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Mr Stuart Sweetman
Managing Director
Post Office Counters Limited
King Edward Building
King Edward Street
London
EC1IA 1AA y,
(CL
10 March 1998
Dear Stuart,
Following John Bennett‘’s conversation with Paul.
Rich, I am enclosing a courtesy copy of the letter
and position paper that I have sent to Peter
Mathison.
Yours sincerely,
Enc
Kelth Todd
Chief Executive
TK Todd
ICL pic
ICL House
1 High Street
Putney
Fegotered in Engand no 142200
70
Regstered Oreo
1H Sueet
‘London SW35 15
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Mr. Peter Mathison,
Chief Executive,
Benefits Agency,
Quarry House,
Quarry Hill,
Leeds.
LS27UA
var DS
Without Prejudice
—]
COPY =
—- Md Pocl—
(CL
I refer to my letter to you of 2™ March, and now enclose on a without prejudice
basis a position paper which sets out ICL’s views in relation to the Pathway
Project.
May I suggest that we arrange a further without prejudice meeting after you have
considered the enclosed document so that we may continue to seek a way forward
in this matter.
Yours sincerely,
Keith Todd
Kelth Todd
Chief Executive
TK Todd
ICL plc
ICL House
1 High Street
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Position Paper
PATHWAY
Introduction
‘The purpose of this summary is to inform BA/POCL (the Authorities) of Pathways position in
relation to the Pathway Project (the Project), in order to facilitate proper commercial discussions to
resolve the present problems and differences facing the parties on the Project. The key issites have
been summarised under headings, with the aim of providing an overview of the problems which
Pathway has experienced in performing the Project in the context of a PFI contract.
PFI Principles
* ‘The foundation of a PFI contract rests upon clearly defined commercial principles which reflect the
correlation between risk transfer and management of risk. The aim of PFI is to allocate risk to the
party best able to manage it. The Supplier takes the entire risk of providing a solution to meet the
business requirements of the Sponsor but, in tum, the Supplier is given the overall freedom to
determine the solution to be provided. It is therefore fundamental that, having transferred the initial
risk associated with the implementation phase of a project, the Supplier should not be hindered
during this phase by the Sponsor, It is for the Supplier to manage the technical aspects of the
project in an expeditious time frame so that the Supplier is capable of eaming revenue which is
commensurate with the risks of the project. The European public procurement regime which
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stipulates competitive tendering, and hence competitive pricing, for PFI contracts, fortifies this
: principle.
It follows from this overriding principle that the Sponsor has the right to monitor the contract work
and the right to reject the IT solution following acceptance testing if the solution is unable to meet
the acceptance criteria. However, the acceptance criteria can only be based on the Sponsor's
business requirements. In other words, having defined the requirements to be met by the system, it
is not then for the Sponsor to dictate the solution, which must remain the exclusive responsibility of
the Supplier. It is also incumbent on the Sponsor to ensure that it carries out its responsibilities for
technical interfaces or other Supplier related dependencies in an efficient manner so as not to delay
the Supplier.
The problems which Pathway has faced and continues to face on the Project arise from the fact
that, as shown below, the Authorities have breached these basic PFI principles. Moreover, BA has
compounded the situation by separately misrepresenting the true position with regard to the
availability of CAPS and the CAPS programme.
Design Interference/Enhanced Requirements
In hindsight, it is perhaps understandable that, owing to the nature of the Project, namely, the
automated payment of billions of pounds worth of benefits, neither Authority was able to divest
itself of the political risk of Pathway's solution proving inadequate. In the case of Pathway, the
Authorities have not constrained themselves to expressing their requirements at a high level,
" leaving Pathway the freedom to implement them in the way Pathway thought best and most
appropriate, having regard to the risk it faced in the implementation phase. Instead, the Authorities
have gone much further, engaging in a continual process of refining their requirements to such a
level of detail that Pathway has had no option but to carry out the Authorities’ detailed instructions.
In practical terms, they have interfered in the design process by wrongly taking over the role of the
design authority.
