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Commercial: In Confidence
Notes Of Legal Contingency Planning Meeting
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Attendees: Date:
Paul Rich Jeff Triggs 8th January, 1998
Nick Grey Joe Ashton
Kevin Corrigan
Noted Stuart Sweetman had written to Peter Matheson setting -
out POCL’s stance on termination of the Related Agreements.
Noted no formal reply had been received from Peter Matheson -
It was felt better not to proactively pursue this matter at present.
However, should DSS disagree with our interpretation on joint
termination POCL should refute any suggestion to seek advice
from say an Independant Treasury Lawyer as we believe the
interpretation is clear. Only if pushed should POCL concede to
use an Independant Queens Council for an opinion. Agreed that
a list of potentially suitable QC’s be drawn up.
Noted Stuart Sweetman had spoken to Peter Matheson in order
to establish the BA position. It appears BA have been taking
their own legal advice and are aware of “contract by behaviour”
as well as written contracts. BA indicated that they viewed the
Pathway response for a 30% prices rise and/or contract extention
was made under Chatham House Rules - BA do not appear
ready to enter negotiations until ministers have decided or given
them a clear steer. Agreed that a draft question and answer
sheet be drawn up to suport any further discussions. JT/NG to
review draft.
Agreed that a copy of the Post Office presentation to DTi
(scheduled for 26th January 1998) regarding the Automation
Programme be passed to JT, NG & JA. Done
Noted all major events and in particular all legal moves must be
checkstepped with Chief Executive before actioning. 7
Noted POCL believed the DSS position/ recommendation to their
ministers to be to negotiate a termination settlement in order to
avoid embarassment to the Government. This, however, could
lead to a further push for compulsory ACT. -
Agreed that a copy of PR’s note on Project “Deep Pink” be
passed to JT, NG &JA. Done.
Agreed copies of the PDA, PSC and CASG minutes would be
prepared, in particular the “lessons learned” paper to CASG
would be copied to JT, NG and JA. Agreed copies of Schedules In
2,3,4 and 5 be passed to JT and NG. Progress
LCPM_801.DOC
JT/NG
KC
KC
KC
KC
10.
11.
12.
13.
14.
Commercial: In Confidence
Notes Of Legal Contingency Planning Meeting
Noted all conversations and letters regarding termination or any
matter regarding a commercial deal to keep the programme on
track should be done on a “without prejudice, subject to contract
basis”. Similarly, any minutes of meetings should not be left
with any misquotes in them. -
Noted if we have made clear our disagreement with DSS to
termination, POCL would be indemnified and protected from
Pathway sueing POCL. However, such a scenario is thought
likely to be very messy and unlikely to be contained or
controllable. Work to date suggests the close down costs to the
Authorities would be of the order of £260m. Termination has
significant risks for DSS as well. Therefore, it is generally
thought that negotiation is more likely than termination at this
point in time. Agreed that it would be prudent to have a draft
letter dissociating POCL from any BA wrongful unilateral
termination. -
Noted if parties were agreeable Contract A could survive
termination of the Related Agreements. Agreed that a paper
outlining the circumstances under which Contract A could be
terminated would be drawn up and the effects of the clause
regarding “a change of Government policy on Contract A”
amplified. -
Noted no further communication had been received or
discussion taken place regarding the Terms of Reference for an
Independant Person to review the cause of slippage of the
programme. -
Noted the legal advice for any POCL response to Pathway’s 30%
price rise/contract extention is to refute the request as Pathway
have no grounds. Should any informasl discussions take place
this would need to be on a “Without Prejudice” basis. -
Agreed that the potential right for Pathway to terminate for non-
agreement of schedules would be examined.
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Action:
JT/NG
JT/NG
TT/NG
Dates of following meetings: 16th January, 1998 12:00pm- 2:00pm, KEB, Room 15
29th January, 1998 — 10:00am-12:00pm, KEB, Room 17
LCPM_801.DOC
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BA/POCL
LESSONS LEARNED REPORT
~ Bringing Technology to Post Offices
and Benefit Payments
24 October 1997
Mr J Cousins
Dr C F Monahan
KERMON LIMITED
INFORMATION TECHNOLOGY MANAGEMENT CONSULTANTS
23a SYD! BATI
Telephone: Fax:!
Certificate No. FS 28876
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BA/POCL RESTRICTED - COMMERCIAL LESSONS LEARNED
Bringing Technology to Post Offices and Benefit Payments
LESSONS LEARNED FROM THE PROCUREMENT
Authors: Dr C F Monahan and Mr J Cousins
Date: 24 October 1997
Version: Issue 1.0
Copy No: 15
Contents Page
1. PURPOSE...
2. CONDUCT OF THE STUDY............
3. LESSONS LEARNED AND BEST PRACTICE GUIDELINES
3.1 Overview of the Programme..........
3.2 Pre-Procurement Preparation .....
3.3 Importance of Sponsor Involvement.
3.4 Project Management...
3.5 Service Requirements
3.6 Evaluation of Service Provider Offerings
3.7 Risk Transfer.......
3.8 Business Case and Indicative Prices ....
3.9 Timing of ITT and Post-Tender Negotiation:
3.10 Post-Contract Requirements.
CONCLUSIONS
ANNEX A: TERMS OF REFERENCE
ANNEX B: STAFF INTERVIEWED
ANNEX C: PROCUREMENT HISTORY
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1. PURPOSE
Ll. This report records the good practice and lessons learned during the procurement of
services to automate Post Offices and the payment of benefits which was undertaken
jointly by the Benefits Agency (BA) of DSS, who acted in tandem with the Northem
Ireland Social Security Agency (SSA), and Post Office Counters Limited (POCL).
1.2. It is normal practice to conclude large procurement projects with a review to capture
what lessons could be learned in order that future programmes can derive maximum
benefit from the experience. A commitment to undertake such a review was given by
the Secretary of State for Social Security to the Chancellor of the Exchequer on
25 February 1996.
13. Terms of Reference for the study, as summarised in Annex A, focus upon:
(a) a major joint procurement; and
(b) _ the application of Private Finance Initiative (PFI) policy.
