slippage it experienced, and the inter-departmental decision to
cancel the Benefits Payment Card. Much of the difficulty of decis
because some of the business drivers of the Department and of Post Office Counters
on-making was
Ltd were, understandably, different. A decision had to be reached based on the
best option for the public
s a whole, taking account of quantified and
unquantified factors.
The Department of Social Security and Post Office Counters Ltd
signed a Private Finance contract with Pathway to provide a
modern, secure method of benefit payment and to automate post
offices
REY in May 1996 the Benefits Agency of the Department of Social Security and
Post Office Counters Ltd (the purchasers), jointly awarded a contract to Pathway, a
wholly-owned subsidiary of the ICL ple computer services group. The project ' was
intended to replace the existing paper-based methods of paying social security
benefits with a magnetic stripe payment card and to automate the national
network of post offices through which most benefits are paid. An extended
chronology of the key events in the life of the project is at Appendix 3 and the three
main players are described in Figure 1
1 The names “Horizon", BA-POCL (Benefits Agency ~ Post Office Counters Lid) and “Bringing
Offices and Benefit Payments” have ali been applied at different times to all or parts of this p:
nology to Post
me.
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Figure tw main players in the Benefits Payment Card Project
The Department of Social Post Office Counters Ltd ICL plc, through Pathway
Security and the Department's
Benefits Agency’
Area of Business The Benefits Agency's purpose is lo Operates a nelwork of some 18,300 Owned by Fujitsu of Japan, the
deliver benefits to the public through post offices, providing servic
services that are active,
such company implements systems for
slomer as postage, bill payment and: major projects and provides
focused, secure and accurate. They financial services, to some 28 million services to a range of industries
operate from anational network of customers each week. One of the including relail, finance,
severai hundred local offices and three main businesses of the Post__telecommunications and the
from three central directorates. The Office, a public corporation education, local and central
‘Agency's Chief Executive is a established under the Post Office government sectors. ICL pic
member of the Management Board Act 1969. Through the Department _ participated in this project through a
of the Department of Social Security of Trade and Industry. Government wholly-owned subsidiary, Pathway,
and is accountable to ministers of appoints the Post Oifice’s that it formed for this specific
that Department, and to Parliament — management board, purpose,
as an Accounting Officer.
Financial and staffing The Benefits Agency employs some In 1999-2000 Post Office Counters Operating in over 70 countries and
70,000 staff and pays over Lic reported tumover of £1.17 billion employing over 20,000 people, ICL's
£80 billion each year through over and profits of £46 million before —_—_ revenues for the period ending
20 different social security benefits. taxation and exceptional items. It March 1999 were £3.3 billion
Its operating costs were £2.4 billion directly employs 12,000 staff and generating a pre-tax profit of
in 1998/99. The other Agencies of has contracts with nearly 17.000 £41 million before exceptional items.
the Department are the Child sub-postmasters.
Support Agency and the War
Pensions Agency, which, with
Departmental Headquarters and
various statutory bodies, constitute a
group with over 80,000 staff
including the Benefits Agency.
Note: 1. This description of the Department's structure describes the situation at the time of the project. Since July 1999 the
Department have embarked on a programme of restructuring to focus on delivering the Government's welfare and
mademisation agenda. This includ g UP anew joint agency for welfare to work services with the Employment Service,
and a separaie Pensions organisation. Internally, traditional poiicy and operational responsibiliies are being aligned more
closely.
Source: Nationa’ Audit Office
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18
Project
Source: Nationa’ Audit Office
EEX As Figure 2 and Figure 3 show, the project was vast in its investment, scale
and complexity. One of the three shortlisted bidders told us that it was the most
complex project their firm had ever bid for, rating 94 points out ofa maximum 100
on their scale of complexity. It was also one of the first Information Technology
contracts awarded under the Private Finance Initiative. The essence of such a deal
is that the private sector supplier receives a contract to design, build, finance and
operate an asset, and is paid for the provision of the service only as it is delivered to
the public sector purchaser. In the context of information technology, government
departments pay for the availabil
or use of the system to the standards laid down
in the contract. In this way, many risks that would normally be borne by the public
sector, such as higher than expected development or running costs, should be
borne by the private sector.
Fue? rr
Estimated contract value, (Payments by Department £1 billion, net present value over 7 years
and Post Office}
Number of post offices to be equipped Up to 20,009, with 40,000 counter points in
Great Britain and Northern lretand
Number of post olfice staff 1o be trained in use of the 67,000 staff, serving 28 million customers per
system: week
Number of social security benefit recipien
issued with Payment Cards
tobe 7 million, claii
1g some 24 different benefits.
Number and value of
benefit transactions: In 1999/2000 some 760 million payments
worth £56 billion were made through post
offices
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The Cancellation of the Benefits Payment Card project
I Figures The Benefits Payment Card System - An overview
Benefits Agency Customer Information flows
Computer Systems Physical movernents ——p
: Details of
Payment encashments,
Card holder authorisations, expities and
stops and enquiries ponses to stops
and enquiries
PATHWA
Systems Benefits Agency
financial and
~ accounting
Card Payrnent systems
Management Authorisation conciliation and
Systern
Post Office
financial anc
Card
production Transaction Management
and System
distribution
1. Cards
issued
Cards lost,
found or
stolen
Note: To ensure clarity, other functions particular to Post Office Counters Limited are not shown,
Source: National Audit Office
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The Cancellation of the Benefits Payment Card project
The project had multiple aims. For Social Security, the project was
intended to deliver savings in benefit fraud and running costs,
modernise the delivery of benefits and improve accounting
EE] The two purchasers’ objectives for the project are summarised in Figure 4
Broadly, the Department of Social Security required a more efficient and secure
method of paying benefits, and Post Office Counters Ltd wanted a technology
platform that would provide basic automation for its existing (largely clerically
handled) business and help it to develop new business.
Figure 4
es of the BA/POCL project
Objective Department of Social Security Post Office Counters Ltd
To provide a virtually fraud-free method of paying benefits at post
offices that is automated, has lower enc-lo-end costs than the current
e
aper-based process, with continuously reducing overall administration
costs year on year;
To automate Post Office Counters Ltd's other ations, its
producls and its support proc to improve competitivene: e
increase efficiency, and to enable greater commercial opportunities for
he
To enable full and ly reconciliation of benefits payments, with
accounting arrangements consistent with recog: e
practic
To provide an improved service to the parties’ customers. e e
Source: Project Statement of Service Requirement 1996
EE] The Department of Social Security are responsible for administering the
social security system, paying the benefits laid down in legislation to those who are
entitled to them. Spending accounts for some £90 billion, nearly one third of all
jaimants through the
Benefits Agency, the largest of the Department's agencies, Figure 5. The Agency is
gove
nment expenditure, and most of this flows to benefits cl
tasked to:
® deliver active, customer focused services;
@ provide secure and accurate services;
B offectively manage money; and
20
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The Cancellation of the Benefits Payment Card project
@ use quali
Social Security benefits I Fino aes
paid through post
offices in 1998/99
efficient organi
ional processes.
Social Fund
Unemployed Sy
War Pensions
Injury Benefits I
Family Credit
Income Support
Child Benefit
Disability Benefits i]
Retirement Pension
() 5 10 15 20 25 30
£ Billions paid in 1998/99
Order Books fil Girocheques
Source: National Audit Office
EEA Most of the Department’s customers still receive their benefit by order
books or girocheques which they cash weekly at post offic i
The process is
expensive to administer and prone to fraud. In 1997-98, the Department paid over
£400 million to Post Office Counters Ltd and Girobank for services related to
cashing benefits. In addition, they spent a further £125 million themselves
administering their existing payment arrangements. Because currently the
encashed order books are not all reconciled to claimants’ details the Department
are unable to verify that all have been cashed, as required by basic financial
accounting standards, though they can identify individual encashments.
EES = he misuse of order books and girecheques is now estimated to cause over
£100 million of fraud each year, as shown in Figure 6. The Comptroller and
Auditor General has qualified his opinion on the accounts of the Department of
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The Cancellation of the Benefits Payment Card project
Social Security in successive years, in part because of the level of fraudulent
encashment of orderbooks and girocheques. In January 2000 the Committee of
Public Accounts expressed concern at rising losses from the fraudulent
encashment of order books and girocheques and looked to the Agency to tackle it
with vigour. *
—~_————— 6
A comparison of the methods of benefit payment used by the Department of Social Secu
Transfers into claimants’ bank accounts ¢
"e by far the cheapest form of benefit payment for the Department
Method of benefit payment Average Direct cost Share of Benefits payments in 1998/99 Estimated fraud in
(pence per 1998 £ million, and
transaction) £ billion, per cent fraud rate’
OrderBook 49 51 63 85
Girocheques and payable orders 79 6 8 22 3.7%
Bank Transfers"? 1 24 29 None identified
Payment Cards® 67 0.03 0 None identified
Total 81 100 107
Noles: 1. The proportion of new claimants choosing payment by bank transfer ranges from 10% for Income Support recipients to 47%
for retirement pensions and 54% for Child Benefit. Some 16 million customers use order books or gitocheques and 8 million
ate paid by bank transfer. There is a continuing trend towards greater use of bank transfers, adding about half a million
ch year. Transaction costs are rounded to the nearest penny.
no
‘Transfers into claimante’ bank accounts are cheaper to the Department, in part because they transfer the cost of providing
cash to the banking system already available to 85 per cent of benefit reci This cost varies according to the method
through which cash is dispensed, and the circumstances of the account owner, The cost of a bank transfer shown here is the
direct cost to the Department, and exciudes any costs to banks, and costs of extending the Agency's systems.
3. At the time it was cancelled, the payment card had been used to pay sorne £30 milion of child benefit, to 37,000 customers in
205 out of over 18,000 post offices. The use of the card has since been stopped.
4, Fraud figures are for misuse of instruments of payrnent only, and exclude other types of benefit fraud. The figures cited here
reflect reductions in fraud achieved by an Electronic Stop Notice System in the Greater London area since the mid-1990s,
(Paragraph 1.7),
Source: Nationa’ Audit Office coilation of Department of Social Seourity data.
In the early 1990s the Department considered alternative ways of paying
benefits. The mandatory use of automated credit transfers for all benefit recipients
offered the greatest potential cost savings for the Department. Howe
felt at that time that compulsory extension of bank transfers on its own would have
limited recipients’ choice of delivery location and put at risk the national network
ver, Ministers
2 Third Report, Session 1999-2000: Appropriation Accounts 1997-98 Class XII, Vote 1 (Central Government
Administered Social Security Benefits and Other Payments)
22
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The Cancellation of the Benefits Payment Card project
of sub-post offices and so this had been rejected by Ministers collectively in 1983
and again in 1992 to 1994. Some options for drawing cash, such as through
cash-back from retail outlets, did not exist at that time.
‘he Department also
considered extending an anti-fraud computer system (the Electronic Stop Notice
System) that was used by post offices within the M25 area to check bar-coded order
books. Thi
marginally increases administration costs because it adds to, but does not replace,
the existing pape
system reduces the incidence of instrument of payment fraud but
EE] 0 When the contract with Pathw
of Social s
s signed in May 1996, the Department
irity’s business as timetabled
se concluded that the programme
represented a good return on investment to public funds, mainly by reducing fraud
and running costs. The main costs and benefits to them, excluding those to Post
Office Counters Ltd, are shown in Figure 7.
The intended main costs I Ficutc 7 usa
and benefits of the
payment card project to costenefit
£ million’
the Department of Social
Security when the deal Payrnent Service Cos! 1480
was signed
as 179
NET SAVING 1029
Net Saving (Discounted at 6%) 609
rimeniof Socal Note: 1. This was the estimated value of the Payment Card solution compared to continuing with
Securty the existing order book system over the life of the coniract to 2005.
Post Office Counters Ltd intended the project to automate and
safeguard their business
EEX The revenue from handling bonefits payments account for just over a third
of Post Office Counters Ltd’s income of £1.17 billion. This business is also
important because of the sheer volume of customer visits that it brings and the
opportunity to offer these customers other services available from Post Office
Counters Ltd and from co-located private retail outlets. Benefit payments also put
cash into the hands of customers visiting post offices. In the early 1990s, Post Office
Counters Ltd had operated a pilot counter automation programme in the Thames
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The Cancellation of the Benefits Payment Card project
Valley area. But they concluded that the business case for counter automation
could probably not be sustained without the commitment of the Department of
Social Security to allow use of automated systems for benefit payments.
ERY] Post Office Counters Ltd told us that they had seen the benefits of the
Benefits Payment Card project to their business as:
providing a service that the Department of Social Security would wish to
use now and in the future;
® supporting the national network of post offices. Though typically some
200 local post offices leave the network each year through natural
wastage, Post Office Counters Ltd still expected on award of the contractin
May 1996 to automate over 19,000 offices through this project;
®@ linking the post office network more effectively, (for example to reconcile
accounting records);
® to provide scope for generating new business. Increasingly, new and
possible clients expect post offices to be linked to an automated network;
and
® to support previously automated post office systems.
The timetable for delivery slipped continually, the benefits were
deferred and in late 1997 Pathway requested improved terms
ERED The Department, Post Office Counters Ltd and Pathway were successfull in
rolling out a limited early version (the “Initial Go-Live”) of the Benefits Payment
Card hardware and software to ten post offices in Stroud, Gloucestershire by
October 1996, close to their contractual timetable. As was planned, this system
had only partial functionality. For example, it:
@ supported the payment of only child benefit, and with only limited
volumes of transactions. The system could technically process other
benefits, but it had yet to include additional security features which would
assure the Department that it could be entrusted with other higher risk
benefits, and in higher volumes; and
24
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The Cancellation of the Benefits Payment Card project
@ did not allow payees to collect benefit from post offices other than their
nominated one.