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The result is a computer system which far exceeds in size and complexity the solution which had
originally been envisaged as necessary to deliver the Authorities' business requirements. - Indeed,
as a result of these enhancements to the solution as required by the Authorities, the system which
now exists is a bespoke solution of huge complexity. These enhancements have inevitably created a
ripple effect on the time and cost to build and operate the system and the overall work that Pathway
has been obliged to undertake on the Project.
It is not uncommon for a Supplier in a fixed price contract to face the problem of users enhancing
requirements under the guise of clarifying them. In a PFI contract this problem is all the more
acute as the Supplier does not have the benefit of a fixed payment. The Supplier must then achieve
live operation as soon as possible so as to enable a revenue stream to come on-line under the
service provisions of the contract. The Supplier is thus driven to avoid protracted negotiations and
make as little use as possible of any contractual protections that may involve conflict, in order to
minimise delay. This is the situation which Pathway has suffered, severely aggravated by the
Authorities! attitude that, as the Project is PFJ, their requirements may be enhanced at Pathway's
expense, as Pathway is obliged to fund the work.
_ The Authorities/PDA
‘The Related Agreements (the Contract) require Pathway to deal with the Authorities in a tripartite
arrangement. Pathway understood that the Authorities would adopt a unified position on the
Project. Instead, with the Authorities having separate business objectives and agendas, differences
between the Authorities have emerged and have resulted in conflict which has been one of the
primary causes of delay.
In the course of pre-contractual discussions it was represented that the PDA would be a competent
management body, properly empowered to work with Pathway, so as to ensure an efficient and
expeditious implementation of the solution.
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In the event and totally contrary to this representation, the PDA has sought to manage the Contract
as ajoint agent of the Authorities but has lacked the competence and proper authority to do so to
the extent that no decision could be taken by the PDA without the direct agreement of both
Authorities. This has caused delay, which has been compounded by the fact that a large part of the
PDA's remit has been to broker agreement between the Authorities rather than exercising any
-powers of its own to provide approvals or otherwise to progress the Project.
‘The imposition of the PDA between Pathway and the Authorities has acted as a hindrance to the
proper understanding of the Authorities' requirements in circumstances where direct access to the
Authorities has been denied. The Contract did not contemplate that Pathway would be obliged to
deal with the PDA in these circumstances. Indeed, the PDA is an extra-contractual body, whose
role is in no way defined or mentioned in the Contract apart from a tangential reference to the role
of the PDA Board in dispute escalation.
The contractual programme was based upon an aggressive implementation timetable, partly to
achieve fast business returns for the parties and partly for political reasons. The short Steady State
period of only five years fortified the premise that implementation would proceed without
unwarranted delay. Regrettably, delay has been the hallmark of the Project inscribed by the PDA,
which, without its own business case or incentive to expedite the Project, has acted as if there was
no correlation between time and money.
At the pre-contract stage, had the true role of the PDA been accurately described, Pathway would
have reconsidered the commercial terms upon which it entered into the Contract.
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Drop Down / Agreements To Agree
A Drop Down phase of three months was prescribed in the Contract in order to clarify the
Authorities! requirements as part of the process of extrapolation and transposition of the
Authorities requirements.
In reality, the Authorities used the Drop Down process as an opportunity to enhance the
requirements (for the reasons previously mentioned) by presenting Pathway, through the PDA,
with hundreds of redrafted requirements. The volume of work involved in this process meant that
the Drop Down period had to be extended by a further three and a half months but even this further
period was inadequate fully to identify the Authorities' requirements.
A major reason for this was the fact that the degree of business analysis that had been carried out
by the Authorities prior to the Contract was insufficient to enable the design to be frozen.
By reference to the stated requirements and the aggressive Project timetable it was implicit that
such work had been done, but this proved not to be the case.
. In the absence of such analysis the Authorities were unable to explain high level requirements in
terms of end to end business process definitions, business rules or outputs and, in order to avoid
delay, Pathway was obliged to work as an unpaid consultant, carrying out business analysis for the
Authorities, whilst performing parallel design work.