1.4. The review was not commissioned as a case study (such as, for example, those for
the Department of Social Security (DSS) NIRS2 and Home Office Immigration and
Nationality Directorate procurements) and therefore distribution of the report will be
restricted.
1.5. The study team comprised Chris Monahan and John Cousins from Kermon Limited,
both of whom have an extensive experience of major IT services procurements
within the public sector and services procurements which have been carried out under
the PFI.
1.6. Each major procurement within the public sector is usually unique in that it is aimed
at satisfying a large-scale business requirement particular to the purchasing
~ organisation or organisations. Such procurements are therefore unsuitable for use as a
straight template to be re-used. However, they do need to address many of the same
type of generic issues. This report therefore does not provide a prescriptive approach
to carrying out future procurements. Rather, it presents the particular issues
addressed and problems encountered and overcome during the BA/POCL
procurement with the expectation that other procurement exercises may find certain
of the Lessons Learned to be useful.
1.7. In identifying the lessons learned, the reviewers have drawn on what is generally
agreed to have been done well and on the areas where there was thought to have been
room for improvement. Whatever the source of the lesson, what is considered to be
“best practice’ has been recorded. The lessons learned comprise:
(a) approaches adopted which were found to be effective;
(b) problems encountered and solutions which resolved them;
(c) aspects of the procurement which with hindsight should have been tackled
differently.
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1.8. Inevitably, given an activity of this scale and complexity, there are areas where the
benefit of hindsight has identified room for improvement. However, that should be
set in context against the considerable achievement that conclusion of the
procurement represented for all parties involved - the BA/POCL Programme, the
sponsors and the service providers - and the enormous amount of hard work that
went into it.
1.9. Section 2 summarises how the study was conducted. Section 3 sets out the lessons
learned and guidelines for best practice and Section 4 provides a summary of critical
success factors and conclusions.
4.10. I Kermon wishes to thank all those who were interviewed and attended the workshops,
and thereby contributed to this report.
2. CONDUCT OF THE STUDY
2.1. The review was carried out between August 1996 and October 1996. The initial task
was to document the history of the procurement in summary form, using project
documents and supporting information provided by Programme team members.
2.2. The early draft was circulated to all members of the management team and the core
negotiating team, who (with one exception) were interviewed to validate the factual
accuracy of the historical record and to comment on additional events which needed
to be included. The BA/POCL Procurement History is provided at Annex C.
2.3. Following the issue of the revised historical summary, a workshop was held with
members of the BA/POCL Programme to ascertain the team’s view of the critical
success factors, what went well and why, what could have been done differently and
why, and the lessons learned which could be useful for other major procurement
projects.
~ 2.4. The next phase of the study involved a series of interviews with members of the
Procurement/Evaluation Boards, the Programme Steering Committee, the three
shortlisted service providers and the financial advisers.
2.5. The outputs from the workshop and the various comments and opinions expressed by
interviewees have provided input to this report. The list of interviewees is provided
at Annex B.
3. LESSONS LEARNED AND BEST PRACTICE GUIDELINES
3.1. Overview of the Programme
3.1.1. The Programme for ‘Bringing Technology to Post Offices and Benefits Payments’
moved from inception, when the Benefits Agency and Post Office Counters Limited
agreed the need to work together to achieve automation of post office counters and
fraud-free methods of payment, to contract award in under two years. The sponsors
have moved a long way very quickly - something they would not have been able to
achieve individually by ‘going it alone’.
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3.1.2. The Programme was highly successful in replacing an arms-length relationship based
on an annual round of BA and POCL negotiations with a strong relationship based on
the pursuit of agreed business aims and objectives. The sponsors now have a long
term commercial agreement with clear obligations and commitments from both
parties.
3.1.3. The contracting Authorities (Secretary of State for Social Security and Post Office
Counters Limited) awarded the contract in May 1996, to the ICL Pathway
consortium, who had demonstrated that their tender offered the best overall value for
money, whilst accepting an appropriate transfer of risks.
3.2. Pre-Procurement Preparation
3.2.1. The Programme commenced the formal procurement by publishing the OJEC notice
in August 1994, calling for interested parties to formally respond and register their
interest. This process therefore commenced before all the following preparatory work
had been completed:
. Heads of Agreement between the sponsors, setting out the principles of their
relationship and the preconditions for agreeing the Memorandum of
Understanding and the final Commercial Agreement;
. Procurement Strategy outlining the procurement route, PFI issues and the
various stages of the plan;
. Outline Statement of Service Requirements (SSR) setting out the scope of the
procurement, the main service requirements, requirements for transfer of risks
and a realistic timetable.
3.2.2. It is recognised that circumstances demanded urgency in commencing and
formalising the procurement programme, which was a key lever in bringing all
parties (BA, POCL and potential bidders) together into one common plan of action.
This purpose was successfully achieved. An alternative approach would have been to
have published an indicative notice in the OJEC during August 1994, informing
industry of the impending procurement and offering the opportunity for an exchange
of views prior to commencing the procurement proper. This has the advantage of
giving greater scope for informal dialogue without the timing and legal restrictions
associated with the formal OJEC notice. This approach is not frequently used by
HMG but it would be appropriate for further guidance on this approach to be made
available from CITU/CCTA.
3.3. Importance of Sponsor Involvement
3.3.1. Sponsors played a vital role in the procurement. The Programme was set up to
deliver the sponsors’ respective business aims and objectives and therefore it needed
the support of sponsors at all times and could not act in isolation.
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3.3.2. The Programme recognised the importance of sponsor involvement since this
procurement was primarily about the purchase of business services for the Benefits
Agency, SSA and the Post Office, whereas many traditional programmes within the
sponsor organisations had been concerned with the purchase of IT products with the
application being developed in-house.
3.3.3. This recognition led to active and full sponsor involvement in all the key processes
and boards within the procurement. For example, the Evaluation Board was chaired
by a senior sponsor at Director level and the evaluation itself had a specific focus on
the ‘business fit’ of the service solutions offered by service providers. Sponsors were
actively consulted and involved with the requirements specification and set the
bounds for contract negotiation with regard to the requirement. They chaired the
Programme Steering Committee and Procurement Board and had further appropriate
representation at these committees.