EEE] ‘hough the parties successfully implemented the limited “Initial Go-Live”
as planned, the process of designing and developing a fully functional
proved much more complex and took much longer than had been expected. The
programme at the time the contract was signed assumed that it would take ten
months to starta live trial of the full system. In fact, this stage had not been reached
at the time the contract was terminated nearly three years later. The overall
timetable for completing roll-out of the full
1999 to 2001 although development work continued and further functionality was
added through successive software releases, which were used in 205 post offices.
Figure 8 shows the extent of slippage in the project after the contract was let in
May 1996. The main reasons for this slippage, how ki
stem across the country slipped from
risks to delivery were
managed, and subsequent consequences, are described in Parts 2 to 3 of this
report. We have found that there were severe delays in Pathway’s development of
Card software, though it is clear that Pathway encountered problems resolving
with the purchasers agreements to agree and detailed requirements in order to
finalise its software, The Department's delivery of data from its own systems
should also be taken into account. The balance of responsibility at different times
throughout the life of the project remains a matter of dispute between the parties.
ERE] During the second half of 1996 the Department, Post Office Counters Ltd
ngly aware of the difficulty they
implementing the full Benefits Payment Card system. The Department found that
the complexity and resource requirements of their Customer Accounting and
Payments $
and Pathway became incre
stem (CAPS) project, which was to feed data to Pathway’s Card
systems, had been greatly underestimated. At the same time, they were aware
from their continuing liaison arrangements that Pathway had encountered similar
difficulties in their own work. Pathway expressed concern about some aspects of
the agreed high level specification regarding security, which were contral to the
Department’s business case. Therefore discussions were opened that led in
February 1997 to a “no-fault” replan involving all parties of both the projects.
Under this agreement, all parties agreed to postpone the delivery dates, as shown
in Figure 8, and to bear their own costs in doing so. The parties all committed to
achieving the revised dates. The Department agreed to continue development of
CAPS separately to Pathway’s development of software for the Card, but ensure
that the necessary technical interfaces were in place to meet Pathway’s revised
timetable. This was the first and last formal, contractual agreement to change
delivery dates, though in 1998 and 1999 when dates slipped again the parties
worked without prejudice using a later timetable in order to sustain progress.
F/51/34
92
ze/LS/4
Slippage in the major milestones of the Benefit Payment Card project
i996 8 : ae .
Planatsuccessve stages SENSI ARIF AN EIS CHIE SEL SESS SS ee
[rar Got [Geta] (Mitomloromwpon ates]
At Contract Signature: May 1996 I
After the project repian: February 1997
At Project Review: December 1997
(Pathway Proposal)
At Project Review: December 1997
(Milestones adopted by Bene‘its Agenoy
and Post Oifice Counters Lia)
At cancellation: May 1999,
.
[Deveioomert
‘Outtum ee
Contract
Terminated
Signe
Source: The National Audit Office
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BOURD Ou,
yoaloid pueg JuswAeg Sjj9ueg 94) JO LOM
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The Cancellation of the Benefits Payment Card project
EBQI The risk that the project might have to be cancelled became serious during
the second half of 1997. By 21" November 1997, a live trial which was intended to
demonstrate sustained, s
range of post office functions in 300 post offices, had not been completed. The
purchasers alleged that Pathway was in breach of contract. Pathway denied
liability and in December 1997 wrote to the Benefits Agency suggesting three
sfactory operation of child benefit payments and a
options to proceed:
® to maintain the existing contract but with Pathway’s prices raised by
30 per cent;
®@ to extend the contract by five years and raise prices by five per cent; or
@ terminate the contract.
The Department took steps to preserve their legal rights
to cancel the project
ERE] As the project slipped and costs threatened to escalate, the differing
business objectives of the Department and Post Office Counters Ltd resulted in
differing views over how best to manage the consequences of delay and of
cancellation. These differences centred principally around how to handle:
@ the consequences of continued slippage of the project in 1997 and the
Department's growing concern about delays in
fraud savings;
uring the intended
WW the issue of legal notices against Pathway in November 1997, and
May 1998 for failing to complete the live trial to time; and
® Pathway’s request to increase the price and/or the period of the contract
in December 1997.
EO 5
terminating their contracts for the Card element of the project. Delivery dates had
arly 1998 the Department were considering options which included
continued to slip and the Department’s business case for continuing the project
cepted.
There was no strong financial incentive on Post Office Counters Ltd to minimise the
could not be sustained if Pathway's proposed new contract terms were
delays or the proposed price increase that the Department could identify. Post
Office Counters Ltd maintain that they too had a strong interest in playing their full
i
8
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The Cancellation of the Benefits Payment Card project
part in delivering the ontire project to time. The Department sought to maintain a
strong position with regard to Pathway’s alleged breach of contract in November
1997 and to keep this open as a means of possibly terminating the contract. A
termination option would require issuing a “cure notice”, starting a 13 week
period after which the purchasers could terminate the contract. After discussion
with Post Office Counters Ltd and the Department of Trade and Industry the
itselfin May 1998. Pathway told us
and that by electing to continue the
Department issued the notice on behalf of on!
that the notice v alled for and ineffectiv
un
project after the notice period, the purchasers had waived any rights they may
have had to terminate. The Department did not accept this having taken Counsel’s
advice. Which party was right in this matter could only have been conclusively
established in a court of law.
EEEA At the same time as trying to preserve their contractual position, Social
Security Ministers recognis
d that their concerns were not the only considerations
for Government, and deliberately sought a wider discussion across Government
Departments to enable a joint decision about the future of the project to be made.
The government decided that removing the payment card from the
project offered better value for money than complete cancellation,
and was preferable to continuation
EEG The decision to cancel the Payment Card project was the culmination of an
Inter-Departmental review of options, beginning in early 1998. The Treasury and
the Departments of Trade and Industry and Social Security, as well as Pathway and
the two principal purchasers, were all involved in developing the way forward.
Their objectives agreed by ministers collectively were to:
@ aim to protect a nation-wide network of Post Offices. This was defined as
avoiding significant post office closures, though in the longer term it could
m
an changing the shape of the network so services could be accessed in
different ways;
@ pay social security benefits in a way that is as cheap, efficient and as fraud
free as possible (taking into account the costs of getting cash into
Ife
claimants’ hands) and consistent with welfare reform;
® modernise the delivery of government services and information more
generally taking full advantage of new technology;
28
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The Cancellation of the Benefits Payment Card project
® improve access to basic financial services, including banking services, for
poorer members of the community and the socially excluded;
@ maintain a thriving IT sector in the UK, in which ICLis a key player, while
ensuring that risks transferred through Private Finance projects do not
end up with the taxpayer; and,
™® deliver best value overall for the taxpayer.
EEE] The three main options were continuation or cancellation of the entire
project, covering both the automation of post offices and the introduction of the
Benefits Payment Card, or continuing with post office automation only. Figure 10
shows the financial evaluation of these alternatives, as compared to the existing
arrangements. Non-financial factors were equally relevant and were taken into
account.
An interdepartmental group facilitated by the Treasury
explored the possibility of reaching a settlement with
Pathway
FEE} Following Pathway’s request for improved terms, the risks associated with
reaching the right decision for the public sector as a whole were managed by
adopting an interdepartmental appro: set up in March 1998 an
Interdepartmental Working Group made up of officials from the Tre
sury, Cabinet
Office, and the Departments of Trade and Industry and Social Security to assess:
@ whether the project was technically viable, and if so how quickly it could
be completed and at what cost to government; and
@ the direct and indirect costs of c llation and of any alternative
available to deliver the project's objectives.
During this period work continued in Pathway, and in the purchasers’
organisations, on developing the Payment Card system. The main conclusions of
the Working Group, prior to negotiations with ICL Pathway on the way forward,
are in Figure 9.
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The Cancellation of the Benefits Payment Card project
y 1o operate nationwide much before the end of 2001, three years laler than originally planned. Su
delivery would require renewed commitment from the parties and was not without risk. The cost of continuing
was uncertain; delays and cost overruns already meant that Pathway would make a loss without a contract
extension or price increase.
The group stated that there appeared to be sufficient grounds to terminate Pathway's contract and claim against
them for up to £200 mition of lost fraud savings. Pathway rejected this and would aim
against the purchasers for their awn abortive costs. Legal advice was that the purchasers’ position was strong
but the outcome of litigation would inevitably be uncertain, The indirect costs of cancellation depended on the
alternative arrangements put in place. The Department of Social Security's preference for @ solution based on
bank transfers could deprive post offices, earlier than otherwise would have been expected, of their largest
source of income, unless a compensatory strategy was provided.
ost cerlainly counterclaim
‘Amajority of the working group recommended thal government offer Pathway an extension of the existing
coniracl lo ensure a five year period of operation following full implementation, bul no price increase. If Pathway
did not accept these terms within two months the contract should be terminated. The Department of Social
Security recommended reshaping the contract to exclude the Benefits Payment Card, moving to bank transfers
and redirecting administrative savings to help support the post office network for the life of the existing contract
Source. Working Group report, July 1998
EEG] The interdepartmental approach adopted from March 1998 onwards
required the construction of a single business case for the project, addressing the
costs and benefits of each option to the public sector as a whole. The Treasury
appointed consultants KPMG to undertake this work, drawing on data from the
Department of Social Security and Post Office Counters Ltd, while maintaining
commercial confidentiality between the two busines
EEZ] The Department of Social Security's
their option to terminate but formally expired in August 1998. This placed the
Benefits Agency's Accounting Officer, Peter Mathison, in a difficult position. Whilst
awaiting the outcome of the interdepartmental decision on the fate of the projet
“Notice of Cure” on Pathway preserved
his own responsibility to obtain value for money was at risk. He informed the
Secretary of State for Social Security that he could no longer justify continuing the
contract. This was on the grounds of the delays to date, signs of further slippage,
their impact on costs and continuing concerns about the deliverability of the
project. For each month of del:
of additional administration costs and lost fraud savings. Mindful that Ministers
were considering the future of the project, Mr Mathison sought formal instruction
the Department were incurring some £15 million
not to exercise his rights to terminate. In response, the Secretary of State
instructed him not to cancel until a joint Ministerial decision involving the Treasury
and the Department of Trade and Industry could be reached
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EEE n September 1998, Ministers asked the Department of Social Security and
Post Office Counters Ltd to join discussions with Pathway about the way forward.
The Secretary of State therefore issued a further instruction to Mr Mathison not to
cancel or otherwise prejudice the outcome of these discussions. As required by
Government Accounting practice, both instructions were reported to the
Comptroller and Auditor General, who brought their existence to the notice of the
Chairman of the Committee of Public Accounts.
Continuation of the entire project, though apparently the
cheapest option, carried sig! ant risks
REZ the option of continuing the project reflected the outcome of discussions
between the government and ICL brokered by Mr Graham Corbett, then a Deputy
Chairman of the Monopolies and Mergers Commission. Mr Corbett facilitated
proposals that would have extended Pathway’s contract by two years and
improved other terms of their agreement. The Department of Social Security and
Post Office Counters Ltd broadly accepted this proposal but ICL reI
Pathway this would have meant a small profit from that point on, but a loss over
the life of the project of around £200m. Pathway insisted that the most they could
accept would be break even, and Mr Corbett informed the government in
October 1998 that he had been unable to find a basis for proceeding. The
government informed ICL that discussions were now at an end, but gave them time
to negotiate a possible partnership arrangement with Post Office Counters Ltd.
EEG In the period October to December 1998, ICL negotiated with Post Office
Counters Ltd and made successive proposals to government. Their final offer in
December 1998 brought concessions that officials estimated as acceptance of a
loss of £126 million, At the same time Pathway proposed a change in the contract
such that the purchas em on the basis of technical tests.
's would accept the s
and model office tests. It was not intended that a full live trial would take place
before roll-out could commence. The Department of Social Security refused to
accept these new terms, because they were concerned about the implications, if
the system should not work, for benefit recipients, many of whom are dependent
on timely and accurate payments. They were particularly conscious of the risks
associated with acceptance criteria from their recent experience with the system
for National Insurance Contributions (NIRS2) procured through a Private Finance
Contract with Andersen Consulting. Pathway’s proposal was subsequently revised
such that acceptance would take place on succé
according to a modified set of test crite
ful completion of all tests
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REQ The numerical analysis shown in Figure 10 indicated that continuation
appeared to be the lowest cost option for the public sector as a whole. But the
analysis was seen against the background of continuing uncertainty about the
prospects for timely delivery of the system. In practice this would have depended
heavily on whether the project could be implemented against the background of
growing tensions between the parties. From early 1999 Ministers became
increasingly concerned about the deliverability of the project because of
continuing slippage and the consequent increasing reluctance among the parties
to commit themselves to it. In April 1999 officials estimated for illustrative
purposes that a further delay of six months to the planned timetable could reduce
the value of the deal to the public sector by up to £110 million. Ministers were
concerned that the delay could be considerably longer than just six months. In
early May 1999, ICL formally withdrew their December 1998 offer.
Outright cancellation of the entire project appeared to be
worse value for money than continuation
With outright cancellation the contract with Pathway would have been
completely abandoned and progress towards the automation of the Post Office
halted. In order to retain Post Office Counters’ customer base, the Department of
Social Security would have been required to continue to pay beneficiaries through
the paper based order book system until such time as Post Office Counters Ltd had
the capability to offer customers a facility to draw cash from their bank accounts
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The estimated net value of
the o;
ns considered by
the government prior to
cancellation of the
Payments Card project to ihe prutlio sector, g no more than s
Public Sector Body Full Continuation Full Cancellation Partial
Net Present Value Net Present Value Continuation
em? £m” ‘The terms agreed
with ICL Net
Present Value
£m’
Department of Social Securiy (1) 44,477 +1,990 1958
Post Office Counters Ltd “361 “1,487 -1406
Overall net value to the Public 4,417 543 862
Sector
Notes: 1. The figures for the Department of Social Security include the net benefits of options over
the period up to 2009/2010 and should not be compared directly with those in Figures 7
and 11 of this report which cover different periods
2. Positive numbers are savings compared to the existing arrangements; negative numbers
are losses. This figure shows net present values (at 1998-99 prices) of the main options
considered by the government. The evaluation compared the options against a
‘business as usual” baseline which assumed the continuation of payments by order
book and girocheques. The analysis was purely financial and under the continuation
option excluded outstanding contractual issues {principally around acceptance testing),
the risks of further slippage in addition to the six months already factored into the figures,
and in the wider context the increasing trend towards payment of benefits by ACT
3. Cancellation was likely to lead to litigation. This option incorporated possible litigation
costs. Aithough the purchasers considered they had a strong case against Pathway in
which they could sue for damages of up to £200 million, they recognised that there was
likely to be a counter claim from ICL in respect of Pathway’s abortive project casts.
