UK Government IT passes up on 50% discount.

Disclaimer : None of the numbers in the post are researched!

The UK Government contracts out its software development to systems integrators. In order to stay competitive, the system integrators off-shore the software development to places in the world where it is cheaper to hire developer. Places like India, China and Eastern Europe. And quite frankly if they were not driving down the costs, we the British Tax Payers would want to know why.

The reality is that the cost savings of off-shoring are not as mouth-wateringly good as they initially look. The off-shoring argument is simple. A developer cost £50,000 in the UK and only £10,000 in the off-shore location, i.e. An 80% discount. (Made up numbers before anyone asks)

However anyone who has worked with off-shore teams will know that they bring additional overheads.

  1. You need two sets of (middle) management. One for both the on-shore and off-shore team.
  2. You need more formal processes (additional process overhead).
  3. Time zones mean you only have a fraction of the day when both teams are in the office.
  4. Small delays creep in due to having to wait for the other team to be available. The delays have a compound effect.
  5. There are often inefficiencies in communication due to language.
  6. Off-shore companies often have higher levels of staff turnover which means you have a lesser chance of retaining high quality staff and the benefit of gelled teams.
  7. More chance of building the wrong thing.

Off-shoring people are smart and they have worked hard to address these issues. The reality is that the savings are not in the 80% ball-park but more likely to be in the 25% – 30% zone. But that is before we include the “building the wrong thing” factor.

The real benefit of off-shoring is liquidity. Access to a greater pool of quality programming talent. Those hiring during the Dot-Com era will remember the days when it was impossible to hire decent developers. I remember times when you had decide on the day whether to hire a Java developer or they would be snapped up by someone else.

For most UK organisations, the economic argumant for off-shoring sort of makes sense. For the UK Government IT, it does NOT make sense. The UK Government gets a 50% discount on hiring developers in the UK. Once this is factored in, the arguments for off-shoring fall apart.

Where does the 50% discount comes from? Easy. Developers in the UK pay income tax and national insurance in the UK. Off shore developers do not pay tax in the UK. In fact, given that the system integrators are mostly US Corporations, it is likely that almost NONE of the investment by UK Government IT will come back as tax revenue.

Its time for UK Government IT to have some tough discussions with the systems integrators so that we can claim our 50% discount.

There is an argument that we do not have enough developers in the UK. Perhaps this will provide the stimulus to invest in IT developer skills in the UK.

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About theitriskmanager

A IT programme manager specialising in delivering trading and risk management systems in Investment Banks. I achieve this by focusing on risk rather than cost. A focus on costs can lead to increased costs. View all posts by theitriskmanager

11 responses to “UK Government IT passes up on 50% discount.

  • Kris Lander (@EnergizedKris)

    Good post. I have had very similar thoughts after my recent experiences working on a government project. However, I can say now that the cost of developers from system integrators is generally far, far, higher both on and off-shore, in some cases 4x. However, I suspect what your average developer gets paid in the UK is, at the top end, your 50K figure. I’d be interested to know more about the corporate tax liabilities of these system integrators. It would seem even more criminal if they didn’t have to pay any UK corp tax.

    Perhaps there is some argument that the UK does not have the talent/companies to deliver our Gov IT, however I know that rather than investing creating a long term capability within the UK departments like the DWP are hell bent on getting rid of all their IT staff, leaving just senior IT managers to manage their suppliers and then asking their suppliers to off-shore as much as they possibly can. Unfortunately much of this is motivated politically, as it is by any rational reasons, something never to forget when trying to figure out the insanity of the Gov IT world.

  • David Peterson

    It’s funny, but I’m coming to COMPLETELY THE OPPOSITE CONCLUSION: it’s vital for us to outsource as many Government IT projects as possible.

    Why? Because there are more software opportunities in the world than software developers to develop them. (Because compared with developing an idea, it is relatively easy to think one up).

    Therefore, to maximise our interests, we should be trying to keep the projects with highest-growth potential in our country, to contribute to our economy. There may be exceptions, but generally, Government IT projects have extremely limited potential. They don’t generate revenue themselves. Theoretically, the could, but in practice they “improve efficiency” or “save costs”.

    We would do much better to tie up other countries’ developers with these projects, while we build the next Silicon Valley in the UK with innovative start-ups.

    (By the way, if you’re paying 50% of your income in tax, you might want to shop around for another accountant!)

    • Kris Lander (@EnergizedKris)

      You make an interesting point, but I think it over-simplifies the problem.