3.3.4. Best practice dictates that sponsor involvement should go hand-in-hand with a clear
understanding on the level of authority delegated from sponsors to the project.
Without this delegated authority the project will be unable to fulfil its obligations and
delays will inevitably occur. It is important to address the working arrangements
between the project and sponsors as well as delegated timescales and financial
thresholds. The project must take a proactive role in framing and vetting sponsor
requirements into a coherent picture. The principle of delegated authority should be
established at the outset with the level and scope of delegated authority being
established and agreed at the start of each stage as part of the stage plan and so
endorsed by the project board.
3.3.5. The involvement of sponsors was not always without difficulty and conflict.
Sponsors may be geographically remote from the Project itself and they still have to
continue with their day-to-day operational duties. Such involvement, therefore,
places a burden on sponsors, that needs to be recognised so that appropriate roles and
groups within the sponsor organisations can be planned and co-ordinated to ensure an
effective and essential contribution. Human nature is such that sponsors react well to
being kept regularly informed of progress, and welcome face-to-face briefings.
3.3.6. From the outset of a procurement programme, a close and well-defined role for
sponsor involvement should be established and agreed with the sponsor organisation.
The sponsor organisation must assess the impact on its own resources and recognise
that adjustment may need to be made before confirming commitment to its proposed
role and involvement.
3.3.7... Early and active sponsor involvement is a critical success factor for any major
business service PFI procurement.
3.4, Project Management
3.4.1. From the outset, the Programme established a Steering Committee at the appropriate
level for a programme of this scale and importance. This committee was co-chaired
on an alternate basis by the respective chief executives of the two main sponsoring
organisations.
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3.4.2.
3.4.3.
3.4.4.
3.4.5.
3.4.6.
3.4.7.
Progressively, a number of boards were identified and established, starting with the
Procurement Board and the Evaluation Board, and then eventually a Sponsor
Director Group. In some cases it would have been beneficial to have established
these board structures at the outset of the Programme. Nevertheless, these boards
were an essential effective ingredient to the decision making process throughout the
procurement. Careful consideration needs to be given to both membership and
chairmanship of such boards, particularly, for joint programmes where there are
business and relationship sensitivities.
As discussed above, for a procurement programme of this scale it was necessary to
establish a range of decision making boards. With new procurement processes being
developed it was found necessary to have a Procurement Board, whose function was
to authorise procurement process which was progressively developed. In hindsight, it
may have been more appropriate for this board to have been chaired by the senior
procurement professionals, so giving sponsors more time to focus on the Sponsor
Director Group and Evaluation Board, which were specifically concerned with
commercial factors, requirements and solution selection.
Within the Programme itself the organisational structure was based on the setting up
of a number of parallel workstreams each with a specific focus and responsibility, for
example business requirements, negotiations, evaluation. The Programme recognised
that a parallel stream approach was essential for a programme of this scale. The
conventional PRINCE approach to stages was adopted and it was recognised that
many stream activities spanned more than one stage. Therefore some key activities,
although not all, were particularly well planned in advance of the actual stage when
they were called in to play. For example the business case stream developed much of
its thinking during the early stages of the Programme and was, therefore, able to
document a highly complex business case and achieve sign-off during a very short
period.
In practice the Programme found that the complexity of dealing with joint sponsors,
particularly in relation to parallel activities and processes proved more complex and
time consuming than anticipated. In addition, the sponsors underestimated the
difficulty of the degree and range of issues involved in changing their relationship
from a one year to an eight year arrangement, consideration of which was needed prior
to the agreement of the MoU (the BA/POCL and SSA/POCL contractual agreements
subsequent to that process) whilst contributing to the formation of business
requirements and reviewing the resulting procurement documentation.
The Programme’s plan for the production of SSR was delayed due to the need for
detailed review and refinement. The parallel activity of MoU agreement took
significantly longer than anticipated and this had become a dependency on the issue
ofthe SSR. This resulted in a two and a half month delay to the Programme.
One critical success factor was the seniority, calibre and commitment of the
Programme’s management team, many of whom had previously tackled IT service
procurements of comparable magnitude for other organisations. Once formed, the
management team remained stable, thereby providing continuity throughout the
procurement and was responsive to sponsor needs. The management team maintained
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3.4.8.
3.4.9.
3.5.
3.5.2.
3.5.3.
3.5.4.
a high level of integrity when dealing with the politically sensitive issues of all
sponsors involved in this joint undertaking.
A second critical success factor was the deployment of external professional advisers
for financial, legal and procurement aspects of the Programme. All advisers were
brought on board at the earliest opportunity and all contributed substantially,
particularly in recognising the path-finding aspects of, and problems encountered by,
the Programme and formulating methods to overcome them. Support was particularly
required in the areas of tariffing using a scorecard approach, contract terms and
conditions and evaluation processes for shortlisting and dealing with variant tenders.
In summary, major programmes, particularly where there is joint sponsor
involvement, will benefit from considering at the outset of the programme the range
of approvals and decisions that will be necessary throughout the duration of the
programme. On this basis an appropriate board structure can be developed and
dependent on the main purpose of each board, suitable chairman and members
nominated. Parallel streams of activity, together with flexibility regarding
conventional stage management leads to a more efficient and effective form of
project working. Much of this has been recognised within the recently announced
PRINCE 2 methodology.
Service Requirements
The Programme’s approach to the development of the service requirements was
based on defining a service architecture which identified the main services and their
boundaries, and then the development of a detailed SSR. The approach was not
prescriptive, enabling service providers to respond with significantly differing IT
architectures, viz distributed and centralised plus a range of payment card schemes.
The Benefits Payment Service was well understood by all parties and hence was
defined in the form of an exemplar requirements specification together with data
flows at the boundaries. The model was tested in draft form against a number of
candidate technical architectures, and in particular it was proved to be technically
neutral between centralised and distributed solutions. This offered a model from
which service providers were able to develop specific solutions within their proposal.