Pathway told us that they too had a strong case. On the basis of legai advice, the
Treasury reflected on these factors when costing the cancellation option.
4. The figure highlights the terms for partial continuation agreed by the government and ICL
‘on 21st May 1999. The precise allocation of some of the costs under this option was
considered in the ré-negotialion of the service contract belween the Benefits Agency and
Post Oifice Counters Ltd. Post Office Counters’ position worsens under this option mainly
Source: Anaiysis by consultants because they sustain progressive loss of benefit payrnent business from 2003, and
KPMG for the government because of the higher up-front cash requirernent of the revised deal.
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The government decided to halt the Benefits Payment
Card but continue with post office automation
ERE] By late April 1999 the main remaining alternative to outright termination of
the entire project was that Post Office Counters
Ltd would extend arrangements
that would allow them to cash benefits paid by the Department of Social Security
into existing accounts at the commercial banks. This option eventually formed the
basis for the agreement with ICL pic, which comprised:
®@ Cancellation of the benefits payment card system;
@ A fixed payment contract to Pathway for rolling out by 2001 the basic post
office automation infrastructure to support post office services and to
support the national use of bar-coding of benefit order books to reduce
encashment fraud;
@ Development of a network banking strategy by Post Office Counters Ltd
with a view to introducing extended banking facilities in good time for the
start of the withdrawal of paper-based benefit payment methods in 2003;
and
@ the Department of Social Security to take no active steps in marketing
bank transfers as their normal method of payment until 2003, to allow the
Post Office an adequate period to manage the transition.
The Government saw this solution as giving Post Office Counters Ltd the earliest
route to automation and through this, further comfort to sub-postmasters about
maintaining their customer base and support for the Post Office’s strategy to
sustain its long-term commercial viability by developing new services and
allowing it a reasonable time to achieve this. It also reduced the complexity and
risk of the automation project.
EE) On 24" May 1999 the Government announced that:
® the Benefits Payment Card element of the project would be dropped,
simplifying and assuring post office automation;
@ automation of post offices would proceed, for completion by 2001;
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® nearly all benefit payments would be made by bank transfers, starting in
2003 and completing by 2005. Until 2003 existing arrangements would
continue;
® people who wished to continue to collect their cash at post offices would
continue to be able to do so, the Post Office would introduce suitable
banking technology and develop its commercial arrangements with banks
to allow this to happen; and
®@ for the relatively few people for whom a bank account might remain an
unsuitable option, special arrangements would be made.
The consequences of the cancellation of the Benefits Payment
Card project are substantial
KEY] he delays to the Card project and the consequences of its cancellation
affect benefit claimants, the Department of Social Security, the Post Office and ICL.
EEG] The effects of the delays to the Card project between 1996 and 1999 were
such that the Department's positive business case for the project reduced from
£667 million net pre:
estimated fraud savings. The Department also lost its planned savings in the cost of
administering order books, but these were broadly matched by savings in lower
than expected payments to Pathw: ng card transactions. Benefit
claimants have not received as soon as originally intended certain quality of
sent value to £148 million, due mainly to the delay in achieving
for proce
service improvements claimed for the payment card, such as quicker response to
changes in their entitlement.
REQ The offects of the cancellation of the Payment Card project are more
diverse, though the Government's new strategy for benefits payment is intended to
address these.
EEE] For Benefits Claimants, the pre
depend on how the Department decide, in agreement with Post Office Counters, to
se future arrangements for payment will
take forward the phased migration to bank transfers. The minority of claimants
who cannot operate bank accounts will require alternative arrangements, also
using the bank transfer system, which are currently being considered.
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REZ] For the Department of Social Security some £127 million of the
£270 million costs of their CAPS programme, which was to link to the Card, may be
wasted because not all the system will now be required. Some of this investment
may be able to be redirected to support the new bank transfer payment systems.
Until the fall introduction of payment by bank transfers in 2005, the Department's
financial accounting and audit will continue to be hindered by the absence of full
by
tment
reconciliation between benefit encashment and entitlement. Convers
introducing an electronic system for the control of order books, the Dep:
expect to eliminate 85 per
full introduction of bank transfers. By moving over to payment by bank transfer
between 2003 and 2005, the Department will also make administrative savings
earlier than if the Payment Card project had continued
‘ent of fraudulent misuse of order books, pending the
EEE] Post Office Counters Ltd and their sub-postmasters are exposed to
different risks, including progress
(two years earlier than the end of the Benefits Payment Card contract), and
acceptance as sole purchaser of the risks involved in the automation of post offices.
loss of benefit payment business from 2003,
In November 1999, Post Office Counters Ltd recorded in their accounts an
exceptional charge of £571 million “for acquiring an asset which does not at this
stage yield suffi
standard accounting practice, the Post Office cannot take account of income that
nt income to justify the cost.” This reflects the fact that under
may be generated from the system but cannot be guaranteed. The Treasury has
adjusted the Post Office’s financing to reflect the higher up-front cash requirement
of the revised deal. Automation is being funded by £480 million of the Post Office’s
cash investments that had previously been earmarked for surrender to the
Treasury in 2002-03, but a wider review of the Post Office’s finances is ongoing.
FEZ] ICL wrote off project development costs of £180 million in June 1999.
Further development costs not written off may not be recoverable from their
caution
revised contract te automate pest offices. Their experience may increas
and aversion to risk on the part of ICL and other bidders for other Private Finance
IT projects. This project has received much publicity in the national, business and
specialist press. Much has been negative, and based on only selective information.
The cancellation of the Card element of the project is one of a series of
failures in government's procurement of Information Technology. In January 2000
the Committee of Public Accounts published a report drawing out lessons from
more than 25 cases from the 1990s where the implementation of IT systems has
resulted in delay. confusion and inconvenience to the citizen and, in many cases,
poor value for money to the taxpayer. The Committee’s main conclusions are
summarised in Appendix 4 of this report. Some are of particular relevance to this
project.
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EEG) The Prime Minister requested that a study be undertaken by the Cabinet
Office IT Unit to examine in detail the experiences the UK Government has had of
major IT projects, both successful and unsuccessful, and to compare them to those
s. The study completed its work in
May 2000 and has produced recommendations for improving the way in which the
government approaches and manages such projects. These recommendations are
summarised in Appendix 5 and in our view would, had they existed and been
implemented in the case of this project, have substantially reduced the risk of
failure. In April 2000 the Treasury Task Force on Private Finance published new
guidance for departments undertaking procurement of Information Technology
through the PFI. Amongst other changes, the guidance recommended that major,
complex, system development projects should be designed through separate,
more conventional contracts, before being built and operated through Private
Finance arrangements.
of the private sector and governments ove!
The Government now plan an expansion of benefit payments
through automated transfers to claimants’ bank accounts
adopted a two-stage Payment Modernisation Programme to provide “a secure and
Following the canceilation of the Card system, the Department have
fully accountable route for benefit payments” and to form part of a wider
govel
nment strategy to modernise government service:
® Up to 2005, the Department will extend the use of bar codes on order
books. This has now been installed in all the 7,000 post offices automated
to date, as an interim measure to reduce encashment fraud; and
®__ from 2003 to 2005 the Department will migrate from using order books to
0 claimants’ bank a
using transfers ants as the normal way of making
benefits payments. The change will further improve accounting and is
expected to make very significant administration and fraud savings of
some £500 million a
ERG [tis planned that Post Office Counters Ltd will extend its relationships with
commercial banks so that benefit recipients will be able to access their benefit
money at post offices, and bank customers generally will have improved access to
cash. An alternative payment mechanism available at post offices will also be
established for those benefit recipients who are unable to open a bank account
These measures will help to generate income for the company and
sub-postmasters, whilst automation will help Post Office Counters Ltd to retain
existing business and attract new clients and types of busine:
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EEG The strategy is intended to balance Social Security and Post Office
objectives, and to take into account wider issues including:
®@ overall value to the taxpayer;
® the wider policy objectives of Government, particularly around combating
financial exclusion; and management issues around the planning and
implementation of large business change projects involving Information
Technology.
EERE] The Government's current plans are designed to achieve substantial and
increased savings from 2005 that will be available for redeployment elsewhere,
and a new benefits payment service that:
®@ takes account of benefit recipients’ increasing preference to have
Pp
fa
they so choose;
yments made into their bank accounts: the provision of encashment
lities in post offices will enable customers to collect their cash there if
®@ has regard to the future commercial viability of Post Office Counters Ltd
and the vulnerability of some offices in rural or deprived urban areas, by
ensuring the Post Office can continue to have a role in benefit payment
arrangements;
® protects the security of paper-based payments in the interim through
extending the electronic control of Order Books; ensuring that the future
change programme is broken down into manageable components; and
@ so far as possible, builds on generic Information Technology systems
rather than having to invest in a new one, thus minimising the risk of
failure and maintaining the ability to keep abreast with the developments
in modern technology.
REE] In June 2000 the Secretary of State for Trade and Industry announced a
package of measures designed to modernise the Post Office network by;
@ ~~ ensuring that benefits and pensions can still be paid in full, in cash at the
local post office;
®@ setting upa sp
‘ial fund to improve local offices in deprived urban areas;
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The Cancellation of the Benefits Payment Card project
providing holp for those on low incomes;
providing people with new opportunities to use the internet;
encouraging post offices to act as Government one-stop shops;
maint:
ing the rural network by placing a formal requirement on the
Post Office to prevent any
‘oidable closures of rural post offices: and
supporting the development of the proposed “Universal Bank”, giving
banking facilities for up to 3-5 million extra people, and allowing
customers, including pensioners, to get cash out of the post office and set
up direct debit arrangements.
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Part 2: How well did the purchasers set
clear objectives for the project and manage
its benefits and risks to their services to
claimants?
of this
large and complex Information Technology project and how well these were
‘This part of our report examines the key risks to the Department's business
managed. It shows that the purchasers felt that they had transferred the risk of late
delivery to Pathway through the Private Finance contract. This indeed ensured
that Pathway, and not the public sector, eventually bore the £180 million abortive
costs of the system’s development. But the Department retained substantial
business risk associated with continuing benefit fraud and with constructive losses
on their linking CAPS project.
Key risks to the project and to the Department’s business needed
to be managed
ER] The role of risk management is to reduce the risk exposure of the
organisation or project to a level that is acceptable. The use of formal risk
management systems has been developing in UK government since the carly
1990s, but all such systems will incorporate the following main elements:
@ Setting clear objective
as a bi
efining aims and objectives which can be used
s for identifying risks to the project and to the purchaser’s wider
business and reputation;
® Risk Identification: listing each risk that could conceivably occur, and
recording them for future management in a risk register or other control
system. Risk registers are a common feature of s ful Information
‘Technology projects;
@ Risk assessment: assigning to cach risk an estimate of the probability of it
occurring and the impact on the project if it does; and
40
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®@ Risk mitigation, monitoring and control: including the allocation of each
risk to a named individual or entity with the responsibility and authority
to manage it, the selection by risk managers of options to deal with
unacceptable risk, and regularly monitoring identified risks and the
effectiveness of the actions taken.
EZ] Some risks originate and are managed entirely within projects, but others
arise from change in the customer's wider business. Figure 11 provides an
overview of the key areas of risk in the Benefits Payment Card project.
Figure 13 An overview of the key risk areas of the Benefits Payment Card project
inderstanding
ind applying a
lanaging
lation,
derstanding
1d soecifying
fequirement
1. Paragraphs 1.20-1.27
Source: National Audit Of
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The purchasers identified the risks of undertaking such a
project a year before the contract was signed, but not all
these risks were managed
EZ] fhe purchasers’ joint procurement team made strenuous efforts to identify
the risks of the project. In March 1995, seven months into the procurement stage,
the
specific risks within the project and the wider business risks that could affe
These covered the
ct it.
er included virtually all those that could have been foreseen such as:
compiled a comprehensive register comprising 224 ris
The regis
® inadequately specified requirements;
delays in the Department ’s CAPS project which would link to the Card
system;
® deterioration in service to customers, such as unacceptable queuing time
at post offices; and
® poor performance by the supplier.
EZ] However, this register did not include sments of probability and
impact, nor did it allocate risks to “owners” for management, or propose options to
mitigate the risks. We found no evidence that it was then further developed into a
fully-featured risk register and actively used in the project
Business Risks
Setting clear and consistent project
objectives
The Department and Post Office Counters
Ltd took steps to manage their divergent
objectives, but tensions remained
Es The project was unusual in that one of the joint
purchasers is a service provider to the other. Post Office
Counters Ltd provided benefit encashment services to the
Department of Social Security, and both organisations sought to
maintain a degree of commerei
al confidentiality from the other. As
shown in Figure 4, the Department's objectives were primarily to
42
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reduce benefit payment costs through a fraud free system as quickly as possible.
Post Office Counters Ltd's objectives were primarily longer term - to safeguard its
and tho:
risk was that the two purchasers might steer the project in different directions or
commercial business of its agents in the sub-post office network. The
not act in a co-operative manner. All three shortlisted suppliers told us that there
were clear commercial tensions between the two project purchasers during the
procurement phase.