A number of the requirements were contradictory and misleading.
Pathway discovered that many business processes simply did not exist and this complicated the
task. Pathway was unable to perform the analysis work in the usual way (by Pathway interviewing
the Authorities’ staff, observing business practices etc.), as Pathway did not have direct access to
the Authorities, Instead, Pathway was obliged to deal with the PDA, which involved a cumbersome
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and time consuming process of submitting draft documents to the PDA for eventual comment by
_ the PDA and the Authorities.
In the absence of defined business processes and direct access to the Authorities, the process also
involved Pathway having to speculate on the Authorities’ requirements, which, when formulated,
the Authorities would consider and then optimise.
Towards the end of the extended Drop Down period it became clear that these efforts would not be
sufficient to define the Authorities’ detailed requirements. As a practical matter it was agreed that
the parties would resolve outstanding requirements by using reasonable endeavours to agree
Agreements to Agree.
This proposal was founded on the basis that any requirements which the parties managed to agree
would be phased into the Project in a reasonable timeframe by way of change control. On this
basis, Pathway agreed to the proposal. However, the Authorities have used the Agreements to
Agree as a further means of imposing detailed processes and features not previously specified in
the requirements which, once agreed, are required to be implemented in unreasonable time frames.
“In light of the delay to the Project it was acknowledged by the Authorities that it was not feasible to
deliver the programme to the original time-scales. Consequently, following Drop Down, the parties
entered into discussions to establish a new programme plan. However, in the absence of a firm,
detailed baseline, and in order to progress the Project, Pathway was forced to undertake work in
anticipation of the Authorities eventual requirements. ‘As and when the requirements were
crystallised substantial rework, without compensation, had to be carried out by Pathway in order to
make the solution compliant with the contractual requirements causing further dealy.
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Change Control
‘The Contract contemplated a specific change control procedure which involved the Authorities and
not the PDA. Instead change control has primarily been dealt with by the PDA_as an administrative
task involving prolonged consultation with the Authorities. This has caused widespread delay to
change control.
Against the ‘background of the Authorities acknowledging that the original change control
procedure lacked the required degree of expedition for the Project programme, and in order to
overcome delay, Pathway progressed work on the Project in accordance with informal instructions
from the PDA, pending formal approval of changes to the contractual baseline. This agreed
approach of working in anticipation of formal change requirements took place in circumstances
where substantial delay was being experienced in obtaining the Authorities’ agreement to change
control, It was intended that there should be some form of risk sharing by the parties in these
circumstances, but, in reality, it is only Pathway that has suffered the consequences of operating
change control in this way. Pathway worked in anticipation of formal change but, when the
Authorities eventually agreed (through change control) the detail of their requirements, substantial
time was spent by Pathway carrying out rework. Pathway has throughout been faced with
uncertainty when implementing the solution in an attempt to meet a constantly moving contractual
baseline. This problem has been exacerbated by the necessity for Pathway to carry out parallel
analysis and design work which, with the overall delay by the Authorities in dealing with change
control and the need for rework, has caused a totally dynamic situation. In these circumstances any
attempt to assess the impact of an individual change would have been futile especially where some
agreed changes were undefined and imprecise.
CARs
The Contract involves many dependencies by Pathway on the Authorities, which to a large.extent
were expressed in the solution as the Contracting Authorities Responsibilities (CARs). Many
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CARs relate to the definition of interfaces, processes, rules and other vital matters required by
- Pathway to complete the design and implement the solution. Pathway entered into the Contract on
the basis that the essential design related CARs would be fulfilled by the end of the initial three
month Drop Down period in order to meet the Project programme. It was implicit from the
aggressive timetable that the Authorities would be able to meet their responsibilities in a timely way
but this has not proved to be the case. Even today some of these essential CARs remain
outstanding, and others are the subject of Change Requests. By way of example, there are
approximately 35 outstanding CARs and 213 classed as ongoing, where there remains residual,
periodic or further obligations on the Authorities. The significant delay by the Authorities in
meeting CARs is related to the fact that the Authorities did not undertake a proper business
analysis which would have enabled them timeously to discharge their responsibilities.