With regard to other counter automation applications, of which there were many,
both current and future, these were specified at the business level in the anticipation
that this would give maximum opportunity for service providers to come up with
innovative solutions. In the event it was found that more information was required
prior to contract schedule development. This led to a recommendation that
requirements should be embodied within a detailed requirements catalogue which
would then form the basis for tenders.
The approach, therefore, did not wholly follow the PFI convention of developing an
output-based specification. The selected service provider was required, as part of the
early contract deliverables, to agree a set of detailed output-based service schedules
developed from the requirements catalogue.
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3.5.5. This approach had the benefit of sponsor commitment and was key to achieving
contract award within the timescales required.
3.6. Evaluation of Service Provider Offerings
3.6.1. The Programme broke new ground in the approach to evaluation and selection under
PFI. Early recognition was given to the fact that past practice, which focused
primarily on assessing price differentiation of bids, required modification. For a PFI
deal, it was anticipated that the potential for variant bids, with differing levels of risk
transfer and variation in both the scope of solutions to the requirement and terms and
conditions, would give rise to the need for a more sophisticated and structured
evaluation method to aid the making of balanced judgements and well-informed
selection decisions.
3.6.2. A consistent approach to analysis and decision-making was established at the outset
of the programme and progressively developed and employed at each of the three
stages of selection (i.e. longlisting, shortlisting and final winner).
3.6.3. The evaluation process enabled comparison of bids from a number of differing
perspectives, for example business fit, viability, commercial and cost. The evaluation
models were developed to enable these aspects of each bid to be assessed with one
another and in relation to each of the other bidders. The aim in the early stages was to
establish a balanced portfolio of service providers, whilst in the later stage the
objective was to facilitate the selection of a well-rounded solution that offered best
value for money overall.
3.6.4. In summary, a major PFI deal needs to recognise that the evaluation process is a key
management and selection tool and one that needs to cope with a wide range of
evaluation parameters. Each PFI needs to define its decision process at the outset and
identify and construct appropriate tools. Relying on past methods may lead to an
over-simplified analysis and wrong selection decision.
3.6.5. More advanced evaluation methods and processes are a critical success factor for
enabling better decisions to be made within the context of PFI.
3.7. Risk Transfer
3.7.1. The critical areas where risk transfer would be negotiated were set out clearly in early
documents such as the Prospectus, Request for Statement of Capability and the SSR.
The experience of the Programme demonstrates how vital it is to identify early on the
main areas of risk. It is therefore important to commence discussions and
negotiations with service providers, once they have been shortlisted, on the details of
which aspects of the risk areas are appropriate for transfer.
3.7.2. Projects should recognise that the transfer of major and unique risks such as benefit
instrument of payment fraud risk, will be new ground for service providers. Hence
there will be significant work involved in assessing the probability of occurrence,
impact and cost of the risk. Once the risk has been quantified, and this is not always
possible, the service provider must consider how to finance or obtain insurance cover
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3.7.3.
3.7.4.
3.7.5
3.8.
3.8.1.
3.8.2.
for the risk, whilst convincing senior management, often within European, Japanese
and American based parent companies, that the risks are both worth taking and
adequately financed.
The risks that the Programme sought to transfer were both sizeable and difficult to
quantify. Some service providers claimed they needed more time to obtain their
intemal approvals of their case to accept the risk transfer requirements of BA and
POCL. Without such approvals being obtained, and with no option of continuing
negotiation, this inevitably results in variant tenders and significant potential for not
achieving value for money.
Service providers found that the negotiation of transfer of risk was complicated by
the need to deal with joint sponsors and their different priorities for risk transfer.
Despite the clear statements in the SSR and previously, service providers’
understanding of the sponsors’ business was such that detailed discussions were
required much earlier in the procurement process, so that they could have better
understood the full scope and nature of the risk prior to the negotiation period leading
up to issue of the ITT. It is also recognised, with hindsight, that final agreement on
the extent of risk transfer has a major impact on price and hence cannot be finalised
without price information”.
Jn future similar circumstances, where significant risk transfer requirements prevail,
consideration should be given to holding service provider Board level discussions on
fundamental requirements for risk transfer at a very early stage in the procurement.
These discussions would complement the written statements on risks to be
transferred in documents such as the Prospectus, which may not have been seen at
Board level. All parties would then be clear on the expectations, feasibility and
implications of such risk transfer requirements. This should result in mutually agreed
action to properly explore and negotiate risk transfer in the context of achieving
value for money.
Business Case and Indicative Prices
Separate business cases were maintained by each of the sponsors because the
business relationship between the parties is such that certain aspects had to remain
confidential to each organisation. It would, however, have been advantageous to have
developed a ‘Programme business case’ combining the key aspects of the individual
cases as this would have made it easier to share relevant aspects of the business case
with service providers. This would have enabled them to gain a better understanding
of the key business drivers, and to tailor their solutions to achieve a better value for
money business fit.
In the context of the above, indicative prices are provided as a basis for informing the
business case. However, within a PFI procurement it is particularly important to
establish the basis of the indicative prices in terms of the inclusion, or otherwise, of
the cost of transferred risks and the underlying assumptions covering the degree of
risk to be transferred.
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3.8.3. The indicative prices supporting service providers’ responses to the SSR were in all
3.8.4.
3.8.5.
3.8.6.
3.9.
3.9.1.
3.9.2.
cases in excess of expectations based on in-house estimates of equipment,
operational and financing costs and in turn on which the business case would be
based. The Programme Steering Committee instructed the Programme Director to
write to all three shortlisted service providers to ‘signal’ that their indicative prices
were unacceptable in that they exceeded the business case tolerances. The
procurement was in its early stages as clarifications of requirements, terms and
conditions and detailed negotiations on risk transfer had still to take place. With the
greater understanding on all sides of these issues, as the procurement process
evolved, the prices, from all suppliers, following the Invitation To Tender (ITT) of
29 February 1996 were further increased. These prices were helpful in focusing on
areas of greatest cost and enabled sponsors to prioritise their requirements prior to the
final ITT.
Dialogue was maintained with each service provider on their main cost drivers and
whether particular requirements were driving up prices disproportionately. Where
necessary the programme invited the relevant sponsor to review the requirement and
either confirm it or modify it to be more cost effective. However, it could also have
been useful to have requested revised indicative prices at a suitable milestone to
indicate whether the service providers’ better understanding of the business needs
and the cumulative effect of negotiations was having an overall effect on the eventual
likely prices.