E%} To manage this risk the Department and Post Office Counters Ltd
negotiated during the procurement stage a Memorandum of Understanding
ed, and delayed the i
of a statement of service requirements to the three shortlisted bidders by two
between themselves. Agreement took longer than exp
ssue
months. The Memorandum, which was mainly used to summarise the business
and commercial understanding between the parties, did not entirely resolve the
fundamental differences in objectives. which later had to be resolved in the
handling of detailed issues. For example, Pathway pointed to areas such as the
design of the card, and the arrangements for allowing claimants to nominate
agents to collect payments on their behalf, which highlighted continuing tension
and disagreements between the purchasers. The purchasers co-operated to
minimise the effect of such disagreements on Pathway’s progress, for example by
instructing them to proceed with designing the system on one ba:
undertaking to reimburse their costs if the disagreements were resolved the other
s and
way.
The purchasers also sought to manage this risk by creating a joint project
procurement and delivery team, staffed by both organisations and reporting to a
joint project board and steering committee with senior Department of Social
Security and Post Office officials. This provided a forum for the resolution of
specific issues between the two purchasers, but the basic differences in their
objectives for the project remained. Although the Authority resolved some
differences itself, it had to refer some back to the purchasers for resolution at a
higher I The
Authority's project management role was transferred to Post Office Counters Ltd in
April 1998, in response to a recommendation by PA Consulting, (Figure 19). The
Department of Social Security also felt that this would make Post Office Counters
Ltd more directly responsible for project management as the system rolled out to
post offices
5
1. Pathway told us that this resulted in substantial delay
E®J Post Office Counters Ltd and Pathway were aware from the outset that the
Department saw bank transfers as the most cost-effective long term answer for
social security payments. The Department had been admii
as an option for social security benefits since the early 1980s, an option which new
ering bank transfers
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claimants in particular were increasingly choosing. An important advantage of the
Benefits Payment Card to Post Office Counters Ltd was that it committed the
s for the
duration of the project. This guarantee constituted a potential financial risk to the
Department to make payments at a guaranteed level through post offic
Department. This divergence of interests at times led to some doubts about other
parties’ positions; for example that the Department was not committed to the
project's success. This was regrettable because it was in the Department's interests
that once commenced the project should succeed, in order to yield the planned
savings in fraud and running costs as soon as possible.
BE} We found that the Department had shown commitment to the success of the
project. In 1997/98 they had employed up to 1100 staff plus consultants in
designing and implementing their CAPS computer systems that were to link to the
Payment Card. In late 1997, when the Benefits Payment Card project was clearly in
deep trouble, they sensibly began contingency planning for a possible
implementation of payment by bank transfers, in case the project should fail.
Pathway told us that they had perceived that the Department's commitment had
reduced from around this time. In their view the project no longer had such strong
champions with the Department as before. The Department do not agree with
Pathway
ew; they consider that all the mei
hanisms and senior support
remained in place up to May 1999 to drive the project forward at the pace which
could be sustained hy Pathway, and that they had delivered releases of CAPS
software to time after the project replan in February 1997.
Business Risk Maintaining a viable business case for the
project
ESM) The main risks to the Department's business case
shown in Figure 7 were; that the costs of developing the
s
stem could increase, that the benefits in terms of
administrative savings and reduced fraud could be delayed,
or that the wider environment (including technical
advances), and ministerial policy might change to make
bank transfers a viable alternative to the Payment Card. As
with all Government projects, there is a basic risk around
changes in Ministerial policy.
44
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The Private Finance contract protected the purchasers
from the direct cost increases of developing the card
system itself
BREE he purchasers managed the risk of cost increases by entering into a
Private Finance arrangement with Pathway. Under the terms of the contract,
Pathway were responsible for the design, build, finance and operation of the
system. Pathway’s development, trialling and roll-out costs were only to be
recoverable from transaction charges that, for the most part, would commence
after acceptance of the system and national roll-out had commenced. On this basis
the purchasers would be liable for their own c
st overruns during the development
phase. In their 1997-98 financial statements published in 1999, ICL reported that
they had made a provision of £180 million for losses arising from this contract. na
conventional contract, development costs would have been met by interim
payments from the purchasers. It is Pathway’s view, disputed by the Department
and Post Office Counters Ltd, that because risks of delay had been transferred to
them, this led to a less than urgent attitude on the part of the pure!
resolving “agreements to agre
asers to
and carrying out their responsibilities.
BREA The risk of cost increases in the development of the Benefits Payment Card
also had to be managed during the implementation phase of the project when
Pathw:
by keeping their business case updated and using this to inform the
ed an incre:
y reques
in price
in 1997. The Department managed this
interdepartmental negotiations with Pathway during 1998 and 1999 that led to
cancellation.
The Department of Social Security’s business case was
highly vulnerable to slippage in delivery of the project
ERE] The Department’s business case was periodically reviewed and updated
over the life of the project. Figure 12 shows the extent to which its value for money
to the Department wa ppage. The original business case justifying
the contract signature in 1996 indicated major savings by preventing fraud, and
substantial potential to yield intangible benefits, but it was marginal in terms of
reduced running costs once the costs of the related CAPS system were taken into
account
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The erosion of the
Department of Social
Security's original
business case, for the
contract period 1996 to
Source:
46
2005
farlment of Soc'al
Security
Fiswe 1?
Case as atProject Case after Project Case at
Signature replan May 1997 Cancellation
April 1996 £ million’ May 1999
£ million? £ million’
Payment Service costs 4477 1464 4112
tess: Administrative Savings 1180 4022 598
less: Fraud sa 1428 1398 765
127 953 251
667 564 148
Notes: 1. Costs and savings are expressed as net present values discounted at 6 per cen!
uM compounded over the planned life of the project, and converted to constant
May 1996 price levels. For comparability, all figures take the assumption that the
contract ends in 2005.
2. The 1996 Business Case compared the costs and benefits of the Card project against
those of continuing with the existing paper-based payment arrangements. At that time
a comprehensive move to payment through transfers to claimants’ bank accounts was
nol an option under policy, though it remained the most cost-effective method of payment
to the Departrneni.
3. In early 1997 the comprehensive introduction of payment through bank transfers was still
not an option under government policy, though it remained the Department's preferred
fong term option.
4, By this stage, incoming Ministers had reopened the option of a comprehensive move ta
benefit payment through bank transfers, should the Card project fail. Also, Pathway had
requested a contract extension or price increases.
Running cost savings included planned reductions in the Department's payments to
Post Office Counters Lid due to the introduction of the more eff d system at post
and savings from replacing the operation of order books.
ERE] The Department took only limited steps to evaluate this risk before signing
the contract. Their May 1996 business
sensitivity to major slippage in the project,
the Department's control. It demonstrated the effect of three months slippage by
se included no analysis to assess its
ince this was seen as largely outside
the CAPS project on the Benefits Payment Card project, but no assessment of major
slippage by the Card itself. The Department have estimated that slippage cost them
some £5 million a month in additional administration costs and some £9 million a
month in lost fraud savings. Any potential further running cost savings foregone by
deferring the introduction of payment by bank transfers are additional to this
estimate.
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The Department’s business case for the project could be
affected by changes in policy on methods of benefit
payment
EREI Benefit payment through transfers to claimants’ bank accounts was the
cheapest and most efficient method of payment. But when previously raised as a
serious option in 1993 it was rejected by Ministers on the grounds that it would
have put at risk the national network of sub-post offices. The joint Department/
Post Office feasibility study of February 1994 had bet
feasibility of automating payments at post offices. The risk that ministerial policy
n asked to report on the
might change was therefore not considered likely. It was only from July 1997, in
the light of continued delays in delivery of the Payment Card, that a review of
options was instigated. The Department and the Agency then commenced
contingency planning for the possible introduction of bank transfers as the normal
method of benefit payment should the Payment Card project slip further.
Business Risk
Maintaining services to benefits
claimants
The purchasers confirmed the
acceptability of the system to customers,
Maintaining
Service to at successive stages
claimants
ESE] Moving millions of customers from a familiar
system of order books and girocheques to a new system
based on Card technology was a major area of business r
for the Department. They had to ensure that the new
arrangements would be acceptable to benefits claimants.
The purchasers managed this area of risk from the earliest
stages of the project. Customer acceptance was one of the criteria taken
into account in their joint feasibility report in February 1994, where for example
the security features of the Payment Card were considered more acceptable than
fingerprint reading.
ESE] During procurement in 1995, customer acceptability was an important
stream of the purchasers’ evaluation of bidders’ proposals. Each bidder's
proposals in this area were acceptable: in the case of Pathway it was one of the
stronger elements of their bid. Post Office Counters Ltd also obtained market
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research into the acceptability of the Card at this time, which established that most
claimants felt they would adapt easily to the new sy.
tem. Younger claimants and
girocheque recipients were particularly in favour of the change.
ERE] the purchasers and Pathway also undertook customer research in
November and December 1996, as soon as possible after the introduction of the
initial limited versions of the Benefits Payment Card system in the first ten post
offices to be automated. The customers, at this stage for Child Benefit only, felt the
change to be genorally positive, The later roll-out to 200 post offices confirmed that
the system was acceptable to customers.
BH2] Customer acceptance had to be balanced against the extent of complexity
this required in the new system. The customer survey in October 1995 showed that
claimants wanted to retain the ability to draw cash from Post Offices other than
their own and to have a nominated Agent collect their benefit for them. These later
proved to be areas of difficulty in developing the system, as shown in the next
section of our report.
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Part 3: How well did the purchasers
manage the risks of delivering the project?
This part of our report examines the key risks of this large and complex
Information Technology project and how well these were managed. It shows that:
well before signing the contract the two purchasers clearly identified the
key risks that eventually delayed delivery and led to the Card's
cancellation. But they were much less successful in
sing these risks
for probability and impact and in actively owning and managing them
subsequently; and
@ the project had a high probability of failure as soon as the contract was
signed, though this was not fully evident at the time. The pressures this
caused during the implementation stage would have severely
project organisation. Understandable differences in the business drivers
of the Department and Post Office Counters Ltd weakened the
y tested any
complementary business objectives and hence the positive relationships
that are e
tial if such challenges are to be overcome.
Understanding and applying the Private
Finance approach to procurement
EZ] The purchasers issued an invitation for potential
bidders for the Benefits Payment Card project in August
1994 and the contract was awarded in May 1996. The only
other comparable Private Finance deal, the Contributions
Agency’s requirement for the replacement of the National
Insurance Recording System (NIRS2), was advertised in
July 1994 and awarded in April 1995. Such
groundbreaking projects face risk and uncertainty
associated with the lack of precedent. Such contracts had to
be drafted and negotiated from first principles rather than
existing templates.
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The purchasers appointed appropriate advisers
EZY The purchasers sought to mitigate this risk of the lack of direct experience
by equipping themselves with appropriate advisers. They appointed Bird and
Bird, a firm experienced in Information Technology contracting as their legal
advisers and as members of their negotiating team. They also obtained assistance
from Charterhouse, a merchant bank, on financial matters. They received specific
advice on Pi ate ance Panel Executive.
rivate Finance practice from the Pri
Towards the later stages of the project in 1998 and 1999 they were able to learn
from experience on the NIRS2 project, for example the importance of acceptance
tually worked as intended when activated. The
criteria that ensured the system act
purchasers also imported specialist advice and assistance in the area of IT project
management from PA Consulting, Andersen and Kermons. Kermons also provided
procurement advice.
But the Purchasers, the bidders and their advisers had to
learn to apply Private Finance mainly through experience
EE] But difficult issues about how to apply Private Finance principles in
practice had to be tackled. A school of thought in Private Finance at that time was
that purchasers should specify their requirements at high level so as not to stifle
the scope for bidders to innovate in proposing solutions. This influenced the
approach of the purchasers in specifying their requirements and relying on the
expertise of bidders to understand the detail and devise workable solutions. For
example, notwithstanding the customer service requirements highlighted in
paragraph 2.20, the purchasers did not see it as their role in a Private Finance
arrangement to document the detailed rules for benefit payment in the form to be
automated. Nor did they request from the shortlisted bidders, to the extent they
would have done on a conventional project, details of the resources the bidders
would employ on the project. Another issue was uncertainty about the extent of
risk transter that bidders would accept. Precisely how the risk of fraudulent use of
payment cards was to be allocated between the Department, Post Office Counters
Ltd and Pathway became a major issue only in the final stages of the procurement,
and it effectively ruled out two of the three bids
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Understanding and specifying the
Requirement
EM2 The key risk in this area was that the project requirement
would be underestimated and that the resultant solution would
prove to be not deliverable to the required timescale and level
of functionality. This risk was managed mainly through a
structured procurement process, in which the purchasers’
joint procurement authority issued a statement of
requirements, which was subject to quality management and
change management processes. Also to test the three
shortlisted bidders’ understanding of the requirement, the
authority evaluated demonstration systems developed by the
The
authority then acted a between the shortlisted bidders
and users representatives in the Department and Post Office Counters
Ltd during subsequent negotiations up to the submission of priced bids.
bidders in response to the statement of requirements
The complexity of the service requirements for the system
began to emerge late in the procurement and this
continued after the contract was signed
EH] At the time the purchasers invited private sector interest their
requirements were detined only at high level. A formal Statement of Service
Requirements was only agreed by the Department and Post Office Counters Ltd in
February 1995 and i
procurement. This statement changed subsequently. Consultants producing an
sued to bidders in April 1995, eight months into the
assessment of “lessons learned” for the purchasers in November 1997 reported
that requirements had increased by between 10 and 20 per cent in the period from
April 1995 to February 1996. They said that the increases resulted from
clarifications, new requirements not included in the original statement, and
detailed documentation of the rules and constraints under which services were to
be provided. Customer Surveys in late 1995 had also emphasised the need to
continue to provide customers with existing facilities to use post offices other than
their own and to nominate agents to collect benefit on their behalf. The former
Director of the Procurement Authority told us that this was a period in which there
had been increased involvement of Department of Social Security officials
responsible for aspects of service to benefit customers. As a result the
Department's service requirement emphasised to a greater extent the need to
replicate existing paymentrules, as opposed to reengineering a simpler process.
