Government cancels SME contracts and hands IT services deals to Capita

Government departments have been cancelling freelance IT contractors supplied through SMEs and giving their interim staff business to Capita under orders from the Cabinet Office's Efficiency and Reform Group (ERG), in what some suppliers see as an apparent contradiction of government SME policy.

The Ministry of Justice (MoJ) cancelled all such SME contracts and transferred them to Capita's £123m Cipher contract on 31 March, the day after the Cabinet Office published an ICT strategy that promised to end the UK "ICT oligopoly", of which Capita is one of the largest members, and to do more business direct with SMEs.

Martin Tucker, managing partner of interim executive agency Gatenby Sanderson, said: "The majority of government departments have signed up to Cipher and that means Capita manage the hiring of interims."

Gatenby Sanderson was considering whether Capita's terms and conditions would force it to give up on the public sector, even though it has a place on the Buying Solutions framework. The Buying Solutions framework, operated by the Home Office, is called Contractor and Interim Exchange (CIX) which, with Cipher and local frameworks, are now the only routes the Cabinet Office will permit departments to use in hiring contractors.

"It seems the Buying Solutions contract has not been taken up as readily as the Cipher contract has," said Martin Tucker. "Government departments have decided to go with a big contract with a PLC, rather than engage with small SMEs like us."

The Cabinet Office denied that the move indicated any change in its commitment to put 25% of purchasing through SMEs, but merely reflected the wider priority to cut costs.

"The government is committed to an overall aspiration of conducting 25% of its business with small and medium-sized enterprises (SMEs), and earlier this month published action plans setting out how each government department will seek to achieve this. Additionally, the government is also committed to improving value for money from public procurement and to that end is centralising category procurement," said a spokeswoman.

"A new centralised strategy to procure professional services will be put in place this year and include a specific focus on how procurement opportunities will be made available to SME suppliers, in support of the government’s commitment and aspirations. The size of this opportunity will be balanced with the overriding priority to reduce costs to government."

In a statement to Computer Weekly, the Cabinet Office also revealed plans for a "new dynamic marketplace" that will allow suppliers to provide quick quotes for contracts below £100,000 in value.

"This will enable SMEs to bid and compete at minimal cost, alongside larger suppliers," said the spokeswoman.

The Cabinet Office had previously defended the Capita move in a written answer to the Public Administration Select Committee last month: "In effect, the Capita service has been replacing small but more costly contract staff agencies," it said.

But one renowned IT services SME, who asked not to be named, says the contract cancellations were preventing IT SMEs from supplying staff direct to government departments, and claimed this contradicted the Cabinet Office SME agenda and IT strategy.

"IT in particular is hit by this," said the IT services SME. "It might save some money in the short term but it will cost a lot more in the long term because you are just reducing competition. When you create a monopoly supply situation, service goes down and cost goes up; simple as that."

The Cabinet Office, however, said that centralising procurement of contractors and interim executives has saved departments 8% through unit price cuts, as well as delivering further savings in processing costs.

Computer Weekly has learned the matter is on the first meeting agenda of the Cabinet Office's newly formed SME Panel, to be chaired by Francis Maude on 29 June. The panel was launched on 11 February at an "SME summit", at which prime minister David Cameron spoke about the government's commitment to do more business with SMEs.

Government spent £123m on contractors with Capita Cipher between July 2008 and February 2011 when SMEs were told their contractors would be transferred to Capita as well, according to a Freedom of Information report seen by Computer Weekly.

Existing interim contracts totalled £14.5m on 1 February, though government departments including MoJ and HM Revenue & Customs had not yet joined Capita's contract.

Roger Clements, sales and marketing director of Capita Resourcing, said he could not estimate how much Capita's business would increase.

"It just depends how many more government departments join the framework," he said.

"A number of departments are engaged in the Cipher service - not all, but obviously there's a drive towards making sure there's compliance in the way government spends money and the way in which departments procure," said Roger Clements.

The MoJ told SME suppliers in February that all specialist contractor and interim contractor arrangements would be terminated and given to Capita in weeks.

"Following an ERG presentation, which reviewed key features and benefits of each model, the MoJ have elected to use the DWP/Capita Cipher Framework which provides a fully managed service via Capita Resourcing Ltd (Capita)," said an MoJ e-mail obtained by Computer Weekly.

"Capita will be the sole supplier of specialist contractors and interims to the MoJ and will be responsible for managing contractual and 2nd tier supplier relationships," said the leaked e-mail.

The day before the MoJ executed ERG instructions to cancel its SME contracts, the Cabinet Office published its ICT Strategy, which promised to stimulate economic growth by creating a more competitive marketplace with greater direct opportunities for SMEs.

"The government will also put an end to the oligopoly of large suppliers that monopolise its ICT provision," said the ICT Strategy. "The government will streamline the procurement process to break down the barriers that impede SMEs from bidding for contracts."

Another contract agency - which refused to be named for fear of reprisals from government - said the Cabinet Office promised to push contract business out to SMEs again in the future, but only for contracts below £100,000 a year. Affected staff were typically earning between £250 per day for service support to £1000 per day for the highest grade programme directors.

Neither Capita, nor any of the SMEs who complained their business was being poached, would say what margin they earned by placing contractors.

The Public Administration Select Committee sent questions about Cipher to the Cabinet Office after Ian Watmore, ERG chief operating officer, appeared at its ICT inquiry.

"How does compelling SMEs to work for large IT and IT services suppliers help deliver the policy objective of a more diverse and open marketplace where SMEs can work directly for government departments?" the Public Administration Select Committee asked.

The Cabinet Office said in its written reply it would get better value for money by sourcing contractors through Capita, CIX and other frameworks.

The Cabinet Office failed to answer the committee's request for numbers proving the case, but said the Capita contract would lead to about 80% of spend being subcontracted to SMEs.

The MoJ had not provided further comment at the time of publication of this story..

UPDATE: When this story was first published on 24 June, the Cabinet Office had not provided further comment. Computer Weekly received a statement from the Cabinet Office on 27 June, and updated the story accordingly to the version now published above.