It is only necessary to have rough estimates of the costs and impact on prices in
order to understand what are the major and minor issues. For a major programme
such as BA/POCL, estimates to within plus or minus £1m would have been
sufficient.
The objective is to be able to warm service providers and sponsors at the earliest point
of the impact of requirements and risk transfer on the business case and overall
affordability of any prospective deal. It would also help the negotiators to better
judge when to call for ‘real’ prices by commencing the tendering stage and final
negotiations as discussed below.
Timing of ITT and Post-Tender Negotiations
The service-based approach enshrined in PFI has proved beneficial to BA, SSA and
POCL, in terms of achieving value for money and significant risk transfer. In order to
achieve these benefits, it was necessary to continue negotiations post receipt of
tenders. Past practice within central government has not advocated this approach but
has recommended conclusion of all negotiations prior to inviting a best and final
offer (BAFO).
In practice, a number of major areas of negotiation could only be concluded once
service providers had tendered prices. Against these prices (‘real’ not “budgetary”)
the Programme was then, through intensive negotiations and in consultation with
sponsors, able to:
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3.9.3.
3.9.4
3.10.
3.10.1.
3.10.2.
3.10.3.
(a) optimise the service boundary - checking that, at the margin, tasks were being
done in the most cost-effective place, i.e. sponsor or with service provider
organisations;
(b) assess the balance between risk transfer and prices and adjust where
appropriate to do so;
(c) _ validate those requirements that appeared to be cost-saving or which appeared
to have costs in excess of their benefits.
As a result of the competitive procurement the Programme succeeded in reaching an
acceptable PFI deal with ICL Pathway. However, sponsors have expressed the view
that original expectations were not fully met (due to unaffordability) in so far as:
(a) _ the degree of risk transferred to the service provider;
(b) _ the scope of the solution, with shortfalls during roll-out and operation
of the services to be funded by sponsors.
Future PFI negotiations should give consideration to what is the optimum timing for
inviting tenders and hence when to bring prices into play within the negotiations. By
choosing the timing carefully, this will optimise timescales and resource
requirements for both purchaser and service provider as well as optimising the ‘deal’.
Post-Contract Requirements
The Programme broke new ground in agreeing to a requirements ‘drop down’
process post contract with the selected service provider. This has meant that a level
of detail is required to be developed by both parties in completing the Service
Schedules post contract without giving rise to price escalation.
In terms of optimising the overall timescale for a major PFI procurement such an
approach has merit. Normal past practice has favoured a full service definition to be
agreed pre-contract which includes detailed definition of inputs/outputs, volumes and
quality criteria at the service boundary, together with associated purchaser/service
provider responsibilities.
The reasons for the Programme adopting the post-contract requirements ‘drop down’
approach were twofold:
(a) The sponsors’ requirements continued to evolve as the procurement
progressed, not least as a result of discussions with the suppliers. These
changes resulted in a new process, the Requirements Catalogue, which
succeeded the SSR and which constituted a definitive set of requirements for
the invitation to tender. It was impractical to develop the service schedules of
the draft contracts at a time when the final requirements were still being
developed.
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3.10.4
3.10.5
41.
4.2.
43.
(b) the sponsors’ need to eradicate benefit fraud, combined with the service
provider’s requirement to control bidding costs, meant that further slippage was
unacceptable. The benefit gained from additional time to accommodate further
work refining the sponsors’ requirements and producing the contract service
schedules, was outweighed by the costs to all”.
In identifying the level of detail required within the contract, the key consideration
should be to establish that which is necessary for the service provider to agree firm
prices. It is also important to agree on how the further level of detail is to be
developed either pre or post-contract with the preferred service provider into the full
service specification. Whenever this process is undertaken post-contract, clear
groundrules must be set out on the procedures and mechanisms for reaching
agreement between the parties. The precedence and relationships between the
requirements, solutions and supporting comments must be clearly stated and
accepted by all.
Where service providers genuinely wish to reduce timescale and cost of bid, they
must offer a view at an early stage as to what they consider would be an appropriate
level of detail for a specification for which they would be prepared to set a fixed
tariff. They must accept, as a form of risk transfer, the risk of discovering aspects of
detail during their development of the full service specification. Such aspects of
detail may give rise to variation in service provider original cost projections which
must then be absorbed without subsequent price escalation.
CONCLUSIONS
The Programme for ‘Bringing Technology to Post Offices and Benefits Payments’
moved from inception to contract award in under two years. The sponsors have
moved a long way very quickly - something they would not have been able to
achieve by ‘going it alone’. Furthermore, they have replaced an arms-length
relationship by a strong relationship underpinned by a commercial agreement with
clear obligations and commitments from both parties.
The Programme was obliged to ‘trail blaze’ in many areas because of the uniqueness
of PFI and of the joint sponsorship. With the benefit of hindsight - including the
knowledge that it was possible to get a solution - it is possible to see areas where
certain processes could have been improved upon. However, a key lesson to be
learned is that major procurements such as this require innovation and adaptation
along the way and it is to the Programme’s credit that they recognised this and acted
appropriately.
The critical success factors for the Programme included:
(a) strong political support - supporting two key Government policies, the
elimination of fraud and the maintenance of a nationwide network of Post
Offices;
(b) strong top management support from the BA Chief Executive and the POCL
Managing Director, each of whom made the project a key objective of their
business;
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(©)
@
)
clear business objectives which were maintained throughout the procurement
phase;
good potential for a ‘win-win’ outcome with the only losers being those
defrauding the current social security system;
several substantial and key risks to be considered for transfer to the private
sector - fraud risk, volume risk, project risk, technology risk - and so no one of
these could undermine the deal;
the Programme ensured that the procurement process was transparent to the
service providers: project plans, evaluation criteria, service provider risk
assessment and so on, thereby maintaining the credibility of the Programme
team with the service providers even in conditions of great stress.
