MoD makes 'shock' decision in handing large payroll deal to CSC

It is estimated that the contract was worth £100m a year to HP

The Ministry of Defence (MoD) has awarded a contract requiring the delivery of payroll and personnel services to serving and veteran communities to CSC, an outsourcer currently shrouded in controversy over £957 million failed NHS plans.

The decision has shocked the analyst community, which estimated that the contract is worth £100 million a year to the current supplier, HP.

There will be a six-month transition period between CSC and HP from when the seven-year contract begins in November 2012.

HP signed the original deal in 1997. It was set to last for 12 years, but was renewed in November 2009. It is now due to expire in November 2009 and HP, Capita and CSC were competing to win the contract.

"We have to say we were completely taken aback by this news. We had wrongly assumed that the deal would go to either HP or Capita," said Georgina O'Toole, director at analyst firm TechMarketView.

"Evidence would suggest that the incumbent, HP, was in a very strong position based on its recent performance."

She said that CSC was not a leading player in the subsector of defence, nor in the business process outsourcing contract type: "Rather its UK public sector business has been dominated by its ill-fated NHS contract."

But she added: "One positive take-away for any UK public sector IT suppliers that have had problems delivering major UK government contracts: if CSC can win a major deal like this one while still dealing with its NHS woes, there's hope for all."

CSC is in talks with the UK government over the failed NHS National Programme for IT, which may lead to the company having to write off the entire £957 million investment it made in the programme.

A Memorandum of Understanding (MoU) was due to be reached in April, but this has now been extended to June after failed negotiations.

In a conference call last week, CSC's chief financial officer (CFO), Michael Mancuso, may have hinted at the MoD deal after he told investors that "the company does not revolve around the NHS".

Sarah Burnett, head of public sector outsourcing at analyst firm NelsonHall, was also taken aback by the decision to take the contract away from HP, but suggested that "price was presumably a major factor in the decision". This was confirmed by a statement provided by the MoD.

An MoD spokesperson said: "We can confirm that CSC has been selected as preferred bidder for the new seven-year contract for HR administration for HM Armed Forces. The result has been extensively scrutinised.

"It represents excellent value for the taxpayer through a significant saving on current costs, as well as providing a very strong technical solution to the needs of the Ministry of Defence."

Although Burnett and O'Toole pointed to HP's recent performance as evidence for it successfully delivering the contract since 1997, where the MoD has said that HP either met or surpassed its six performance priorities, the company has also had its fair share of problems.

For example, HP's payment delivery system was lambasted by a parliamentary committee in 2009 after it malfunctioned and short-changed thousands of soldiers, sailors and airmen, including those serving in Afghanistan.

The MoD and HP were found to have made "truly reprehensible" mistakes in managing the rollout of the Joint Personnel Administration system, whilst the committee also labelled the payroll system "catastrophic" after it left thousands underpaid, and overpaid thousands of others.

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