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EJ =n October 1995, in an effort to draw together the detailed requirements,
the Purchasers started to set up a Requirements Catalogue. It was intended that
the catalogue would provide detailed service definitions and that service providers
would respond with solutions to these in their bids. However, in November 1995 in
response to increasing concerns from the service providers and the purchasers
about the time and cost of the procurement the Authority stopped werk on
developing these service definitions. With the agreement of all three shortlisted
bidders the Purchasers stated that detailed requirement definitions would be
agreed with the selected supplier after the contract had been awarded, and invited
tenders on the basis of higher level specifications. Though work on the
Requirements Catalogue was stopped, the purchasers continued to direct
additional information on their requirements to the bidders right up to the issue of
the formal invitation to submit priced bids. Some 333 additional details and
clarifications to requirements were issued between November 1995 and the end of
January 1996.
E82 = From the records it seems that when the contract was signed there were
289 “agreements to agree” the detail of the service contained in it, of which
38 remained to be agreed by Pathway with the Department, 124 with Post Office
Counters Ltd, and 127 with both clients jointly. Pathway told us that they had
expected these to be cleared within the first three months during a process of
drop-down, but drop down instead focused on legal arrangements rather than the
technical and service aspects in the agreements to agree. The Department told us
that it had never been intended to resolve the agreements to agree during drop
down; only the mechanisms for completing them. Some of the outstanding
agreements were relatively minor, such as the design of the logos to appear on the
card, whereas others, examples of which are shown in Appendix 2, were more
significant. Resolving the more important agreements to agree was essential to
finalise the detailed design of the system and deliver the full service
The emerging complexity of the requirement increased
the difficulty of the solution
E®J Pathway told us that the emergence of complexity in the service
requirement after the contract was signed caused them acute problems in two
main areas:
@ temporary tokens ~ the arrangements that apply when someone collects
a benefit (prior to issue of a Card) or on behalf of another person at short
notice on a temporary basis; and,
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®@ extended verification processes ~ through which the Department could
change the targeting of identity checks on particular groups of payees.
Payees were asked to verify their identity at the counter by giving personal
details in answer to computer-generated questions when presenting their
payment card. This important anti-fraud feature is explained further in
Figure 13.
I Figure 13 I A case study in emerging complexity: Arrangements for verifying the customer's identity
Statement of Service ReauverertI
In the Contract with Pathway:
Agreements to Sa .
Source: Project documents reviewed by the National Audit Office
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Pathway felt that complexity lay not so much in each individual area butin the way
they combined across the different types of benefit recipient (normal beneficiaries,
for
permanent agents, temporary agents, and alternative pay Different rul
different benefits needed to be reconciled. Complexity thus related to a small
minority of payment collections (estimated to be between one and five per cent),
often where agents collected more than one benefit. Pathway told us that the
Department appeared inflexible in simplifying the application of rules to lessen the
complexity of the resulting
simplification, but were constrained by legislation and by the need to meet benefit
recipients’ expectations in this difficult area, (paragraph 3.11).
em. We noted that the Department had attempted
EX] =m accordance with Private Finance practice, the Department's part of the
requirement was specified mainly in terms of the performance they required,
rather than how the service was to be delivered technically. Pathway, like the other
bidders, responded with their own technical solutions. Tokens and extended
verification pro
the contract was signed there was not a detailed design that demonstrated how the
solutions in each of these areas would work in practice. Pathwa
s were elements of Pathway’s proposed solution. At the time
's position is that
their solution was robust enough at that time to be developed to meet the full
requirement. This was also the view of the Department.
ERE] The Department gave us their own perspective of how complexity emerged
in areas identified by Pathway. On the issue of verification procedures, the
Department felt that they had sought to preserve their requirement for flexibility to
target verification procedures in response to changing patterns of fraud. They had
agreed to Pathway developing initial software using “hard coding”, but had
required the full version to be written using “soft-coding”, to ensure verification
questions could be targeted effectively in practice.
ESE] Pathway also noted that at the time the contract was signed there was no
authoritative document which collated and reconciled all the different rules which
rhe rules differed between benefit
governed payment of different benefit partly
for historic reasons, and partly because the differing circumstances of different
types of claimants determined the extent of their reliance on emergency payments
and on agents to collect benefit on their behaif. This proved to be a very difficult
area to resolve. It required the Department and Pathway to identify and harmonise
historically divergent payment practices between different benefits, tracing these
back to often conflicting regulations and legislation, to produce a single set of rules
that could be programmed into the Card system. Pathway produced the first
version of the new document which documented these rules in 1996 and
submitted it to the Department for agreement. Five subsequent iterations
followed, during which time the Department examined at length the need to
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change legislation, which proved to be difficult. The document was not finally
agreed until February 1999, just before the Card project was cancelled. Pathway
continued designing and redesigning software while this reiteration continued.
The Department told us that they had provided a statement of rules they had
considered definitive as early as October 1996, and had worked hard with
Pathway on the correct interpretation of these rules.
ERE] Pathway told us that they had expected more scope to redesign the
Department's bus: rules and requirements so that they could use software
more closely based on the solution that they had installed in the initial ten post
offices in September 1996. This initial go-live was always intended to be an interim
system. It did not offer full functionality, and included some extemporised
processes which would have to be replaced with permanent software for the
subsequent roll-out to 200 post offices. It was a development based on software
he purchasers had, during the
e of the project, identified as an
running live in post offices in Ireland.
procurement pha the extent to which
Pathway would have to change software running on the system in Ireland.
ESE] The project initially proceeded on the basis of proposals from Pathway that
it would involve mainly the integration of existing software packages. In the event,
the greater than expected complexity of the service requirement obliged Pathway
to undertake much more development of new software than they had planned for
in their winning bid. This had major implications for the degree of difficulty of the
project since software development is a complex and high-risk activity, especially
against a requirement specified largely at high level. The most comprehensi
published research known to us in this area is that undertaken by the Standish
Group into the outcome of software development projects in the United States. The
key findings are shown in Figure 14.
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The outcome of software
56
development projects
Fue jure 14
In small In medium Intarge
companies companies companies
(per cent) (per cent) (per cent)
Project successful: Compieted on time, 28 16 9
on-budget, with all features and functions as
specified
Project “challenged: Completed and a7 62
operational but over budget, or aver the
time estirnate, and offers fewer features and
functions than originally specified
Project cancelled: at some point in the 22 a7 29
development cycle
Notes: 1. The Standish Group resear challenged” or
cancelled, average time overruns were 230 per cent in large companies and the average
cost overrun was 189 per cent of the original cost budget.
also reported that for project
2. For the purpose of this survey, large companies were defined as those having an annual
tumover greater than $500 million, and a medium-sized company as those with tumover
of $200 million to $500 million.
Source: The Standish Group, based on 1995 survey responses from 365 IT executive manager
the USA across major industry segments including finance, manufacturing, retail, services and loca
slale and federal government institutions. Some 8380 development projects were represented.
ERE] An increased need for bespoke software development also places
additional demands on a supplier's resources. ICL is primarily a software
ial
integration company and most of its staff work in this area. Department of So
Security off
managing suffic
by the conclusions of a review in 1997 by PA Consulting (Figure 19), which
is told us that they felt Pathway had had difficulties mobilising and
nt resources to deliver the revised solution. This was supported
concluded that Pathway did not initially have the resources in place to complete the
development work required. The Department understood that the full range of
software to be integrated was not delivered to Pathway by its sub-contractors until
late 1997. Pathway
cause of project delay and that their system integration staff had the necessary
skills for system development and testing.
position is that the speed of this mobilisation was never a
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The Department had to manage the risk that slow
progress on their CAPS system could affect the Benefits
Payment Card project
EREI issuing benefits payment cards and making payments to claimants
depended on the successful flow of payment information between the
Department’s and Pathw
s systems. In May 1995, while negotiations with
bidders for the Card contract were proceeding, the Department commenced
om that would
development of the Customer Accounting and Payments (CAPS) sys
tem. The objectives of the
provide this information to the benefits payment card
CAPS project were to:
@ support card payments, to meet commitments given by Ministers, the
Department and Post Office Counters Ltd;
® support security initiatives to prevent programme losses;
W_ support improved accounting, to provide proper stewardship of
programme money and to position the Department to produce resource
accounts;
®@ facilitate the alignment of benefit sytems, bringing commonality to
business processes and to harmonise data; and
@ make data available that meets the Department's information needs.
Developing CAPS and the Payment Card in parallel added
to risks
ERG Ali three shortlisted bidders told us that they were conscious of the size and
complexity of CAPS and that any slippage in its development would be likely to
affect the Benefits Payment Card Project. The proposed CAPS timetable at the time
the Benefits Payment card contract was signed specified that by December 1996,
half of all post offices would have heen converted and half of all CAPS benefit
payments would be converted to a card basis. Both systems would continue to roll
out in parallel over the following two years. This development project was
managed by the Department and was comparable in size and complexity to the
Benefits Payment Card itself, thus compounding the complexity, challenges and
risks of the programme as a whole.
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Developing these two large, linking proj
tandem added substantially to the development risk of the whole programme.
Pathway have said that one of the major technical obstacles to their progress was
cts and Post Office systems in
that the CAPS system was not available when promised. In particular they point to a
clause in the contract which they interpret as meaning that the Department would
provide Pathway with complete data and interfaces with CAPS for testing purposes
by September 1996. This did not happen. This was important because Pathway’s
system had to change in response to changes in CAPS interfaces. The Department's
view is that this interpretation is unrealistic in terms of the way the development
programme operated, and is based on the contract as signed, and not as modified by
the “no-fault” agreed replan in February 1997. They also contend that Pathway did
not have a complete system to test by September 1996 in any case. The clause and
the interpretations placed on it, are reproduced in Appendix 6.
ERY During 1996 the CAPS project and Pathway had both slipped against their
original plans. Pressure to meet the timescale for the initial go live with Pathway in
ten post offices resulted in software being designed specifically to work in the low
risk context of handling a relatively small number of Child Benefit payments. Much
more work was necessary to develop it further to provide a generic, high volume,
solution with the full range of security features that the Department required to
support all benefits.
After initial delays, the Department improved their
management of CAPS to meet the needs of the Benefits
Payment Card
ERE] tis clear that the risks of late delivery of CAPS were not well managed prior
to the replan of the whole CAPS and Payment Card programme in February 1997.
Anew project director took up post in mid 1996, around the time that the Payment
Card contract was awarded to Pathway. He found that the project had net been
appropriately resourced. The Department also commissioned a review by
consultants Ernst and Young which in December 1996 reported:
@ a lack of project management expertise at the right level within the CAPS
senior management team;
®@ a focus on short term objectives to support the initial go-live, at the
expense of developing a set of plans and designs for the programme as a
whole; and
doubts over the strength of financial projections and cost control.
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EEG) Ernst and Young made recommendations for improved management and
planning which the Department implemented to reduce the risk of subsequent
slippage on CAPS. While CAPS along with the other two parties, had contributed to
delays in the project up to the project replan in February 1997, thereafter the
Department successfully released software and data from CAPS in time for the
equivalent releases of Payment Card software by Pathway. We found no evidence
that from then onwards the releases of CAPS software had delayed the
implementation of the Payment Card
E#4] Besides sustaining progress on the CAPS project, the Department had to
co-ordinate it effectively with the Payment Card. The CAPS project management
structures and risk management processes were separate from those for the
Payment Card. An alternative arrangement would have been to create a common
programme management tier to oversee the Card Project, CAPS, and related
activities in Post Office Counters Ltd. This would have ensured that due weight was
given to interdependencies between constituent projects. But the project was only
one part of Post Office Counters’ wider transformation programme and similarly
CAPS had a wider remit for the Department than just supporting the Card. So a
single management structure was not thought feasible in this case due to the
commercial sensitivities of the two purchasers.
EEZ] Though the Department and Post Office Counters Ltd did not set up an
overarching programme structure, the Department managed the risks of
inadequate co-ordination between CAPS and the joint Delivery Authority by
establishing close links at board and management team level. Key Departmental
staff attended meetings for both projects. Pathway were not directly involved in
C
programme when the joint Delivery Authority was wound up. Pathway told us that
in the absence of a common programme management tier, and of direct formal
interaction with CAPS, they had found it impossible to ensure dovetailing of the
t the detailed level or to avoid surprises during the phased
of software. The Department pointed out that plans were continually
PS board meetings and had no direct, formal access to CAPS staff until late in the
two programmes
releas'
shared with Pathway
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Selecting the supplier
EZE] he purch:
complex project of selecting a strong supplier capable of delivering
rs per
ved the importance for such a large and
a working system. The evaluation of proposals was run by the
joint Procurement Authority, staffed by Department of Social
Security and Post Office personnel and was supported by
contracted legal, procurement, project management and IT
specialists. The Authority was controlled by a single Director
who reported to a Project Board, which met at least monthly to
oversee and advise on the procurement process, and act as the
committee for the shortlisting and evaluation of suppliers’
proposals. The main stream
of work the authority undertook to
manage the risks of supplier selection were:
™@ the evaluation of five bidders’ responses to the Statement of
Service Requirement, against a range of criteria, as a basis for
selecting a shortlist of three bidders, followed by;
@ examination of
firms; and
fem demonstrations mounted by the three shortlisted
® formal evaluation of priced bids from the shortlisted suppliers against
technical, managerial and commercial criteria.
The purchasers effectively identified the risks of
Pathway’s proposals, but were less successful in
evaluating and reducing these risks
E#2] After receiving bidders’ responses to the statement of requirements the
Procurement Authority set up risk registers for each of the three shortlisted
bidders and established procedures to identify, evaluate, control, monitor and
report these risks to the Project Management Board
EEE Risks were classified according to their perceived severity. “A-class” risks
were “show stoppers” which if still present at the time of invitation to tender would
mean that the service provider would not receive an invitation.
srious “B-class
risks were categorised into those with an impact on the project of more than
£5 million a year, £1 million to £5 million a year and under £1 million a year. They
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would not preclude a service provider from tendering, but the costs would be taken
into account in bid evaluation. “C-class” risks were minor, which though
considered in evaluation, would not add costs to a bid.
