Monday, April 03, 2006

Risky Business

All around the world, governments have proved hopeless at managing projects. No less than 90% of public projects end up over-running their original budgets, and a good proportion of them never work properly (see here for classic international study).

So fixed price contracts sound like a good idea, right? Instead of taxpayers taking the risk of project over-runs, they're passed on to the contractor. Not only should the contractor be in a much better position to manage the risks, but the fixed price gives him a strong financial incentive to do so.

And we've got two current examples of how it works in practice.

First, for all the usual reasons, the rebuild of Wembley stadium is running way behind schedule and way over budget. But the bulk of the cost is falling on the contractor, Multiplex, which is locked into a fixed price contract. The customer- in this case the FA- is escaping relatively unscathed.

Second, the NHS's monster patient records system (the National Programme for IT- see previous blogs starting here) is proving far more difficult and expensive to build than the bureaucrats planned. But because of contractural fixed pricing, at least some of the cost is being passed on to contractors. Which is why one of them, Accenture, the world's second largest consultant, this week took a $450m charge against expected losses on its bit of the contract.

Well, you say, as a taxpayer, that's all to the good. Why should I pay for cock-ups by contractors?

And in some respects you're absolutely right. But the question is where do we go from here?

Take Multiplex. Their share price has collapsed since they got into difficulty with Wembley. So much so that they're now facing a class action from disgruntled shareholders, who reckon Multiplex management withheld the bad news from them until after the shares had tanked.

But Multiplex are hitting back: at the FA. The company's UK managing director says:

"The construction of Wembley had been subject to many design changes, historical and ongoing. These changes have implications on time and under the terms of our contract. A fixed-price contract was entered into. The contract is adjustable in the event of change by the client. On a project of the size and complexity of Wembley, it would be unprecedented for no changes to have been made."

So the price is not actually "fixed" in the sense of being immovable: it's only fixed if the customer makes no change in specification. Just like when you hire a builder to sort out your kitchen. Now, that's not quite the same thing.

What about Accenture's contract? The company is pointing the finger at the NHS' decision to allow GPs and other healthcare providers a wider choice, rather than locking them into a standard package as originally envisaged. And after an 8% shareprice drop their shareholders are turning up the heat:

'Analysts asked why Accenture didn't cut and run from the NHS project, especially after the government appeared to have "changed the rules" by allowing health providers to choose alternative systems. Green (CEO) insisted that he believes in the work the NHS is trying to do and said the project will be completed in a way that is "fair to the NHS but also fair to Accenture."He did suggest that the company is trying to renegotiate its contracts, however. "We're currently talking to the NHS about revisions to the approach and deployment schedule," he said.'

Translation: we've got our lawyers crawling all over the contract, and the NHS will have to back down.

So in both cases there's a real question over what the contract actually says. Messy and expensive legal battles beckon. Plus of course, next time the government goes looking for fixed pricing- like for the 2012 Olympics- they're going to find the price has gone through the roof.

Fixed price contracts and risk sharing are an excellent idea in principle. The difficulty is that the the customer has to be able to spec the project adequately in the contract. Given everything we know about our public sector, and the fact that these are monster projects, that is a frankly laughable idea.

Yet another reason why governments should downsize themselves. Contracts or not, they are simply not capable of managing complex projects cost effectively.

PS The CEO of Connecting for Health- the NHS offshoot running the NPfIT- is a gent by the name of Richard Granger. He sounds excellent value: "A few months ago, he compared the NHS project to a sled being pulled by huskies. “When one of the dogs goes lame, and begins to slow the others down, they are shot,” he said. “They are then chopped up and fed to the other dogs. The survivors work harder, not only because they’ve had a meal, but also because they have seen what will happen should they themselves go lame.” The IT project management business seems to be full of Big Swinging Dicks with a dog fixation. Tyler used to work with one who rejoiced in his nickname of the Dobermann; unfortunately, after tearing large lumps out of everyone in sight, he had to be put down. Watch this space.


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