44. General conclusions regarding the lessons learned included:
(a)
(b)
©
@
many people in the public sector have an unrealistic expectation of PFI, and in
particular the extent to which the private sector is willing to accept risk;
allowing the design to be the responsibility of the PFI service provider - and so
not clear until contract award - introduces the risk of having a ‘planning blight’
with associated in-house developments. This risk may be reduced by careful
definition of the service boundary;
where the service to be contracted out is essentially unique to the public sector,
it is important to ensure that the service provider can move quickly up the
learning curve so that they understand the risks involved and are in a position
to submit an operational and commercially feasible solution. This process
requires considerable effort and resource;
in the IT field, many established suppliers are as conditioned to the traditional
public sector approach as the civil servants. Getting an acceptable deal under
PFI requires flexibility and innovative thinking by both sides and the
BA/POCL Programme has certainly generated its fair share of new thinking in
this respect from which many in the future will benefit.
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ANNEX A: TERMS OF REFERENCE
LESSONS LEARNED REVIEW - TERMS OF REFERENCE
Review objectives:
(a) _ Establish the lessons to be learned from:
. a major joint procurement
. the application of PFI policy
so that they are available for the benefit of future major procurements.
(b) Document the overall procurement process in summary form, as a template
which could be considered by future procurements and as a starting point for
any future audit.
Review baseline:
The Review identifies the overall procurement process as a number of parallel streams
of activity in terms of the progressive development and refinement of the:
. requirements
. solutions (including Demonstrator and Risk Register)
« _ business case (including Risk Transfer)
. contract; and
. selection and decision parameters (including processes).
Review approach:
For each stream, the underlying process will be established as a number of steps. For
each step, the following will be examined:
. what went well, and why
. what would be done differently, and why
. what was different from previous practice, and could be useful to others in
future
. what were the Critical Success Factors.
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ANNEX B: STAFF INTERVIEWED
The following staff were interviewed during the review:
. BA/POCL Programme Team
Robert Albright
Keith Baines
Mike Dolan
Pat Dugdale
Tony Johnson
Pat Kelsey
Bob King
Stuart Riley
Derek Selwood
Andrew Stott
. BA
Derek Brown
Ken Davenport
Peter Mathison
George McCorkell
David Riggs
. DITA
Larry McCaffrey
. SSA (Northern Ireland)
Jim Fleming
Nigel McCormack
Alec Wylie
~ . POCL
Richard Dykes
Bob Peaple
Jeff Prince
Paul Rich
. Legal Advisers
Hamish Sandison
. Financial Advisers
Guy Pigache
. CITU
Brian Standen
Service Providers
Cardlink - Nick Billington
IBM - Hirsch Cashden, John Evered, Helen Mundy
Pathway — - John Bennett, John Jones, Tony Oppenheim.
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nesievents
1. BA-POCL Discussions and In 1993 the Benefits Agency (BA) and Post Office Counters Limited (POCL) established a development group to investigate
Feasibility Studies causes of the current payment system deficiencies and to develop a solution. The feasibility report was presented in February
1994; key aspects included:
ee
1993 - 1994 - THE CONCEPT TAKES SHAPE
ee 2 sone oe
* positive authorisation of benefit payments at point of encashment
* electronic transmission of payment details from a central payments database to terminals at each post office counter position
tokens (plastic cards) with no intrinsic value for accessing the system to be held by the customer
« infrastructure would support work for other Post Office Counters Limited clients and provide platform for development of new
services.
2. Related Initiatives ALPS and Benefits Agency and POCL were developing other systems to address deficiencies:
CAPS
« Automation of London Post Offices (ALPS) / Electronic Stop Notice System (ESNS) to bar code order books and combat
benefit fraud
* CAPS - Customer Account and Payment System to provide a single benefit account from which to authorise payments.
3. Senior Management Structures I Programme staff consisted of a mix of POCL, BA, Northern Ireland Social Security Agency (SSA) and consulting staff. The
Established senior management structures evolved to consist of:
a) Programme Management Team (PMT) - the Programme Director and his direct reports
b) Programme Management Board (PMB) - as PMT plus head of CAPS team
c) Joint BA/POCL Programme Steering Committee (PSC). Chaired alternately by Chief Executive of BA and Managing Director
of POCL with representatives from SSA, Department of Trade and Industry, DSS Finance, DSS Policy, Treasury and the
Private Finance Panel Executive.
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AUGUST 1994 - NOVEMBER 1994 - STAGE 1 - ESTABLISH THE PLAYING FIELD
4, 30 August 1994 The OJEC notice was issued on 17 August 1994 and published 30 August. The description of services indicated POCL as the
QJEC Notice Published procurer of computer and other services, a major function of which was to be support of payments for DSS and other
Government Departments. The DSS and DHSS Northern Ireland requirements for ‘complementary’ services were to be in
addition to the (POCL) services. Further information on the procurement was to be provided to service providers later.
5. September 1994 The options for the procurement strategy were reviewed during September 1994. A five stage procurement project was
Procurement Strategy Agreed proposed:
Stage 1: Establish Playing Field
Stage 2: Innovation & Clarification
Stage 3: Contract Negotiation
Stage 4: Evaluation & Award
Stage 5: Pilot Evaluation.
6. 23 September 1994 92 responses to the OJEC Notice received.
Responses to OJEC Notice
7. 5 October 1994 The Prospectus entitled ‘Bringing Technology to Post Office and Benefit Payments’ provided a brief to industry on the
Prospectus Issued background to the opportunity, the organisations, their existing IS strategies and a vision of the future for benefit payments and
POCL applications.
Significant guidance was offered regarding the solution envisaged:
« design of token/plastic card system to take account of susceptibility to fraud, public acceptability and speed of transaction
* signatures and photographs to be considered on their merits
intrusive biometrics (eg fingerprints) unlikely to be cost-effective and contentious in terms of public acceptability
¢ migration to smart card required long term
need to support transactions for other POCL clients.
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j 8. 19 October 1994 The Request for Statement of Capability issued on 19 October served the purpose of the familiar request for information
Request for Statement of questionnaire but importantly:
Capability Issued
a) requested responses from potential prime contractors or consortia only;
b) specified that an evaluation would be undertaken based on the responses to the questionnaire and the proposed approach to
be taken to the technical solution, and acceptance of risks (particular emphasis placed on fraud risk).
