Tuesday 11 June 2019

Capita Contracts Review - My open letter to the Policy & Resources Committee

Response to Review of Capita Contracts
The review set out at Agenda Item 7 falls short of the standards that should be expected when considering such an important decision. As such, any decision taken at this meeting will have no credibility and may expose the Council to the risk of a legal challenge. Worse still, it may fail to address the unsatisfactory performance of Capita and provide poor value for money at a time when budgets are under extreme pressure.
The Council has chosen to withhold Appendix C which contains the business case that support the decisions. Without that Appendix there is no way to validate or support any of the assertions made in the report. I have asked both the Leader and the Chief Executive to release Appendix C but have so far not even had the courtesy of a reply.
There were numerous misstatements and inaccuracies at the time these contracts were originally let. Many of the concerns raised then have come true. Contracts reviews were carried out in years 3 and 4 which found that everything was fine, yet we have been hit with a series of recurring problems which suggest the reviews failed to discover or address the underlying problems.
Starting Point:
In July 2018 this committee resolved the following:
1.   Agrees to review the council’s partnership with Capita, and authorises the Chief Executive to develop a Full Business Case.
 2.  Agrees that the proposed strategic aims underpinning the Full Business Case should be to:
a)    Deliver high quality services; b)   Secure best value for money for Barnet’s residents; and
c)    Strengthen the council’s strategic control of services.
 3.  Notes the three options identified and considered in more detail in paragraphs 2.4 to 2.7 and Tables 1 to 4.
 4. Agrees that option 2 – realigning the CSG and DRS contracts to bring back in house those services listed in Table 5 – is the proposed preferred option to be tested in the Full Business Case.
 5.  Agrees that option 3 is fully tested and considered in the Full Business Case.
 6.  Agrees that the Full Business Case should review the joint venture arrangement for the delivery of Development and Regulatory Services.
 7.  Agrees that the Full Business Case should be considered by Policy & Resources Committee, for referral to Council for final decision.
Eleven months later and this has not been delivered, even though there was both a clear rationale for doing so and unanimous approval by this committee. In the interim, a meeting was held between the Council and Mr John Lewis, the Chief Executive of Capita, but there are no minutes or details of what was discussed or agreed at that meeting nor the extent to which that meeting has influenced the remit and structure of this review. As such, it raises serious concerns about governance and authority of this committee.
 Failing Performance:
Capita’s performance has been lamentable. The fraud and subsequent Grant Thornton review exposed the fundamental failings of Capita’s systems, the inadequacy of management and failure of the Council to adequately monitor Capita’s performance. It was also noticeable that Grant Thornton identified that “the Business Director for Regeneration, with overall responsibility for regeneration projects, had only nine months experience of regeneration and was not directly involved in reviewing the financial management activity of his managers. The role was geared more towards commercial account management, focusing on the contractual relationship with the Council and not with detailed functional and technical oversight of the projects themselves”. The high turnover of senior management is a recurring theme across a number of the failing services provided by Capita.
The Pensions Regulator has fined Barnet and issued improvement notices because of Capita’s failure to provide a basic service. Again, the churn of senior management has exacerbated the resolution of the failings. Schools Payroll has been given a no assurance rating by Internal Audit and 170 members of staff had pension payments incorrectly deducted from their pay packets.
Highways performance is poor in spite of spending £50 million on the Network Recovery Plan. The complex contractual framework, the inability to agree and enforce common KPIs between Barnet and Capita and between Capita and the Highways contractor has made contract monitoring and enforcement much more difficult. Yet again, there have been difficulties in recruiting and retaining a Senior Highways Manager. It is also important to note that Capita were paid an additional £1 million in gainshare on the Highways Contract even though London Councils initiated the contract.
Customer service has failed to meet targets with calls to Housing Benefit and Council Tax, having failed to meet the agreed KPI in any single quarter since the contract started, even though the 20 seconds service level target for answering calls was raised to 60 seconds.

What makes this situation even worse is that Capita claimed an additional charge on top of their core fee because the number of calls answered exceeded the contracted volume.
IT has been a consistent failing service. The implementation of the Mosaic casework system was commissioned from Capita as a special project for which they were paid extra, on top of the contract fee. However, they still failed to deliver the system and new external consultants were commissioned to implement the system incurring additional costs. It has also caused significant operational difficulties and is sufficiently serious to be identified as a red risk on the Corporate Risk Register (AC028).
Procurement has been poor, with Capita being paid £5.9 million in gainshare on procurement contracts even though it appears to be generally realised that the savings were nothing more than smoke and mirrors. This became even more apparent at the Urgency Committee on 30 November 2018 when a settlement was agreed with Capita to cease claiming any further procurement gainshare payments.
Capita’s performance has, by any measure, been poor. A constant churn of managers with posts vacant for prolonged periods, has prevented problem resolution and contributed to the continuing poor performance. The failing performance is not just my opinion, it is also the opinion of Council Users and Commissioning Officers who gave 9 out of 10 indicators a Red rating with 7 of the 10 ratings worse than last year.