      Firstly, don’t under-estimate the scale. 7.6 billion in 2009 on ICT and it’s impact on the 700+ billion (1/3 of GDP) we spend annual in the public sector and the resulting quality of those services. IT is increasingly a cornerstone of the UK government services and infrastructure. I think there are some big factors that make government services particularly unsuitable to be outsourced or even given to external system integrators. Here are a few that come straight to mind:

      1) Effective government service design/implementation is tightly coupled to design/implementation of IT systems required to support them. Unless we are prepared to let suppliers do BOTH (never going to happen) I can’t imagine any supplier being more effective that a well run in-house Gov IT capability that works hand-in-hand with those who design government services. In particular, it is not in IT suppliers interests help the Gov simplify and reduce dependencies on IT systems.

      2) The goal-posts are constantly changing, with changes in policy/legislation/government. High agility is required – every contract or layer of management or distributed location has a negative impact. Perhaps stable, independent, mature systems could be maintained by a supplier using outsourced capability, but when it comes to new development and the key systems that face constant change I think the overhead is very high. It is also worth mentioning the extreme security constraints that make complete/effective outsourcing almost impossible and this security separation leads to even more costs.

      3) The IT systems themselves are not independent of each other and are in fact highly interdependent. And there are A LOT of them. The programme I was working on had dependencies on over 20 systems which also in turn had dependencies on each other. These IT systems are delivered/maintained by a number of different suppliers and often it gets worse with the software delivery in the hands of one supplier and the hosting of the system in another. I’m sure I don’t need to tell you that these suppliers often don’t play nicely together and that is at cost to the UK Gov. The overheads are HUGE. Are we ever going to hand over all these systems to one supplier? No, for obvious reasons. Worse though the current strategy is ensure fragmentation to promote “competition” and mitigate the risk of having all their eggs in one basket. However, what actually happens is their risk fall through all the cracks in their contracts with suppliers which is ultimately to the cost of UK Gov.

      Few private businesses would handover the development of their mission critical IT systems to a third party, it’s impossible to be as effective, especially when such systems are so tightly coupled to the service a business might offer. UK Gov should be no different IMO and if we don’t have the talent/capability in this country now, then we should be building it up, not increasingly farming it out to those that do.

      • David Peterson

        If there were over-supply of software developers in the UK then I would agree that we should keep these projects within the country, for all the excellent reasons you mentioned. However, there is not an over-supply. Demand exceeds supply.

        Fortunately, we have the option of buying extra supply from other countries. But we need to decide which projects should be conducted “in-house” and which should be outsourced.

        In my view, the ones we want “in-house” are the ones that will provide us with a competitive edge and huge potential gains. The ones that are “business as usual” (BAU) are better targets for outsourcing. Yes, if we had the capacity to do them in-house too, it would be easier and better, but we don’t.

        Government projects – certainly the way they are specified and built at the moment – on the whole are BAU, not high-growth projects. Therefore, government projects should be among the first candidates for out-sourcing.

        Another effect will be that other countries’ developers will be tied up doing our plumbing work, rather than building their own high-growth businesses. Whether this is a good thing or not, is a question for debate.

    • David Peterson

      Basically, what I’m suggesting is that building Government IT projects in the UK will provide jobs and (may) save some costs, but it will absorb our local IT talent.

      Building new IT businesses in the UK will provide jobs and will grow the economy in a way that completely dwarfs those cost savings.

      We need to look further than the costs of the projects themselves, and look at the benefit to our economy as a whole.

      Even if the Government is outsourcing for the wrong reasons – i.e. to save costs – we should support it wholeheartedly.

      We should also be growing our local IT talent. An excellent way to do this is by creating an environment for IT start-ups to thrive. Which kids want to work on Government IT projects when they grow up? None. They want to work for the next Google or Apple. We want those kind of companies in our economy too. It’s win/win.

      • Kris Lander (@EnergizedKris)

        You have won me over to some degree David, but we are still going to pay through the nose to deliver something that could be so much better and that is hard to stomach, especially given that so many staff that used to work directly for the Gov now work for the suppliers Gov now contract out to.

        Longer term I think the Gov’s ability to make big changes to public services will be hamstrung by it’s dependency on outside help. IT delivery has always been segregated from service design, but the use of external IT suppliers makes it harder to fix. The project I was working falls into this category (and is perhaps less BAU than most) which colors my perspective.

