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Briefing on the New Horizon Contract
July 27 1999
Contents
1. Introduction
2. The New Contract
2.1 Background.
2.2 Service Scop
2.3 Prices
2.4 Risk Transfer
2.5 Timescales
2.6 Acceptance
2.7 Contract Structure.
2.8 Contract Management...
2.9 Termination and transfer
2.10 Future Developments
3. Implications of the New Contr
3.1 Introduction
3.2 Cost Control
3.3 Change Managemen'
4. If You Need More Information .........c:cccecsessssecsseesssseesseecsseesssessseessneesssnessneessnee
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1. Introduction
This paper is prepared as a summary of the main differences between the old
and new contracts between POCL and ICL Pathway, following the
cancellation of the benefit payment card, and the new commercial terms
agreed by the Post Office Board on 24 May 1999. The intended audience is
POCL managers who need to understand the main provisions of the contract,
either because they have working contacts with Pathway or because they
have an interest in the services Pathway will be delivering under the new
contract.
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2. The New Contract
Background
On 24 May, 1999 Post Office Counters Ltd and ICL Pathway signed a letter
agreement that made major changes to the previous contracts between POCL
and Pathway. At the same time, DSS and ICL Pathway agreed to terminate
their contract for the benefit payment card services, and DSS withdrew from
the tripartite Authorities Agreement.
The letter agreement specified that POCL and Pathway should produce a
“codified” contract that incorporated the changes into a new contract by 16"
July. The codification process has now been completed, and the new contract
is due to be signed on 28" July.
There are significant changes to many aspects of the contract, summarised in
the following sections.
Service Scope
The new contract excludes all the services that Pathway were due to provide
in connection with the benefit payment card, but includes order book control
service throughout the contract.
The software-related services to be delivered at the contracted price are
restricted to those defined in the baselined versions of the Release Contents
Definitions (RCDs) for the Core Services Release and the Core Services
Release Plus. This includes dealing with agreed qualifications to the CSR+
RCD. Any other software-related services would have to be introduced by
POCL through change control and would be at additional cost.
The Core Services Release (CSR) is broadly equivalent to NR2 under the old
contracts, minus the benefit card related services. The Core Services Release
Plus (CSR+) is the replacement for the old NR2+, and includes Logistics
Feeder Service, Watercard and Quantum.
The number of counter positions to be automated is limited to 39,750.
(Previously this was 40,250, with price increases for any above 38,750). The
39,750 includes positions in training centres - which are no longer subject to a
separate limit - and includes up to 250 portable configurations. The contract
clarifies that these are notebook computer based; standard equipment
mounted on trolleys etc. does not count as mobile configurations for this
purpose. In addition to the counter configurations, up to 1,000 post offices can
have back-office PCs.
Carrying out the data migration procedures in outlets is now a POCL
responsibility; a price reduction was built into the charges to compensate for
this.
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Prices
The basis on which POCL pays for services under the contract is entirely
different, and is modelled on standard “turnkey” build and operate contracts,
rather than on the PFI basis of usage-based charging.
There are two main elements of charging for the contracted services:
e Stage payments on Acceptance and during roll-out
¢ Operating payments during the steady-state operation of the services.
These charges are largely fixed - 7% of the operating payments is variable by
the number of transactions, and a further 32% is variable with the number of
post offices at which the service is provided.
In addition, there are specific charges related to modification costs during the
roll-out, though these are the resolution of a long-standing dispute about
liability for modification costs, rather than a new feature in the new contract.
Any changes or additions to the contracted services will be charged ona time
and materials basis, either through contract change control, or through the
Operational Business Change catalogue which will set out pre-defined prices
for various types of outlet change.
In addition to the charge-out rates applicable to Pathway development staff,
senior consultants’ and senior managers’ involvement in changes is now
chargeable at higher rates than other Pathway staff.
The previous allowances of 1.6% offices opening or relocating and 1% closing
per annum built into the standard charges still apply, and will be provided as
a refund at the year-end, based on the most expensive changes during the
year.
All charges will be subject to usual invoicing procedures, but there is a shorter
timescale (23 days rather than 30) for payment of invoices for the stage
payments during roll-out.
Risk Transfer
The new contract significantly reduces the risks that Pathway was previously
taking under the PFI. In particular, risks in relation to achievability by POCL
of the roll-out timescales and in relation to future business volumes are now
largely with POCL. Pathway’s risk in connection with fraud is also reduced,
largely as a result of removal of the payment card from the contract.
If POCL delays the roll-out timescale, then Pathway is entitled both to receive
stage payments as though the delay had not occurred, and to have a time and
cost adjustment for any over-run of roll-out activities.
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Timescales
The new contract will run to March 31 2005, unless terminated earlier by
POCL.
The main roll-out is to start on 234 August 1999 and be completed by 5th
February 2001, with a peak rate of 306 offices per week during 2000. 730 post
offices are expected to be left outstanding at the end of the main roll-out.