EZ ‘he procurement authority managed these risks through discussions with
the service providers and evaluation of their written responses. Pathway’s
responses were comprehensive and detailed, and some proposed significant
changes in their proposals for design and implementation of the project. These
included the use of verification procedures to confirm the identity of claimants at
post offices, and upgrading key software from 16 bit to 32 bit technology. On the
ba
evident however from subsequent events that some of the risks identified in
is of these responses the pw) s cleared and downgraded ri
Pathway’s solutions and recorded as cleared at the time the contract was awarded
were still live, as shown in Appendix 7 of this report. These included areas such as
the system’s ability to meet security requirements and the dependence of the
system on the development of new software. Pathway told the National Audit Office
that many of the risks identified by the purchasers as re-emerging post contract
were not shared or discussed formally with them, and that they had not been
aware that the purchasers saw many of them as still live
EEG] Just before the issue of the invitation to tender the risk register for
Pathw.
which according to the purchasers’ procurement strategy should have precluded
y's proposal showed one outstanding “A” - grade “show
topper risk”,
them being invited to tender. This risk, of Pathway’s reliance on a key piece of
messaging software which would need to be scaled up to meet the requirement,
was downgraded on the basis of proposals from Pathway. At this stage Pathway’s
bid had the highest number of outstanding s
rious B - grade risks, each with an.
even or higher chance of occurring.
EE] Though the approach to identifying risk to the project, based on the
analysis of each service provider's proposal was sound, it focused heavily on
isk of late
ry could be transferred to the service provider to manage, whereas in fact, as
financial risk transfe:
deli
subsequent events showed, much business and commercial risk for the benefits
is was based on the premise that the business
card payment project still lay with the Department. In fact, delays in delivering the
project would cost the taxpayer some £15 million a month in terms of continuing
fraud and administration costs. In principle, the purchasers had some protection
against these costs through their rights under the contract to sue Pathway for
damages of up to £200 million. Howe
because the agreement reached with ICL in May 1999, by mutual consent and in
agreement with Minis
the purchasers did not sue for damages
ers, was in full and final settlement of their claims against
Pathway and Pathway’s claims against them.
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EEE) During the pre-contract period all three shortlisted suppliers offered and
provided the joint Authority with versions of their own risk registers for the
project. Pathway submitted a risk register containing 20 risks. The most s
ore
risk recorded related to the technical boundaries between Pathway’s and the
such as the late
‘tems. It also put a marker down for other risk:
delivery of the CAPS system and the handling of temporary tokens and casual
agents, which became major issues after the contract was signed. While cl
Procurement Authority would hi.
register very carefully, we found no evidence that they had fed anything from itinte
early the
ve to consider the content of Pathway’s risk
their own risk assessment process.
The purchasers’ evaluation of suppliers’ system
demonstrations gave only limited assurance about the
quality of the proposed solutions
EQ] [In 1995 the Procurement Authority required the three shortlisted suppliers
to demonstrate the credibility and viability of their proposed solutions. ‘The
demonstrations formed a key part of the purchasers’ technical evaluation of the
suppliers’ proposed solutions. They were used by the purchasers to identify the
risks associated with each bid and to invite proposals for the bidders as to how they
would deal with them. They also offered the suppliers the opportunity to “sell” the
benefits of their solution.
EEME he techni
phase. The evaluation could only ever have provided ver
the capability and viability of the service providers, because all three
‘al evaluation of bids was undertaken during the demonstrator
y limited assurance about
demonstration systems had only limited functionality and were not fully fledged
prototypes. They were to help convince the purchasers that the suppliers knew
what they were getting involved with and, for example could demonstrate some
understanding of the speed with which business could be transacted at post
offices. One bidder described the phase to us as “just smoke and mirrors”.
Nevertheless, one losing bidder told us that they had spent up to £1 million in
simulating the environment and systems for their bid.
EEA] In 1994, when the Department and Post Office Counters Ltd established
their project procurement strategy they considered having two bidders entering
into a pilot competition through which each would develop and trialas}
an approach is particularly suitable where there are substantial development
risks. Costs of the pilots may be shared between the bidders and the purchaser.
The purchasers however did not adopt a piloting arrangement, on the grounds
ct.
tem. Such
that it would have delayed the proj
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The purchasers decided to accept the lower confidence of
delivery that they had in Pathway’s proposed solution
compared to other bidders’, because only Pathway’s bid
was clearly compliant with the Private Finance Initiative
The purchasers evaluated bidders’ technical proposals on a scale of zero to
ten against the eleven criteria shown in Figure 15. Zero represented an
unacceptable proposal with serious shortcomings and ten an outstanding
proposal. Most scores under each criteria were in the range four to six, where four
indicated that the proposal was viable but raised some outstanding issues that
were relatively minor or manageable; and six that the proposal was sound with no
significant issues. The evaluation team consistently assessed Pathway’s proposal
as being less strong overall than those of the other two bidders under most of the
eleven criteria.
EEZ] The technical evaluators’ overall assessment of the credibility and viability
of the Pathway solution was that while acceptable, they ranked behind the other
two consortia. The final evaluation identified and confirmed a significant number
of risks inherent in the Pathway solution, many of which were potentially high
probability and high impact risks and which were factors in the later problems in
the project.
EES) Pathway’s proposed solution had some attractions because it was based on
simpler benefits pi
a yment system already working with the Post Office in the
Republic of Ireland. The solution featured a “distributed architecture” in which
each post office held its own database of payments due. In principle this offered
advantages of improved availability and shorter transaction times, an important
factor for Post Office Counters Ltd. It contrasted with the other two bidders’
s used by UK banks for
credit card systems. Neither of these bidders had already de’
proposals which were based on centralised databas
sloped a working
social security benefit payments system. The risks associated with the Pathway
architecture were seen to be in terms of scaling up of the system, the software
required to support it and the changes needed to cope with the full service
requirement.
EE (he purchasers’ evaluation team reported their strong concerns about the
reliance on unproven third party software to support Pathway’s solution for post
office automation and the benefits payment card system. This matter, they said,
generated little confidence in Pathway’s ability to deliver to time and quality and
left a question mark over the delivery of the service.
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Criteria Weighting, Cardlink 1BM Pathway
(out of 200)
Price (£ million)’ 1005 - First
Compliance with the Private Finance I
tive (See Figure 16) Probably
compliant
Compliant
External factors affecting potential success*
Acceptability of the system to the customers of the Department of 30 58
Social Security and post offices
Acceptability of the systern to Department of Social Security & post office 15 60
staff and agents.
Flexibility, in terms of reacting to external change. 20
Reliability and support in terms of helping ensure continuily of service. 20
Innovation 15
Viability factors, in terms of service delivery’
Fraud tree method of payment for benefits payments. 30
Credibiity to manage and deliver the start up of services. 15
Credibility of service delivery once implemented. 20
Management capability of the bidding team shown in the demonstrator 20
phase.
Stability and coherence of the bidding organisation, including the prime 15
contractor and other consortium members.
Noles: 1. Price is shown as Net Present Value, discounted at six per cent per annum, for the duration of the contract. The values
given are for the most likely outcome. Total prices could be higher or lower depending mainly on the volume of transactions
and on infiation over the ile of the contract
2. In this scoring system a score of “4” meant "Ordinary" - that the proposal was viable but nothing special, and raised some
‘outstanding issues that were considered relatively minor or manageable; and "6" was “good” - that the proposal was
basically sound solution with no sig
Source: Nationa’ Audit Office
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Foreseeing the
signed, the evaluation team reported that they had a low belief in Pathway’s
appreciation of, and empathy with, either of the purchasers’ business
of difficulty that were to arise after the contract was
requirements or ability to deliver a service which would meet the required service
levels. They reported that they considered that Pathway had weak authentication
procedures, the weakest security proposals and that Pathway had manifest lack of
understanding of the management of fraud risk.
EEG) The evaluation team reported that Pathway’s performance in managing the
demonstration phase of the procurement had been substantially below those of the
other two service providers and raised concerns about Pathway’s lack of internal
controls. They reported that Pathway had not shown itself to be adept at foreseeing
and preventing problems.
EES the r
consortium’s bid was the most expensive. The IBM and Pathway pric
Its of the financial evaluation of bids showed that the Cardlink
s were very
close together.
Figure 16 How the purchasers assessed the bidders’ proposals for compliance with the Private Finance
Initiative
The risks the purchasers wished to transfer
to the supplier
ink’s proposal IBM's proposal Pathway’s proposal
Onus of proof on the: Liability limited to £10 v
purchasers, no acceptance million a year, no
of cardholder verification acceptance of cardholder
fraud verification fraud’
v v v
guaranteed volumes to be 92 per cent of revenue to v
set al end of first year of be guaranteed
roll-out
» Charges to increase at Charges to increase in line v
inflation less 1 per cent with inflation
Financial limits of ability set 7 v
per year and per event
Note: 1. The purchasers estimated the risks accepted by Pathway in the area of f to them some £34 mili
than the risks accepted by IBM.
Source: Nat‘ona! Audit Office assessment of the purchasers’ bid evaluation
igher
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66
EZ) Whilst acknowledging the implications of selecting Pathway, the evaluation
team considered this preferable to awarding the contract to IBM. IBM’s bid would
be unlikely to be PFI compliant and accepted less risk than Pathway’s in terms of
having to pay penalties if they failed to prevent fraud. The group therefore
unanimously recommended to the Evaluation Board that any contract award
should be made to Pathway. On 29th April 1996 the Project Board accepted that to
proceed with Pathway implied a degree of risk but concluded that such risks were
manageable and were outweighed by the relative merits of other aspects of their
bid.
Pathway’s acceptance of part of the risk of fraud was a
key factor in their selection as supplier
EZ2I One of the Department’s key objectives, and in contemporary Private
Finance Initiative thinking an imperative in terms of getting the project off the
public sector's balance sheet, was to reduce the risk of fraud. Their business case
for the project relied fundamentally on eliminating the cost of this fraud. In the
existing paper system, such fraud includes:
@ loss or theft of order books and girocheques which are used by the wrong
person;
@ manipulation, for example amounts changed or order book covers and
foils swapped;
@ counterfeiting of payment instruments; and
alled.
@ customers continuing to cash a book which has been re
EEE] Phe areas where the purchasers sought risk transfer to the supplier were
set out in early project documents, such as the Prospectus, Request for Statement
of Capabilities and the Statement of Service Requirements. But the purchasers did
not hold detailed discussions about the exact transfer of fraud risk with each
service provider until January 1996, just before the issue of the formal Invitation
Yo Tender in February 1996. Where such unique and significant liabilities are
involved, it is now recognised as good practice to reach an acceptable
understanding with service providers much earlier in the process. Because there
was at the time little experience and formal guidance in government on risk
transfer the purchasers had to develop their own approach.
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EEE] The differing readiness of the shortlisted bidders to accept fraud risk played
a major role in the ction of Pathway as supplier. As well as being potentially
massive, exposure to fraud broke new ground for the service providers. The two
unsuccessful shortlisted bidders told us that they were very concerned about the
risk exposure that bidders were being asked to accept. This concern focused on the
maximum liability of £200 million to cover fraud and system failure or poor
performance over the life of the contract. This suggested to them that they could be
exposed to fraud or failures attributable in some way to failures by post office staff
who operated the system or by the Department. They told us that these factors
were reflected in very large risk premia within their bids. One bidder had decided
not to bid at all until urged to do so by the purchasers.
EZZ] Conversely Pathway told us that having as d the se
their technical solution they had concluded that their probable exposure was only
a handful of millions each year. So they were not deterred by this element of the
Invitation To Tender. Under the contr:
Counters Ltd as still being liable for instrument of payment fraud attributable to
Department and post office staff and
‘urity measures in.
ct they saw the Department and Post Office
tems,
EXE] At the time the Card project was cancelled there had been no proven cases
of fraud attributable to misuse or misappropriation of payment cards at the
200 post offices disbursing child benefit. Pathway had paid refunds to the
Department totalling £2,000 in respect of duplicate payments to claimants
attributable to deficiencies in the performance of their initial go-live system.
EZQ The failure to implement the new benefit payment arrangements nationally
for all benefits by 1999 as planned had exposed the Department to an estimated
£100 million or more of fraud a year through continued misuse of order books and
girocheques.
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Implementing the solution
EZZ_ Given the extent to which difficulties were not resolved
during the procurement period, the risks to the project when the
contract was awarded to Pathway were likely to have a major
effect on the cost and timescale of the project, however strong
were the arrangements for managing implementation. The
purchas
re-emerged during the system development and
implementation stage mainly through:
's attempted to manage the major risks that
@ formal risk management procedures operated by a joint
delivery authority, replaced in April 1998 by a Post Office
Counters Ltd team;
agreeing a project replan with Pathway in February 1997;
® commissioning an independent review of the entire programme from
PA Consulting when slippage continued, and acting on the
recommendations; and
W the risk management arrangements of Post Office Counters Ltd from
April 1998, when their Horizon team took over responsibility for the
contract with Pathway.
Formal risk management arrangements continued after
the contract was signed, though they were not fully
effective
EXE] When the contract was awarded to Pathway in May 1996, the Department
and Post Office Counters Ltd established a joint Delivery Authority to manage the
development, system acceptance and roll out phases. Like its predecessor, the
Authority was staffed and funded jointly by Department and Post Office Counters
Ltd. This body effectively stood between Pathway and the intended users of the
system in the Department of Social Security and Post Office Counters Ltd. The new
Project Steering Committee included the Chief Executive of ICL and Managing
Director of Pathway, as well as the Chief Executive of the Benefits Agency and the
Managing Director of Post Office Counters Ltd. Similarly, below the Steering
Committee the new Board included the Managing Director and Programme
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Progress against the project plan was regularly reported to
the Steering Committee and Board. Figure 17 shows the organisation adopted for
the proj
in this period.