        Also, whilst I’m sure the kids want to work for the next wave tech start ups, I’ve started to think more about the value to society in terms other than bottom-line. I’m reminded of this blog post which begins “The best minds of my generation are thinking about how to make people click ads. That sucks.” (http://bit.ly/qqj5EW). It also ends with an interesting quote from a software exec who fears that the valley has become “An entertainment-oriented, hit-driven business that doesn’t fundamentally increase American competitiveness.” What as a country do we really want to do to add value to the world around us? At this point I fear I’m going to digress very quickly into much larger and deep philosophical questions . 😉

        What I can agree on though is the need to invest in developing IT talent, along with those who work in other technology industries such as bio-technology and nano-technology that will change the world over the coming years. I only hope we’ll be producing more than the next groupon. 😉

  • Kev

    I believe staff quality and turnover is a significant factor in the failure of off-shoring to deliver the expected savings. Given the emphasis on cost savings companies who offshore want to minimise their payroll even in supposedly low cost locations, and also can have employment contracts which would be borderline illegal in higher cost locations. This leads to a tendency to employ large numbers of average quality programmers, because their less likely to leave than the better ones, and so leads to a tendency to produce fairly average quality product.

    One might expect this to be offset by competition in the market but firstly all the companies in this space have already implemented the same off-shoring model and secondly for big product contracts – government IT, banking back ends – once the product is installed it takes a decade of work to replace it.

  • Steve Freeman

    A colleague of mine visited one of the government flagship projects. They were doing good work on the analysis side, but the business lead didn’t even know /where/ the programmers were, never mind /who/. That rather large database of /our/ critical information now belongs to US-led Indians, we can’t get control back.

    The problem is that, apart from the general waste of money, government IT is doing nothing to grow the pool of local talent. Worse, it strengthens the impression that coding is for losers (maybe it is). Imagine what we could do if we spent a fraction of our billions on improving the state of the art.

    Don’t forget that much of our current core infrastructure was spun off from excess US government spending.

  • Paul Dolman-Darrall (@PDarrall)

    Since a colleague mentioned this, thought it might be worth spending some time showing why certain arguments that have been made are incorrect.

    UK Government IT passes up on 50% discount – This is incorrect, at the same time as trying to take a systemic view of the situation, it also fails to take a systemic view. It makes a key assumption, that the person has no value elsewhere and thus would not contribute tax. It further makes a mistake in assuming that the Indian does not pass value to us. Trust me, its the American’s who make the money from Made in China products.

    One of the comments then comes to a totally opposite view. There may be exceptions, but generally, Government IT projects have extremely limited potential. This view is also pretty poor. Its not the IT project that matters but the outcomes achieved by government supported by IT. If successful IT is a contributor to these outcomes, then government has a strong track record of changes that contribute significantly to society. There will always be arguments about incremental spending, is the last £1 the government spent as valuable as the first £1 but govt has lead to many infrastructure changes that are very positive for the private sector. Ask yourself why people do business in the Uk but not Iran. Government projects can lead to very high growth in the private sector and GDP.

    the ones we want “in-house” are the ones that will provide us with a competitive edge and huge potential gains – This is a very sensible view, its just the idea government ones are low value is poor and unproven. The surprising thing is I am using a government funded ‘internet’ idea to reply to this very comment.

    An excellent way to do this is by creating an environment for IT start-ups to thrive – Now whilst it is true start-ups can be a considerable contributor to an economy, it is not the case we all want to work for them. In fact public sector continues to draw staff from all walks of life who value contribution to society. Further than this, there is some zero-sum thinking going on here. The number of developers can change and does. The invisible hand for a lack of a better term tends to over time balance demand and supply. (note over time.)

    • David Peterson

      It looks like we agree on the general idea of keeping the growth projects “in house”.

      Where we differ is on our perceptions of Government IT projects. Your perception seems to be that Government projects on the whole provide us with a competitive edge. My perception is that a significant proportion of Government IT projects are focused on efficiency or cutting costs – e.g. in the NHS, the Inland Revenue or the prison service – and although, theoretically, these IT projects help the economy grow, by making the UK more attractive than Iran, top-line growth isn’t the primary focus. The entrepreneurs descending on California aren’t going there because of its wonderfully efficient prison service.

      Not everyone wants to work for a start-up. There will still be plenty of public sector IT jobs for anyone who wants one. I’m not suggesting we take extreme measures and outsource all of Government IT. I am only suggesting that as a community we encourage the Government to outsource cost-cutting projects that offer little top-line growth potential. It’s what they’re doing anyway (probably for the wrong reasons) so it should be well received. 🙂

      • Paul Dolman-Darrall (@PDarrall)

        Agree, our perception of government projects is different. In reality both of us are right in this instance. There are a significant number of projects just focused on efficiency and cutting costs, however government agenda also include far reaching reforms on health, education, poverty, benefits which has a significant impact on the economy (not always for the better).

        Thus if we differentiated on this line, it would mean some projects would benefit from in house, and some from out house. So we are definitely agreed high growth projects stay in house, which is also good advice for most companies.

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