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Cost of council’s Capita contract already cut by £20m, with further savings to come

Cost of council’s Capita contract already cut by £20m, with further savings to come

🕔12.Mar 2014

A pledge by Birmingham City Council to reduce the cost of its IT contracts with outsourcing firm Capita is being pursued so rigorously that a £20 million cuts target has been more than achieved, Chamberlain Files can reveal.

Backbench Labour councillors have spent months attempting to assess the odds of the Capita bill being trimmed by so much, but it can be confirmed that the £20 million cuts figure was passed two months ago.

Draft results for the Service Birmingham joint venture company are understood to show that the council paid Capita just over £100 million in 2013, compared to £126 million in 2012 – a fall of 20.6 per cent.

Forecasts for 2014 suggest the payment to Capita for running IT services, a call centre and administering the council’s payroll will fall sharply below the £100 million mark.

The steady reduction in payments has been apparent since Labour regained control of the council in 2012 and appointed Cllr Barry Henley chairman of Service Birmingham.

Cllr Henley, who has run businesses across the world and is a former head of the faculty of technology at Birmingham City University, was given a remit to make Service Birmingham more efficient and cut costs.

It’s emerged that Henley’s work behind the scenes has already saved more than the £20 million that Labour promised to trim from Service Birmingham costs two years ago.

He has sought to impose a “more equitable” share of efficiency improvements for the council.

Cllr Henley told colleagues he was appalled at how the distribution of efficiency savings unfairly favoured Capita, with the outsourcing firm receiving 70 per cent and the council 30 per cent.

Asked about the cost to the council in 2013 of the Service Birmingham deal, Cllr Henley said: “We have made steady progress, but I can’t share the figures with you as they are commercially confidential.”

However, a Labour councillor familiar with the situation said: “It’s all down to Barry, really. You have to give him credit because he’s gone in there and sorted it out. He doesn’t stand any nonsense.”

Service Birmingham made operating profits of £21 million, or £60,000 a day, in 2012.

A report detailing renegotiation of the Service Birmingham contract will go to the council cabinet at the end of April. It is likely to make the case for continuing with Capita for the time being and state that the cost of terminating the contract would be prohibitive.

Copies of the Service Birmingham contracts were published after a campaign for openness led by Aston University Professor David Bailey.

Although heavily redacted, they show that the council can terminate at will by giving 60 days’ notice. However, compensation would have to be paid to Capita on a sliding scale.

It’s believed that the cost of cancelling in 2014 could be as high as £30 million, based on the council’s own calculations. Lawyers for Capita, however, are likely to put the figure at more than £50 million.

A renegotiation of the contract in 2011 gave the council a £12 million ‘saving’. But the money has to be paid back at the rate of £1 million a year, or in full if the contract is cancelled.

The agreement between the council and Capita runs until 2020. Labour council leaders are expected to conclude that the cost of exiting from the deal could be affordable from about 2017 onwards, and then only if an alternative IT provider could be found.

Any suggestion of bringing IT services back in-house is certain to be firmly rejected. The council’s IT experts transferred to Service Birmingham employment in 2006 and have not been replaced.

The gradual fall in the cost of Service Birmingham, down from £197 million in 2010 to under £100 million in 2014, could make life more difficult for Labour leadership challenger John Clancy. He wants the council to rip up its agreement with Capita and transfer responsibility for IT to a consortium of West Midlands-based companies.

Cllr Clancy will call for more transparency over Service Birmingham’s financial position. Although the company’s results for 2013 have been finalised, they won’t be published until October 2014.

Service Birmingham facts:

  • Service Birmingham Ltd is the Vehicle through which Birmingham City Council has outsourced services to Capita PLC. It started in April 2006 and runs until 2020.
  • Birmingham City Council paid Service Birmingham £126 million (£345,000 per day) for net goods and services in 2012, (£113 million – 2012; £157 million – 2011; £197 million 2010).
  • Service Birmingham made gross profits of £26 million (£72,000 per day) in 2012 and operating profits of £21 million (£60,000 per day) in 2012.
  • Birmingham City Council passed the £1 billion landmark in payments to Service Birmingham during 2013.
  • Ninety-eight per cent of the Dividends are paid to Capita. The city council does not hold dividend-bearing shares.
  • Dividends paid to Capita 2010-2012: £36Million; Estimate 2010-2013: £43.5Million.


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