These are to be handled through operational business change, but at no
additional cost to POCL, and are planned for completion by 14" May 2001.
The planned date for the CSR+ release is April 2000.
Acceptance
Contractual Acceptance only applies to the Core System - i.e. the release of
software and other associated services that is being delivered in the Live Trial
and for the start of roll-out. There is no provision for Acceptance of CSR+ or
subsequent releases (though all releases are subject to testing and release
authorisation). The thresholds for medium severity Acceptance faults have
been increased from 10 faults in total, to 20 faults overall, or 10 in any one
Acceptance Specification. The threshold of any 1 high severity Acceptance
fault still applies.
There is a disputes resolution process for any disagreements over the status or
severity of acceptance incidents. This involves an expert decision by Peter
Copping of PA Consulting (or a replacement with similar skills and seniority)
with POCL having certain defined grounds for vetoing such decisions.
Contract Structure
There is now a single contract, rather than the three contract structure that
applied previously. The organisation of the contract into clauses and families
of schedules has largely been preserved, with those schedules in the old
Authorities that are still relevant having been merged into the corresponding
schedules from the POCL Agreement.
The Schedules are organised as follows:
Schedule 1
This is an overview of the POCL service environment with which Pathway’s
services are expected to work.
“A” Series
These include the main “terms and conditions” schedules, and the
Requirements and Solutions. A new schedule has been added which defines
how Change Control Notes and Change Requests that were signed but not
incorporated into the old contracts, or still in progress, will be carried
forwards into the new contract. A copy is at Annex 1.
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“B" Series
These are the Contractor schedules and include the Hardware Software and
Documentation licensed for use by POCL, Interface validation procedures,
the contractual Timetable, and rules for aggregation of any remedies resulting
from failure to meet transaction time service levels.
Schedule C1
This lists Optional Services that Pathway will provide on request at additional
cost to POCL.
“L” Series
These set out obligations in relation to the Operational Trial
Functional Schedules
Each series covers one of the contracted services, including service definition,
acceptance, roll-out, POCL responsibilities, service management, service
levels, contingency services as follows:
Series Service
E Automated Payments
F EPOS
G Infrastructure
H Order Book Control
K Logistics Feeder
Contract Controlled and Contract Referenced Documents
The current list of Contract Controlled and Contract Referenced documents is
at Annex 2. These form part of the contract. Documents that related to the DSS
services, infrastructure and roll-out and to BES in the old contracts are no
longer a part of the contract (with the exception of the CCD covering benefit
card exit arrangements.)
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Precedence
The precedence of the components of the contract has been changed in the
new agreement. This is relevant in the event of any conflicts between different
provisions of the contract. The general order of precedence is:
a. Clauses and Schedule Al
b. Schedules A2-A14 and A17
c. Schedules E1, F1, G1, H1, K1 (Service Definitions) and G6 (Infrastructure
Roll-out)
d. Schedule A15 (Requirements)
e. Schedule A16 (Solutions)
f. Other Schedules
g- Contract Controlled Documents (CCDs)
h. Contract Referenced Documents (CRDs)
There are two exceptions:
1. In relation to service levels, the Service Level schedules (E8, F8, G10, H8,
K8) take precedence over everything except the Clauses and Schedules Al-
Al4 and A17.
2. In relation to software-related services, Pathway’s obligations are limited to
those in the CSR and CSR+ release contents definitions. (Even though these
are CCDs and would normally rank below the requirement and solutions,
they are given precedence in this regard by a specific reference in the
Clauses.)
Contract Management
The new contract includes changes in the meetings and procedures for
commercial and contract management of the POCL-Pathway relationship. In
particular it sets out new procedures for change management.
The contract defines 6 joint management processes for contract management.
These are:
Change control - this is now to be overseen by a joint change control board,
meeting fortnightly, which will agree timescales, monitor progress and
review decisions. Changes will (subject to authority limits) be able to be
authorised by the Head of Horizon Commercial for POCL and by the Finance
and Commercial Director for Pathway. There are also urgent and emergency
procedures for changes that can not wait for the normal timescales. Pathway
will not carry out any changes without a validly authorised CCN. The backlog
of CCNs from the Related Agreements is to be cleared by December 1999.
Contract Administration - this formalises the role of the POCL and Pathway
Contract management teams in maintaining an up to date version of the
contract and in providing expert guidance on the preparation of CRs and
CCNs, and monitoring resolution of agreements to agree.
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Service Review Board - this is unchanged from current arrangements.
Contract Steering Group - this is a new meeting which takes over the roles
which were fulfilled under the old contracts by the Joint BA/POCL/ Pathway
Contracts Negotiation Team (CNT) and the POCL/ Pathway Commercial
meetings. It is the escalation route for issues from the change control and
contract admin. areas, and also for any disagreements about Remedies from
the service review.
New Business Board - this is a reinstated meeting that will oversee new
developments during the pre-contract stages when requirements and
solutions are developed through the Business Requirements Definition
process.