The project’s published timescales were:
Stage 1: Establish Playing Field August 1994 - November 1994
Stage 2: Innovation & Clarification November 1994 - March 1995
Stage 3: Contract Negotiation March 1995 - September 1995
Stage 4: Evaluation & Award September 1995 - December 1995
Stage 5: Pilot Evaluation December 1995 onwards,
9. 3November 1994 A service provider briefing conference was held to present the opportunity to industry; explain the procurement process,
Industry Briefing Conference including how offers would be evaluated and service providers shortlisted; provide a forum for service providers to ask
questions.
10. 19 November 1994 Nine Statements of Capability were received and evaluated in accordance with the paper entitled Statement of Capability
Receipt of Statements of Evaluation Process. The objective was to select a ‘portfolio’ of service providers with a variety of approaches to allow
Capability innovation.
The long-list selected comprised:
© BT with Citibank
«EDS
° IBM
* Cardlink - a Special Purpose Vehicle (SPV) comprising Andersen Consulting and Unisys
« Pathway - a consortium led by ICL.
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__ Mileste foneslEvents oo _. kk
NOVEMBER 1994 - JULY 1995 - STAGE 2 - INNOVATION AND CLARIFICATION
2
11. November 1994 to Work on the Statement of Service Requirement (SSR) had started during Stage 1, and built upon the information provided in the
February 1995 Prospectus. Some sections of the draft SSR were issued to prospective service providers in December 1994 as part of an
Development of SSR information pack, which included summaries of two joint BA/POCL reports entitled “Order Book Report’ and “Girocheque
Report’. Work on the final version was substantially completed on 6 February 1995, subject only to minor amendments arising
from quality assurance comments.
The SSR made a clear distinction between:
a) strategic IT infrastructure for POCL
b) solutions to existing BA and POCL business requirements, particularly benefit payments.
The SSR set out the separate objectives for BA and POCL as well as the following joint objectives of the Programme:
« fraud-free method of paying benefits, with continuously reducing overall administration costs
* automation of other POCL transactions
full and speedy reconciliation of benefits payments
« improved service to both parties’ customers.
The procurement scope was represented diagrammatically to show BA and POCL services and the service boundaries.
The Implementation programme was to commence Spring 1996.
I 12. November 1994 to Once work had progressed to the stage where Statement of Service Requirement (SSR) issue was in prospect it was vital for
April 1995 BA and POCL to cement their relationship by agreeing the Memorandum of Understanding (MoU). The SSR could not be issued
Agreement of BA/POCL to service providers until the MoU was agreed. The MoU was signed on 13 April 1995.
Memorandum of Understanding
Edited copies of the MoU were given to service providers for information after the SSR had been issued.
13. April 1995 The SSR, dated 6 March 1995, was issued to the five longlisted service providers on 13 April 1995.
Issue of SSR
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14.
January 1995
Set up of Procurement Board
and Evaluation Board
A Procurement Board was established to oversee the procurement, give guidance on policy issues and approve the
methodology by which evaluation for shortlisting and eventual award would be conducted.
Chairmanship would alternate between the two main parties’ business sponsors - Director of Resources, POCL and Head of
BA's Banking and Accounting Branch.
The Evaluation Board, comprising a sub-set of the Procurement Board members, was responsible for considering the
evaluation reports from the shortlisting and final selection exercises and making the decisions. The chairman was POCL’s
Director of Resources.
8 June 1995
Receipt of Proposals
The five responses received on 8 June 1995 were evaluated in accordance with the paper entitled Proposal Evaluation
Process, which had been approved by the Procurement Board. The Proposal Evaluation Grid focused evaluators on the
Characteristics vs Viability aspects of each proposal.
The Proposal Evaluation Model paper described the model structure, provided guidance on scoring for evaluators and the
evaluation weights for low-level criteria. A separate paper (not available to evaluators) set out the full weights which were
approved by the Evaluation Board.
16, July 1995 The evaluation team’s report presented the results of the evaluation in tabular and various diagrammatic forms including the
Evaluation Board agrees Proposal Evaluation Grid.
shortlist
On 19 July, the Evaluation Board agreed the shortlist as Cardlink, IBM and Pathway.
17. July 1995 The PSC endorsed the shortlist of three on 21 July.
PSC Endorse Shortlist .
18. July 1995 The indicative prices in the proposals were used to update the Business Case.
Update of Business Case
19. June 1995 to August 1995 During the evaluation, SPRRs were drawn up in respect of all risks identified against each service provider. These were issued
Development and Issue of to shortlisted service providers during August and September 1995 and provided the foundation for much of the Stage 3
Service Provider Risk Registers I discussions with service providers as they strove to resolve or eliminate the risks.
(SPRR)
The SPRRs were reviewed regularly by the Risk Assessment Panel (RAP).
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r—“‘“‘_—OCOCOC—C Histon : _
JULY 1995 - FEBRUARY 1996 - STAGE 3 - CONTRACT NEGOTIATION
20. July 1995 The SSR stipulated a two stream approach to Stage 3, ie:
Demonstrator and Negotiation
Streams Commence a. discussions and demonstrations aimed at addressing technical risks and improving understanding of solutions such that
concerns over technical and viability aspects were cleared; and
b. negotiation, by the time of issue of ITT, of a draft contract with each service provider which was acceptable to BA and POCL.
21. October 1995 In the course of the stage, it was concluded that further work was needed to update and clarify those requirements which had
Stage 3 Re-plan and Initiation of I not been finalised at the SSR stage.
J Requirements Stream
I Are-plan was undertaken resulting in a third ‘Requirements and Solutions’ stream of activity to develop a ‘Requirements
Catalogue’ focusing on 5 groups:
¢ POCL Infrastructure
« Benefit Processing Applications
* POCL Applications
¢ Implementation
I « End to End.
I 22. October 1995 The Sponsor Directors Group (SDG) was set up to give the Programme direction on business issues as and when needed. The
Sponsor Directors Group Set chairman was the Chief Executive of the SSA.
i Up .