POCL
It became apparent during installation work for the first 200 Post Offices that many post offices are
not fit for the purpose of installing automation equipment. POCL could not reasonably have
believed that the Post Office premises were fit for automation and did not give Pathway a proper
opportunity to investigate the physical condition of the POCL premises for itself before entering
into the conttict, If the extent of the work required to render POCL premises fit for installation of
automation equipment had been made known at the pre-contract stage Pathway would have
adjusted its bid price accordingly and allowed more time for this work in planning. Indeed, the full
impact of this problem is still being assessed. Of greatest concem are the substantial additional
costs and the possibility that the problem is so severe that it will not be possible to maintain the
required "beat rate" during National roll out. Indeed it would appear to be impossible to automate
all post offices in their current role.
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CAPS
Quite apart from the substantial issues mentioned above there is the serious problem conceming
misrepresentation in relation to CAPS.
It was represented pre-contract that CAPS would be available in one single feed for integration
testing on the Ist September 1996. The BA's Benefit Migration Plan was predicated on this basis
and the rapid migration of benefits set out in the plan was of fundamental importance to Pathway in
determining its pricing mechanism. This reliance was well known to the Authorities, but
nevertheless the date given by the Authorities for the availability for CAPS and the consequent
dates shown in respect of the Benefit Migration Plan have proved false (as shown by the attached
schedules). It appears that no proper enquiry was made of the status of the CAPS programme
before these representations were made. Indeed, it is now apparent that BA realised at the outset of
the Project that the CAPS programme could not be delivered in accordance with the time scales set
out in the Benefit Migration Plan, Given the earlier representations, Pathway should have been
informed of the actual situation as soon as the real position was realised. This is all the more so, in
light of Pathway's earlier concemss as to the availability of CAPS, in circumstances where Pathway
was prohibited from having a direct dialogue with CAPS to confirm the true position.
CAPS is so fundamental to the viability of the Project programme that had Pathway known the true
position it is doubtful whether Pathway would have entered into the Contract, At the very least
Pathway would have priced the services to reflect the deferred CAPS programme and revenue ioss,
Following award of the Contract, if Pathway had been told of the delay to the CAPS programme,
Pathway would have had the opportunity and time to mitigate the impact of such delay and respond
commercially to the changing circumstances of the Project. Pathway would have been relieved of
the coercive effect of the aggressive timetable, which drove Pathway to minimise delay and absorb
additional cost without proper recourse to the procedures laid down in the Contract.
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Indeed, it now seems that the true position as to the CAPS programme was deliberately concealed
from Pathway for several months. It was not until February 1997 that Pathway received notification
of the delay to the CAPS programme, by which time fundamental principles relating to the basis of
the replanning exercise had been established and these involved Pathway making further substantial
commercial concessions so as to minimise delay to the Project.
It is now proposed by BA that a CAPS programme implementation pilot should be undertaken with
an option to defer the benefit rollout. This proposed pilot demonstrates the underlying weakness of
the CAPS programme and the extent to which CAPS readiness was misrepresented. Indeed,
without a state of readiness on the CAPS programme BA has no incentive to progress the Project.
On the contrary, it is clearly in the interests of BA to prolong the pre-acceptance phase of the
Project so as to avoid payment of guaranteed sums.
Global Effect
Jn the context of a PFI contract, Pathway was entitled to proceed on the basis that there would be
no intervention from the Authorities. Pathway should have been unfettered in its provision of a
solution to meet the Authorities’ requirements. Instead, Drop Down and Agreements to Agree have
been used to enhance the requirements so that Pathway has been driven further and further away
from its original solution.
‘The consequent delay and cost has been compounded by the lack of preparation on the part of the
Authorities, in failing properly to carry out business analysis, which in tum has contributed to delay
in crystallisation of the Authorities' requirements and discharge of CARs.