There is no transparency about the methodology used to carry out the review, who carried it out and who peer reviewed or sense checked the findings. In particular, I would note the following issues:
·         It appears that the review has looked at individual, silo based services and carried out a like for like comparison of costs. That is an artificial basis and ignores the synergy and savings that could be generated if the service was restructured. I have repeatedly asked that the review should take the opportunity to consider a restructuring of service which could generate significant savings that would not be realised on a simple like for like in-sourcing exercise.
·         There is no transparency on the cost base used for comparison. For example, the cost of the service as set out in the contract is not the price paid by the council. Each year the council is invoiced separately for Indexation to reflect the cost of inflation. In 2017-18 Barnet were charged an extra £1,668,464.23 for indexation, split £937,502.23 on the CSG contract and £730,962 on the Re contract. It is not clear if a proportion of the indexation charge was allocated to each service when the comparison against in-sourcing was made. If it was not included, then it will artificially inflate the savings of the Capita service.
·         Any comparison between the cost of the Capita service and an in house service must take account of the inferior and unsatisfactory service provided by Capita. Failure to consider this will mean that the comparison will be between a non compliant/unsatisfactory service with a fully compliant in house service. This will always place the fully compliant service at a financial disadvantage.
·         Mention is made of the cost of pension liabilities of bringing staff back in house. However, it is important to note that in 2017/18 Barnet paid Capita an additional charge, on top of the contract fee, of £3.849 million in Pension Strain, Recharges and Costs.  In 2016/17 the figure was £5.211 million. It is not clear if these additional charges were included in the cost calculations but if they were not, it may artificially inflate the savings of the Capita service.
·         Revenues and Benefits have defined workloads that Capita will provide within the contract fee. In 2016/17 Capita were paid an additional £428,267 for workload that exceeded the contractual limit. In 2017/18 Capita were paid an extra £190,953 for additional workload. It is essential to understand how these excess workload payments were factored into the calculations. If they were not included, then it will artificially inflate the savings of the Capita service.
·         Customer Service has defined volumes included with the contract. In 2017/18 Capita charged an extra £415,876 because the contracted volumes were exceeded. It is not clear if these additional charges were include in the cost comparisons but if they were not, it may artificially inflate the savings of the Capita service.
·         A huge amount of Council senior management time has been taken up dealing with the problems generated by Capita. It is not clear whether the cost of resolving Capita failings has been included in the calculation but if not it will artificially inflate the savings of the Capita service.
It may be that all of these additional costs were factored into the business case calculations but as the public do not have sight of Appendix C it is not possible to make that assessment.
The Cost So Far:
To date, the cost of the two contracts has amounted to £398.5 million, £145.9 million above the contracted value. While some of  the additional cost is for projects that Barnet may have had to procure separately, it is clear that overall, the costs have been much higher than expected.

There is very little transparency of costs on the Re contract. However, based on the most recent benefits realisation table published last year, an analysis of the CSG contract suggests that in the first 5 years of the contract, no actual savings have been realised as demonstrated in the chart below. 

In July last year there was a clear view that a range of services would benefit from being brought back in house. So far just two services have been in-sourced: Finance and Strategic HR. The Council has an opportunity to rethink how it is structured and how it can create a sustainable financial model in an environment of continuing central government funding cuts. This report ignores those opportunities and opts for the status quo of a commissioning council, with Capita providing services in silos from geographically dispersed offices around the UK. This model has been shown as failing in the direct services provided by Capita. However, the silo structure that forms the basis of the Capita contract has also had a negative impact on other services provided by the Council. This was highlighted by the Children’s Commissioner in her report into Children’s Social Care Services in the London Borough of Barnet of January 2018, where she said, “Silo working was pervasive throughout the Council. While lack of ‘join up’ is often seen in large organisations, the silos found in Barnet at the corporate level mitigated against the potential of SCB to make a strong contribution to support the improvement for children”. Capita’s contract structure reinforces the silo structure of the Council while delivering unsatisfactory services. Maintaining the status quo with Capita will maintain silo working limiting the Council’s ability to deliver real change.
When there is a problem, decisive action is necessary. The fraud and the subsequent report from Grant Thornton was a wake-up call that Capita were failing in so many aspects of the service. This was the opportunity and impetus for change. The report to the committee appears superficial and without rigour. It shows a reluctance and timidity to change and resolve the problems that are clear for all to see. It suggests your acceptance of failure by Capita and that there are no better solutions. Please do not accept the officer recommendations and ask for a more thorough and rigorous examination of the options.