Release Authorisation Board - this has the same role in relation to CSR, CSR+
and future releases as similar boards have fulfilled in the past.
The previous disputes resolution procedures in the contracts have been
removed. In the new contract, other than in relation to Acceptance, any
dispute that can not be resolved in negotiation between POCL and Pathway is
subject to the courts.
Termination and transfer
POCL can, as before, terminate the contract by giving 12 months notice and
paying a termination fee based on Pathway’s unrecovered costs and lost
profits. In addition POCL can terminate in various circumstances where
Pathway is in default without paying compensation. As previously, there is
no provision for early termination by Pathway.
On cessation of the services from Pathway - either at the end of the contract or
on earlier termination - POCL has an option to purchase the project assets (i.e.
the hardware, software licences, telecommunications contracts etc.) Following
completion of roll-out, or any time if POCL pays the termination charge, the
cost is one pound; prior to that the cost represents Pathway’s unrecovered
investment in hardware.
Future Developments
All future developments on the infrastructure are to be agreed through
change control. POCL will have the choice - on a case-by-case basis - of
contracting for developments at a fixed price or ona time and materials basis.
Operating charges for additions to the service will be at marginal cost for
services developed for Royal Mail, DVLA, DNS, Girobank, and the Co-op
Bank. Operating charges for products for other clients or for POCL’s own
applications are to be agreed, and may be above marginal cost.
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POCL and Pathway will resume and continue discussions on establishing a
Public Private Partnership for developing network banking and government
gateway services on the infrastructure. However, such a partnership is not yet
in place and there is no obligation on either side to agree to one being
established.
3. Implications of the New Contract
Introduction
The cancellation of the payment card, and the new commercial terms with
Pathway mean that POCL managers need to adopt a different approach in
dealings with Pathway to those that were applicable under the old regime of a
PFI contract and joint sponsorship with DSS.
The new situation brings significant challenges for POCL:
* the new contract with Pathway is more costly and involves large up-front
payments, thus putting pressure on both cash-flow and profitability; and
loss of the benefits card means both the loss of a stream of income from BA
and puts at risk a third of POCL’s existing business, with the planned move
of benefits payment to automated credit transfer within the life of the
Pathway contract.
This means that POCL needs to maintain tight control of expenditure with
Pathway and maximise the business benefits from the core system services
which they are contracted to deliver at a fixed price.
Cost Control
There are two elements to this.
Firstly, all POCL managers need to ensure that they deliver the POCL
responsibilities under the contract for which they have responsibility. This is
particularly important in regard to any activities which could affect the roll-
out timescale, since any slippage which is (wholly of partly) POCL’s
responsibility will result in increased payments to Pathway.
Secondly, any changes are likely to result in additional charges. The
presumption must therefore be against change - i.e. the business priority is to
deliver and exploit the core functionality that POCL will get at the contracted
price.
Changes can only be introduced through the change control procedure using
a Change Request. There is no central budget for changes and therefore any
change requests that involve chargeable work by Pathway need to include a
business justification and budget provision - these will be confidential to
POCL and should not be shown to Pathway without clearance from the
Horizon commercial team.
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The detail required for the business justification will depend on the costs
involved. For minor changes that can be accommodated within existing
budgets, a simple statement of benefits would be sufficient. Larger changes
would require authorisation through the usual business control processes via
CoMPEC and/or MaPEC.
Typically budget provision will either be in the form of sponsorship from the
business customer for the change (e.g. from the client account manager in the
case of new automated products) or provision from an existing budget (e.g. if
a manager in Horizon is able to reduce their budget by making savings on
their consultancy budget by paying Pathway to do work that was previously
budgeted to be done in the Horizon Programme).
Change Management
POCL will need to implement internal management processes to support the
new contractual change management process. This is overseen by a joint
change control board, and where changes are contentious or particularly
costly, the change sponsors may be asked to attend to help resolve the issues
arising.
Because of the new liabilities for delay, it is essential that POCL meets agreed
timescales for reaching decision on proposed changes. This includes review of
associated documents. Timescales will be agreed in advance at the joint
change control board meetings which will take place on a fortnightly cycle.
4. If You Need More Information
Reading this document is not a substitute for getting expert advice on specific
issues, on which you should contact either the Commercial or Contracts team
for advice, (Liz Blackburn on GRO n commercial issues, or John
Cook on nn contracts issues.)
The whole of the contract , with the exception of the pricing schedule, which
is commercially confidential, will be made available to Horizon programme
staff on the LAN once it has been agreed by John Roberts and Neville Bain. In
the meantime, I will hold a printed reference copy in King Edward Building.
The contract is a lengthy and complex set of documents and you are advised
to seek expert guidance (as above) before relying on any parts of it, since there
are complex interdependencies, definitions, and rules of precedence that may
affect its meaning.
KEITH BAINES
Head of Horizon Commercial
27' July 1999
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