I Figure 17 I The organisation adopted for the Benefits Payment Card Project
Nine individual
benefit computer
systems,
Customer
Accounting anc
Payment Systems
»». [CAPS] tear
I Key
I -# Accountability and reporting
I —> Working Relationships
Resources
Benefils Agency
Management Team
CAPS
Project Board
Project Steering Commities
(Members drawn from
Benefits Agency,
Post Office, Counters, ICL)
Project Board (Members
drawn from Benefits Agency,
Post Office Counters and ICL)
Joint Delivery
‘Authority
{London}
Pathway
[Feltham, Middiesex]
Post Office
Computer system
and business teams J
ICL Plc Pathway's
Sub-Contractors
Note: The organisation during the earlier procurement stage was simitar, bul without the inclusion of ICL Pathway.
Source: National Aud't Office
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EEE) The Delivery Authority established a new risk register incorporating risks
from the pre-award project register (paragraph 2.3), those outstanding on the
procurement team’s risk register for Pathway’s solution (paragraph 3.24), and
othe
Authority and were described in regular highlight reports made to the new Project
Director and his team. Key risks and issues were reported to the Board and the
Steering Committee.
I Figure 18 I wre 18 ‘A summary of the risk registers produced a different stages of the project
arising from further review. Most risks were managed within the Delivery
Source: National Audit Cffice
EX3 Our examination of the Delivery Authority's risk register revealed that not
all on-going risks were captured from the procurement phase. For the majority of
identified risks the register did not show the countermeasures or mitigating action
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taken. We noted also that assessments of the probability of risks occurring were
not consistently applied, in that there were inconsistencies in the numerical
od.
systems us
EESE None of the project documentation we saw provided evidence of the use of
project planning tools to identify the potential impact of delay. Project plans
maintained by Pathway and by the Delivery Authority appeared to lack “earliest”
and “lat
point estimates. We found no evidence of the use of sensitivi
imates of duration for each major activity, using instead only
ingle
analysis in detailed
project plans; this resulted in repeated instances of “unforeseen” project slippage.
Such estimates are a fundamental cornerstone to all project planning, and deli
measurement.
The purchasers and Pathway replanned the project in
early 1997
EH] «Following the project replan in February 1997, (paragraph 1.13), the
Department diverted additional and more highly experienced staff to CAPS in
order to reduce the risk of slow progress on their part impeding Pathways
implementation of the Card. From July 1997, Pathway strengthened their
management team for the project and they increased staffing and technical
resources
The purchasers and Pathway obtained and acted on an
independent review of the project
EEE] Despite the replan in February 1997 the project continued to make slow
progress. In July 1997 the Chief Executive of the Benefits Agency, Peter Mathison,
and the Permanent Secretary of the Department of Social Security, Ann Bowtell,
met ICL to register concern at the further slippage and the uncertainty
surrounding future releases of software. As a result, Pathway, the Department and
Post Office Counters Ltd commissioned PA Consulting to provide an independent
pry
portare shown
review of weaknesses and risks in the programme, the implications for deli
and the options available. The key conclusions of PA Consulting's
in Figure 19.
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Figure 19 Key conclusions of the Review of the PA Consulting Review of the project
The prog
me was “world class in its ambitions”;
On CAPS The Department's plans for delivering ils own systems
of tight management control would be vital
¢@ well thought through but continuation
Post Office Counters Lid had made satis
the resources available to.
story progress, though PA registered concerns about
he roll-out of the infrastructure, and the s! ie for
managing both the implementation and the continuing service.
The extent of development work that Pathway needed to do had been seriously misjudged and
Pathway were still implementing new management arrangements and cisciplines to reflect their
enhanced understanding of the demands of the programme. There was uncertainty about
delivery, due in part to the deferrai of known problems and system functionality to later releases of
software. Though PA had received satisfactory answers fo their questions on the robustness of
Pathway's technical solution, there would continue to be reservations until the final design was.
compieted.
The Delivery Authority had spent too much time on as
between the Department, Post Office Counters Ltd and Pathway, and recommended that
Authority could be reduced to a quarter of its current size by transferring its functions to the two
purchasers, The Authority was wound up over the following six months and replaced by the Post
Office "Horizon project tearn.
ects that might be bette
Source: PA Consulting Report: October 1
EZ] The purchasers responded to the PA Consulting Report with the measures
examined in the remainder of this part of the report.
From April 1998 the Department relied on the risk
management arrangements of Post Office Counters Ltd for
implementing the system with Pathway
EHS) puring this period the main risk facing the Department was that the
software being developed by Pathw:
greater volumes might not be suffici
initiall
y to handle payments for all benefits and in
ently
sought to manage this by receiving and responding to regular progress
reports from Post Office Counters Ltd.
secure or stable for a live trial. They
BEA when the Post Office took over from the Delivery Authority the lead in
managing the contract as recommended by PA Consulting, the Department moved
to an arms-length role and drew the management of their side of the Benefits
Payment Card project into their expanded CAPS proje
Horizon Project Manager reported fortnightly to the Department's CAPS Board
and attended the Board monthly. The Department was never invited to attend the
. Post Office Counter's
Post Office Project Board. Links continued at working level between the CAPS and
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Horizon Project Management Offices and at joint liaison meetings on
implementation and technical issues. The Department actively sought, but did not
obtain, an open, shared risk management process from the Post Office Horizon
team, who maintained direct reporting arrangements between themselves and
Pathway.
Ed Later in 1998 the Department met Horizon and Pathway and discussed
with them the extent of further testing of Pathway's system before the live trial.
Lack of agreement on this point meant that the Department refused to authorise
the start of the live trial, which had been planned for May 1999. Also at this point,
further work still needed to be done on CAPS to test benefit systems “end-to-end”.
This remained the position when the Card project was cancelled
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Glossary of terms
BA/POCL project The complete project including the Benefits Payment Card and the automation of
post offices.
Initial-Go-Live The limited pilot stage which took place in 1996 in ten post offices
Instrument of Payment Misuse of order books or girocheques by benefit claimants or other persons for
Fraud financial gain
Notice of Cure A legal document issued by a party to a contract giving the other party a period of
notice after which the contract may be terminated.
Order Book Social Security payment instrument, containing tear-off sheets similar to cheques,
which claimants present to post offices in exchange for cash
Post office counter ‘The programme to install in post offices modern computer technology to manage
automation and record a wide range of counter transactions.
‘The Purchasers The Department of Social Security and Post Office Counters Ltd
Software Development The design and writing of new computer programmes
Software Integration The linking of existing computer programmes to form a new end-to-end
application
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Appendix 1
Scope and methodology of the National Audit Office's examination
Scope of this study
ga We examined the conduct of this project to identify:
@ the reasons why the Payment Card project failed to meet its objectives;
and
@ whether there are useful lessons that should be learned for other projects;
particularly in terms of the approach taken towards the management of
risk.
The study focused on the role of the Department of Social Security and of the
Benefits Agency in the project. The National Audit Office has no statutory rights of
access to Post Office Counters Ltd.
Main aspects of the National Audit Office's methodology
i2] To carry out the examination we :
@ Designed the examination using experience acquired on our several
earlier studies of Private Finance Initiative deals for Information
Technology services, authoritative publications on best practice in risk
management, and recognising the conclusions of the Committee of Public
Accounts in their report on Information Technology Projects [HC65
1999-00);
@ Collected information about the pre-procurement, procurement and
implementation stages of the project, and the government's plans that
supplanted it;
® Took specialist advice from Admiral ple, a company experienced in
project management and risk management on the standards achieved in
the project:
® consulted various parties involved in the project; and
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® evaluated the information and advice received.
Design of the study
3] The National Audit Office he
following Private Finance Initiative deals for Information Technology services:
acquired recent relevant experience on the
@ The Contract to Develop and Operate the Replacement National Insurance
Recording System, (published May 1997);
@ =The Immigration and Nationa
(March 1999);
Directorate’s Casework Programme
@ ~The Passport Delays of 1999 (October 1999).
These examinations provide an understanding of the issues that government
purchasers faced in taking forward ground-breaking private finance deals,
contemporaneously with the Benefits Payment Card. Further National Audit Office
studies of other such deals are in progress.
EX Wealso had regard to guidance on Private Finance Information Technology
projects that emerged from HM Treasury while we drafted our report.
B Authoritative publications on best practice in risk management that we
consulted included:
Bl “Management of Risk”: Central Computer and Telecommunications
Agency (1994);
@ “Management of Risk: Case Study 1: Implementing a systematic process
for the management of risk across an organisation”: Central Computer
and Telecommunications Agency (1994);
@ = “Risk Management: Guidance note”: HM Treasury (1994);
@ the PRINCE 2 Project Management handbook.
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Collection of information
We collected information from the following main sources:
the documentation issued to bidders during the project procurement
phase;
the detailed proposals of the three shortlisted bidders before the award of
contract;
interviews with members of the joint DSS and Benefits Agency/Post Office
handled
procurement team, including officials and advisers, on how the:
the specification of the service and the negotiation of the deal;
the legal agreements and schedules underpinning the purchasers’
contract with Pathway;
the project management documentation of the Joint Benefits Agency/ Post
Office Counters Ltd’ Delivery Authority during the implementation phase;
risk management documentation, particularly risk registers and reports,
raised during both the procurement and implementation stages of the
project.
scrutiny of the reports of successive external reviews of the project and
interviews with authors of these reports where we required clarification:
a visit to a post office operating the Card payment system prior to its
cancellation; and
interviews with each of the three short-listed bidders, including Pathway,
who also made available to us selected project documentation,
demonstrated to us the operation of the system, and shared with us
lessons they have learned.
We also searched the internet, using search engines, for international
evidence on Information Technology project outcomes.
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Use of specialist advice
8 I We engaged after competition Admiral ple, a leading international
Information Technology services group with over 2,500 staff. It manages major
programmes and provides consultancy advice in the public and private sectors. An
experienced Admiral consultant and project manager worked as part of the
National Audit Office team, focusing on how the risk management and project
management arrangements of the joint procurement team and the programme
delivery authority compared to best practice:
Iso obtained advice on our methodology and on our draft report from
HO Wes
David Taylor, President of the Institute of IT Directors in the UK.
Evaluation of information and advice received
EEX Our evaluation proceeded whenever possible through corroboration of
independent sources; for example our interpretation of the risk registers used by
the joint purchasers was cross-referenced to equivalent risk documentation and
interview evidence from bidders representatives.
EXE As is our standard practice, we circulated copies of the draft report in
confidence to the Department and to the bidders identified in the report. We asked
for and obtained comments from them, and after a process of clearance, received
confirmation from them that the facts contained in the report, their presentation
and the conclusions we had reached were fair.
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Appendix 2
Agreements to Agree
The contract between the two purchasers and Pathway included 289 agreements
to agree later the detail of aspects of the service
Agreement required from Statement of the agreement required after contract signature
Depariment of Social Security The contractor shall distribute cards by secure methods agreed in advance of their distribution by DSS
and the Contractor
Department of Social Security The contractor shall ensure that any chosen security verification details or procedures are updated
when agreed between the parties without adversely affecting the authorised person's ability to collect
authorised payments and without having an adverse impact on the overall time of transaction
ment of Social S
rity The number of DSS staff with access shall be limited and between DSS and the Contractor.
Department of Social Security _ tis for DSS's operator of CAPS services and the contractor to agree, subject to DSS approval, the
technical nature of the connection.
Department of Social Securily Pathway confirms thal the card authentication method will be positive rather than negative, resistant to
forgery or other unauthorised manipulation and will include an agreed mechanism for identiying the
aitempted use of counterfeit or invalid cards
Depariment of Social Security Pathway will agree a Service Level Agreement with DSS prior to service commencement.
Joint Contingency plans to be based on impact and risk assessments and agreed between the contractor
and the authorities.
voint The contractor shall agree with the authorities the overall business processes al the counter, before
roll-out.
Joint On presentation of a terminated card, the system shall prompt the counter clerk to take action in line
with procedures agreed belween the contractor and the authorities.
Joint The contractor shall reconcile card management actions against instructions received from DSS,
Details of such reconciliations shal! be agreed within three months and shall depend upon the
proposed solution,
voint The contractor and the authorities shall define and agree training requirements for both BA and Post
Office Counters Ld training, The training services provided shall ensure that 95% of trainees on
completion of training shalt be able to demonstrate achievement of the agreed level of competence.
Pathway has defined ils solution for training; this document is with the authorities for discussion and
agreement.
continued.
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Agreement required from Statement of the agreement required after contract signature
voint DSS require access to the management inform:
Payment System management information catalogue requirements. The nature and form of
presentation of this information is not as yet defined but is expected to be presented in report formats
10 be agreed with DSS by a date consistent with the project pl
in collected as pari of the response to the Benefit
Joint The planned roll-out of the Post Office Counters Lid Service infrastructure for each post office shail be
agreed by the contractor and the authorities.
voint ‘The contractor shall produce a testing strategy and plan to be agreed with DSS by a date consistent
with the project plan agreed by the parties.
Joint Customer Education. The specific objectives and activities of the campaign will be agreed as part of
the process starled on 31 January 1996.
Joint Audit. To agree means of achieving comprehensive audits of various kinds. The content of the audit
trail will be agreed between Pathway and BA/POCL.
Joint Pathway confirms that cardholder verification methods will be resistant to impersonation and will
include an agreed mechanism for identifying the attempted use of a card or temporary token by
unauthorised persons.
Joint {In the event of the customer being indisposed] ... If only a short indisposition is anticipated a
temporary agent arrangement will be established, using a procedure to be established in detail with
the DSS.