23. November 1995 The financial evaluation methodology was approved in principle by the Procurement Board. The Financial Adviser's proposals
Financial Evaluation Planning for a common charging structure were approved as the basis for inviting tenders and service providers were notified
1 accordingly.
I
H 24. November 1995 to Senior management reviewed the contract options and adopted a three contract structure comprising a common over-arching
I December 1995 service agreement, changes to which need to be agreed by both sponsors, and separate BA and POCL service agreements.
Three Contract Structure
Adopted The draft contracts were issued to service providers on 21 December 1995.
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. December 1995.
New Timetable Agreed
The BA Chief Executive and POCL Managing Director committed to issue of the ITT by end of February 1996. Service providers
were advised, and were subsequently told of the intention to award contracts by end May 1996.
. November 1995 to
February 1996
Seals of Approval (SOAs)
obtained
The BA Seals of Approval process in respect of non-financial matters was modified to accommodate the special needs of the
Programme and certificates were signed by BA users and non-BA users. The certificates were reviewed by the Benefits Agency
Steering Committee for Information Strategy (BASCIS).
27.
January 1996 to
February 1996
Value Factors Assessments
The principle of including non-monetary value factors in the evaluation had been agreed by the sponsors in October 1995.
Descriptions of the ten factors were included in the notification of award criteria given to service providers on 6 November.
Separate value factor assessments were carried out by the Core Negotiating Team (CNT) and the Demonstrator stream.
The reports comprised marking grid assessments of performance against the factors, supported by references to evidence and
appropriate rationale and evaluation material - providing an audit trail.
The results were combined into a Programme Value Factors (PVF) report. The PVF report was subsequently quality assured by
the sponsors and approved by the Evaluation Board before receipt of tenders.
28
January 1996 to
February 1996
Negotiation of Risk Transfer
The Procurement Board approved the Programme’s approach to “Risk Transfer” to service providers.
Additional negotiation meetings were held with shortlisted service providers to discuss the transfer of risk, particularly fraud risk.
29.
February 1996 -
Pre-ITT Hurdles Review
In order to receive the ITT, each service provider had to clear a number of hurdles to prove that they had met or exceeded:
* minimum service requirements acceptable to sponsors
* minimum requirements for partnership with POCL and for development of new business opportunities
«sufficient transfer of risk (particularly fraud risk)
* acceptable funding method and financial structure.
The mechanisms were:
* nocategory A ‘critical’ risks or unacceptable profile of ‘serious’ risks
e agreement to draft contracts acceptable to both BA and POCL.
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oe ls es eee
lestones/ ants ee rr —— oe Histo ae
30. 27 February 1996 The Chancellor of the Exchequer and Secretary of State for Social Security, plus the Deputy Prime Minister, President of the
Meeting Between Chancellor of I Board of Trade and other ministers, met with BA’s Chief Executive and POCL’s Managing Director to agree the plans leading to
the Exchequer and Secretary of I award of contract, and to obtain all parties’ commitment to their achievement.
State for Social Security
The Chancellor circulated the key milestones to all parties.
31. February 1996 to April 1996 The POCL Programme approval process involved endorsement by the Major Projects Expenditure Committee (MaPEC) in
POCL Approval Process respect of Operational, Financial and Technical aspects of the project. The POCL business case covered both the counter
automation programme and the Chesterfield-based Transaction Information Processing (TIP) system which processes outputs
from counter transactions in order to produce management information.
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32. 29 February 1996 The Procurement Board reviewed the evidence regarding the ITT hurdles and approved issue of ITTs to all three shortlisted
Issue of ITTs service providers.
A Common Charging Structure, as discussed during Stage 3, was obligatory for all service providers as per Financial Adviser's
recommendations.
However, tenderers were given the option to offer variant bids with reduced levels of accepted risks and/or alternative bids
using alternative charging structures. Variant and alternative bids were referred to as non-compliant bids.
33. 21 March 1996 The tenders were evaluated in accordance with the procedures described in the paper Processing Tenders from Receipt to
Tenders Received Award: This included an initial “walk-through” to measure compliance with the ITT before all tenders (both compliant and non-
compliant) were evaluated.
The evaluation team was divided into several streams (eg Finance, Contracts, Technical) plus facilitators. Access to priced
tenders was strictly limited in view of the involvement of some evaluators in reviewing value factor scores.
The value factor scores were reviewed and some pre-ITT scores were amended to take account of experience since ITT issue.
(The revised results were endorsed by the Evaluation Board on 19 April.)
The Sponsor Directors Group was briefed by the evaluation team on 28 March that prices exceeded acceptable levels for both
the BA and the POCL business cases. The SDG agreed that further talks be held with all service providers to discuss how
prices could be reduced by negotiating revised ‘packages’.
34. 1 April 1996 The Core Negotiating Team met with service providers to negotiate reduced cost options.
Negotiations Restart
35. 16 April 1996 The Sponsor Directors Group met with the CNT on 16 April to reach decisions on each element of the revised packages
Invitations to Retender Issued proposed by the service providers and to approve issue of the Invitation to Retender (ITR) to all three service providers.
The ITR requested tenders that were compliant with each service provider's revised draft contract, but allowed one variant bid
with a commitment that all bids would be evaluated.
I 36. 22 April 1996 The Retenders were evaluated in accordance with the Processing Tenders procedures, tailored to the actual information
Retenders Received provided by tenderers.
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37. 29 April 1996 The results of the Retender evaluation were presented by the evaluation team to the Evaluation Board. on 29 April 1996. The
Evaluation Board Decision Board unanimously agreed that award to Pathway should be recommended to the PSC.
38. 15 May 1996 BA and POCL signed the Commercial Agreement which was based upon the MoU agreed in April 1995.
BA/POCL Sign Commercial
Agreement
39. 15 May 1996 The Programme Steering Committee endorsed the Evaluation Board's recommendation on 1 May 1996 and following various
Award to Pathway Treasury, POCL and ministerial approvals, the contract was awarded to Pathway.
The award was announced on 15 May by the Secretary of State for Social Security at the National Federation of
I SubPostmasters conference.
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