In the belief that Pathway had to minimise delay to eam revenue by striving to meet the CAPS
programme, Pathway conceded many commercial and contractual issues. This has involved
Pathway working, without compensation, in anticipation of formal approvals and requirements. ”
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Substantial time and delay have been faced by Pathway in respect of rework and abortive design
work which has been carried out in parallel with Pathway's unpaid consultancy work, all of which
have been aimed at expediting crystallisation of the requirements. The management structure of
the PDA and its lack of authority has prevented Pathway from expeditiously dealing with the
‘Authorities and has intensified the overall delay.
The global effect of all these issues is that Pathway is facing revenue loss and increased costs
which run into hundreds of millions of pounds. As is well known to the Authorities, Pathway
secured loan facilities of £200 million to fund the cost of performing the Contract. The additional
work and delay, which have deprived Pathway of revenue, have caused Pathway to draw against
the loan at a much faster rate, with the overall borrowing requirement having virtually doubled.
Yet, despite all the issues which Pathway has been obliged to contend with, Pathway has prevailed
by achieving Release 1C. This release involves automated payment of child benefit being made at
205 Post Offices, across 335 counters.
In the next few weeks some 40,000 claimants will be using the payment card to collect Child
Benefit. The service is well liked by the Post Office counter staff and benefit claimants and meets
the requirements expected of it. Pathway is providing a world-class service management system
and have a committed and structured approach to completing the Project.
Clearly, Release 1C has not come without its price, and the plain truth is that, despite all Pathway's
efforts and achievements, Pathway will not be able to eam its rightful revenue because CAPS is not
available.
The global effect of the issues raised in this paper is such that an increase of 30% to the pricing
mechanism would be necessary in order properly to compensate Pathway. Pathway now seeks an
appropriate commercial solution to compensate Pathway for the global loss it has suffered as a
result of the Authorities' performance of the Contract and the misrepresentation as to CAPS.
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SCHEDULES
COMPARISON OF CONTRACTUAL vs. ACTUAL CAPS AND PATHWAY RELEASE DATES
SEPT. '96 APRIL '97 MAY '97 I JUNE '97 JULY '97 NOV. '97 FEB. '98 OCT. '98
CAPS 1 Version Release
releases & I containing full
dates functionality .
ORIGINAL
CAPS :
POSITION I PATHWAY I Initial Go-Live Release 1 on 1 Release 2 on 1
releases & April July (3 months .
dates later) :
Es GLEE eae :
CAPS Version 2.0 of Version 2.1 of Version 2.2 of I Version 3.0 of .
releases & CAPS multiple CAPS multiple CAPS multiple I CAPS multiple
CURRENT I dates releases on 1 releases on 2 June releases on 24 I releases
CAPS April November
POSITION
(subject to
pilot scheme
currently PATHWAY I Release 1a Release Release 1c on New
under releases & Ib on 4 3. November Release 2
discussion) I dates May (Live) on 5
: October
@
BENEFIT MIGRATION PLAN - REVISED DATES
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ITT/Contract I Master Plan I CAPS Plan I Change Delay in Benefit
8th Feb '96 11th Oct '96 I 16th Dec '96 I Request Months Pop'n
Millions
Start Dates
Child Benefit Sep - 96 Jan - 97 Apr-97 Jul - 97 10 6
Incapacity Benefit, SDA, WB, MA Nov - 96 May - 97 Sep - 98 Sep - 98 22 2
Family Credit, DWA, ETU Apr-97 Jul - 97 Apr - 98 Apr 98 12 1
DLA, AA, GA Apr - 97 Sep -97 May - 99 June - 99 26 2
Retirement Pension May - 97 May - 97 Sep - 98 Sep - 98 16 8
Income Support Oct-97 Oct-97 Jan - 98 Mar - 98 5 4
ISA Oct - 97 Oct - 97 May - 98 Jun - 98 9 1
Social Fund Jan - 98 Jan - 98 Jan-99 Jan - 99 12 3
War Pensions Jan - 98 Jan - 98 Jan - 00 May - 99 16 7)
Clerical Jan - 98 Jan - 98 Jan - 99 Jan - 99 12 1