Joint In as much as the authorities reserve the right to determine the strategy and pace of roll-out, the effect
on service levels, public and user acceptance cannot be quantified by Pathway until such time as tt
strategy has been agreed and evaluated. Pathway reserve the right to reject an implementation
strategy which it cannot sustain or which would give rise to unacceptable contractual, operational or
financial constraints
Note: Due to the scope of this report, this appendix does not list examples of ‘agreements to agree" involving or
Pos! Office Counters Lid
ly Pathway and
Source. Nationa’ Audit Office review of contract documents
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Appendix 3
Chronology of events
Date
1988
1993
February 1994
1994
May 1994
80th August 1994
19ih October 1994
December 1994
Late 1994 to 6th March 1995
March lo April 1995
13th April 1995
8th June 1995
duly 1995
June to September
Stage
The Monopolies and Mergers Commission recommenced that the Post Office should replace its existing
mainly annual service agreements with its major clients with longer-term contracts. Such a longer-term
contract with the Department of Social Security was eventually signed to support the Benefits Payrnent
Card project.
group is set up to examine the alternatives to
the paper based payment of benefit (through Order Books and Giros) and to report into the feasibility of
automating the payment at post offices.
The joint development group report recommends that benefit payment should be automated.
The Government's Green Paper on the future of the Post Office states that “automation is the best way of
securing a future for the business, its employees and agents."
Secretary of Stale announces to the National Federation of Sub-Posimasters the intention 1o move towards
anew automated system for paying bene
Invitation Notice to bidders published - 92 expressions of interest received by 23rd September 1994.
Request for statement of capability issued to bidders - nine subsequently received. The timetable projects
contract award by December 1996.
Announcement of the five shortlisted suppliers.
Development of the two purchasers’ Statement of Service Requirement
Five-week delay while Department of Social Security and Post Oifice Counters Ltd agree a Memorandum of
Understanding for proceeding with the project, (13th Apri)
Issue of Statement of Service Requirements (SSR) to shortlisted suppl
Five responses received to the Statement of Service Requirement. Pathway consortium became a special
purpose vehicle comprising ICL, Oe La Rue and Girobank.
Evaluation board selects the shortlist and negotiations commence with three remaining bidders, Pathway,
IBM and Cardlink (Andersens).
Risk Registers are drawn up and issued to each bidder, and used during later procurement, as each strove
to resolve or eliminate the risks of their proposal
continued.
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Date Stage
Oclober 1995 Secrelary of State publicly states thal the Benefits Payment Card will be introduced in 1996
November 1995 The procurement team postponed detailed negotiation with bidders on requirements and solutions unti
after selection of the contractor. Negotiations focused on contract clauses and schedules.
29 February 1996 Invitations To Tender issued to three bidders. Bids received, on 21 March, were all priced above the level
acceptable to the purchasers and only one bid was compliant in terms of risk acceptance.
16th April 1996 Invitations To Retender issued to ail three bidders in order to obtain affordable and compliant bids. The
retenders were received on 22nd April
28th April 1996 Project Evaluation Board accepted thal 1o proceed with Pathway implied a degree of risk but agreed that
such risks were acceptable and manageable.
15th May 1996 Pathway are awarded the contract on basis that operational trial is to be completed by June 1997 and
roll-out to be completed by 1999. Secretary of State for Social Security announces award at National
Federation of Sub-Posimasters conference.
September 1996 Initial ‘Go-Live" system achieved on time for 10 post offices in Stroud, Gloucester for the payment of Child
Benefit only, and the first payment to Pathway for handling a transaction is made
February 1997 Major replan of the project on a “no-fautt” basis. Both the purchasers and Pathway had missed the dates
required to meet the initial contract date for completion of the operational trial.
July 1997 Senior Social Security officiais propose an independent review of the project including Pathway, the
Department of Social Security and Post Office Counters Ltd.
September 1997 DSS Ministers bring slippage to the attention of Treasury and Trade & Industry colleagues. PA Consulting
employed to carry out a three parly review of the project
Novernber 1997 The Benefits Payment Card sysiem is extended to a further 205 post offices in the north-east and
south-west of England, but stil only to pay Child Benefit.
21st November 1997 Contractuai deadline for the completion of the operational live trial is missed, and the purchasers allege that
Pathway is in breach of contract. Pathway denies liability.
December 1997 Pathway inform the purchasers that they require improved terms if the project is to be completed
Development of the Card system continues in the meantime.
1998 Ministers commission an inter-departmental working group to review the project - to include a review by an
Independent Pane! of experts chaired by the Chief Executive of the Treasury Task Force on Private Finance.
April 1998 Majority of the functions of joint BA/Pos! Office Counters Lid project team transferred to the two sponsor
bodies. Join! team retains contract management role,
May 1998 The Department of Social Security issue a ‘notice of cure’ to Pathway to protect their negotiating position
continued.
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Date
duly 1998
September 1998
October 1998
October - November 1998
1999 January-May 1999
24 May 1999
July 1999
Position as al June 2000
Stage
Interdeparimental working group report to Ministers stales thal the project is feasible bu dependent on
successful renegotiation with ICL based mainly on extension of contract period.
Ministers authorise Mr Graham Corbett to facilitate discussions between the purchasers and ICL, while
officials prepare a fall-back position if talks are unsuccessful. Department of Trade and Industry request
strengthening of Post Office Counters Lta’ management of the project.
Mr Corbelt informs ministers that discussions with ICL have proven unsuccessful.
Discussions between ICL and Post Office Counters Ltd.
Negotiations proceed to agree terms on which the Benefits Payment Card may be removed from the
project
Announcement of agreement that Department of Social Security's contract has been terminated and that
Post Office Counters Ltd and Pathway have agreed in principle to set up a new conventional (non-PFI)
contract to continue the project to automate the national network of post offices.
Post Office Counters Ltd and Pathway signed an agreement
automate post offices
Department of Social Security and Post Office Counters Lid have signed an agreement to extend the use of
the order book control system to reduce order book fraud as post office automation is rolled out. Post Office
Counters Ltd have accepted the automated system, national roil-out has started and implemented in
5,000 post offices.
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Appendix 4
Key Conclusions and Recommendations by the Committee of
Public Accounts, “IMPROVING THE DELIVERY OF GOVERNMENT IT
PROJECTS” January 20007
@ Deci
business of public bodies, and cannot be treated in isolation from other
ions about IT are crucial to the development and success of the
aspects of their work. Failure to deliver an IT system can have a profound
effect on an organisation's ability to provide services to its customers. Key
decisions on IT systems are, therefore, business decisions, not technical
ones, and should involve senior management. And the commitment of
senior management can be a critical factor in securing a successful
outcome.
® Projects are conceived and grow from identified business needs. However,
what seems a clear objective at the beginning can easily become blurred
's must be identified before
and confused as events progress. The end u:
the project commences so that their needs are taken into account fully
during design and development.
@ The scale and complexity of projects is a major influence on whether thi
ey
succeed or fail. Departments should consider carefully whether projects
are too ambitious to undertake in one go. This consideration is
particularly important if a project connects with the business operations
of other parties, or depends on the development of IT undertaken by other
parties.
@ The management and oversight of I projects by skilled project managers
is essential for ensuring that projects are delivered to time and budget. But
the successful implementation of IT systems calls for imagination and
well-conceived risk management, as well as sound project management
methodologies.
3 Committee of Public Accounts - First Report 1999-00
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@ = The increasing use of complex external contracts for the delivery of major
public sector IT projects and the supply of strategic IT services has
highlighted the need fora high degree of professionalism in the definition,
negotiation and management of IT contracts. It is essential that public
sector bodies get the right contracts in place. With large sums of public
money at stake, any lack of clarity, or debatable interpretation in a
contract can lead to expensive misunderstandings that might have to be
resolved in the courts.
® ~The implementation of an IT system is not an end in itself. It is important
that sufficient attention is paid to ensuring that staff know how to make
full and proper use of it. Without this it is unlikely that the anticipated
business benefits will be realised. Training of staff can take up
considerable resources, often a significant proportion of the overall cost of
the project. Training must address the needs of users, and of those
operating and maintaining the system.
@ Aswellasv
disabling impacts on public services and on citizens. These have included
the failure to pay social security benefits to vulnerable people and major
delays in issuing people their passports. In addition to planning and
managing projects positively, Departments should therefore have
contingency plans in place to maintain adequate levels of service in the
event of project failures.
sting enormous sums of public monoy, failures in IT can have
®@ It is essential that organisations learn lesson from the projects
undertaken. A post-implementation review is designed to establish the
extent to which they have secured the business benefits anticipated. The
review may encompass whether the project has met its bus
objectives, user expectations and technica! requirements.
ness
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Appendix 5
The Action Plan for Departments and Suppliers arising from the
Cabinet Office Review of Major Government IT Projects, May 2000
The report was produced by a review team comprising public and private sector
members, which reported to a steering group also drawn from government
departments and major private sector IT users and chaired by Mr lan McCartney,
Minister of State at the Cabinet Office.
Whilst the:
consider that those in bold have particular relevance to the Benefits Payment Card
relevance for all projects, the National Audit Office
ction points hi
project, and could have improved its chances of succe:
Actions for Departments
Ensure that a single Senior Responsible Owner is appointed for all projects,
including those that cut
s more than one department or agency, and that
personal objectives set for these individuals include the responsibilities of this
role.
In all dealings with suppliers, both on new and existing projects ensure that
activities aimed at co-operation and open communication are encouraged.
Nominate a contact point for contributions to the database of lessons learned and
notify the Office of Government Commerce of all current and pending projects in
order to benefit from lessons learnt and to contribute to the ongoing database.
Ensure that pre-contract review of supplier's plans is carried out for all major
IT projects and that review continues through the life of the project. Ensure
that own plans are in order as well.
Ensure that periodic revie
and capture the realisation of benefits.
ys are carried out during the life of a project to monitor
Ensure that a post implementation review is carried out for all projects.
Adopt a formal project management approach, such as PRINCE, for all new
projects.
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Provide audit of skills as part of the Modernising Government action plan based on
IS Skills framework.
Ensure that all major projects have a business case for business change, in line
with the guidelines, and that this business case is monitored and updated
throughout the life of the project.
sure that all projects follow the risk evaluation and reporting guidelines.
Liaise with the Office of Government Commerce and use the Project Profile
Model to determine the complexity of new projects, to determine the required
level of project management experience and conduct Peer Reviews of all new
projects following guidelines supplied and feeding information back to the
central review database.
Conduct a review of training provided to Project managers and ensure that all
Project Managers have the appropriate training in accordance with guidelines
published by the Office of Government Commerce.
Ensure that all projects follow the re’
ised procurement guidelines.
Ensure that all projects follow a modular approach unless for overwhelming
and documented reasons.
Undertake on-going assessment and improvement of Information Systems skills.
Actions for Suppliers
Suppliers should work with departments and agencies to ensure their proposed
solutions meet business needs not just technical or operational requirements.
Produce realistic plans, including financial, technical, personnel and
communi
tion plans, through the lifecycle of the procurement to ensure
continuing alignment of supplier activity with business need.
Share information about problems at the earliest opportunity to ensure small
issues do not escalate.
Agree proc
co-operation and an open dialogue between supplier and client.
es at the start of the procurement that will actively encourage
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88
Whilst Government ultimately has responsibility for the assessment and
acceptance of bids, suppliers must ensure that they fully understand the
requirements, that bids are realistically pric
are achievable.
ed and the timescales proposed
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Appendix 6
The availability of the Department's CAPS system to integrate with
Pathway's Payment Card system
Pathway contend that one reason why the development of their Payment Card
system encountered difficulties is that the Department's CAPS system was not
designed in time to provide stable interfaces with the Payment Card. They contend
that they had been led to believe that CAPS would be available in its entirety by
September 1996. There is no dispute that the complete version of CAPS was not
available by then. The relevant clause in the contract was as follows.
Schedule BO? Clause 2.5
‘The dates in the contractual milestones table are conditional on CAPS releases and functionality
being available lo the contractor as sel out in the table below this paragraph, and shall be delayed by
an amount equal to any delay of such availability
Available for technical testing 1 June 1996
lable for full integration testing 1 September 1996
The Department contend that this interpretation is unrealistic in terms of the way
the development programme actually operated, and is based on the contract when
it was signed in May 1996, and not
agreed replan in February 1997. They also contend that Pathway did not have a
complete es did
not slip behind equivalent releases of Payment Card software by Pathway after
February 1997.
s it was modified in the light of the “no-fault”
stem to test by September 1996 in any case, and that CAPS releas
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Appendix 7
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The re-emergence of cleared risks in the purchasers’ registers
Key:
I @ Very high @ High
Source: Analysis by Admiral ple, for the National Audit Office, of project documentation.
) Medium
Low
Pathway's solution is dependent on sole source
third party software (Irom Escher Ripaste)
Supplier does not fully understand POCL
Accounting Requirements, leading to software
risks
Design deficiencies in the supplier's system
architecture
Post Office and Department security
requirements not fully addressed by supplier's
system design
POCL requirements for simple (rural) post
offices not fully addressed by supplier's system
design
Proposed solution dependent on bespoke
software development
Requirements for payment to permanent agents
and proxies are not addressed by supplier's
design
Automated transactions will take longer and be
less reliable than current manual process
Inadequate planning/plan not acceptable/pian
‘out of date
Supplier is proposing inadequate testing
Pathway's lack of a track record
Inadequately specified requirements and
system interfaces between Pathway's and the
purchasers’ systems.
Availability of the Department's CAPS and
benefit systems for testing the Pathway solution.
Pathway design does not map onto the
BA/POCL. requirements
Inadequate project management met
planning and risk management
ods,
Procurement
Stage
NIA
Outstanding
Cleared
Outstanding
Cleared
Cleared
Cleared
Cleared
Cleared
Cleared
Cleared
Outstanding
Outstanding
Outstanding
Outstanding
Not identified
Implementation Stage
Pathway told the National
Audit Office that neither
of these risk regist
were shared or discussed
formally with them
&
©
G
G
ee
eeeecee e
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