BBC's £1.5bn outsourcing costs under fire

The BBC's £1.5bn IT outsourcing deal with Siemens Business Services (SBS) has come under fire from MPs for over-estimating cost savings and for key projects running late and over budget.

The BBC signed the 10-year deal with SBS in 2004 to replace the services previously supplied by BBC Technology, which include desktop computers, specialist technology projects and support for programme production and broadcast functions. SBS acquired BBC Technology for an undisclosed sum as part of the deal.

When BBC managers sought approval for the SBS deal they told BBC governors that cost savings were guaranteed at £35.2m a year. In a report by parliamentary spending watchdog the Public Accounts Committee (PAC) it has now emerged the savings for the first year fell 38 per cent short of that figure at just £22m.

The deal does not allow the BBC a share of SBS' profits on the contract if they exceed a specified level - a clause that is now standard in many outsourcing contracts today. SBS' forecast profit margins for the contract are 12.25 per cent for commodity work and 23 per cent for special projects.

The BBC is also criticised for not exercising its rights of open-book access to check how profitable the contract is for SBS. The BBC argues that benchmarking provisions keep the contract competitive, but these do not apply to one-third of the services provided by SBS. The BBC is now due to examine the SBS profits on the deal this year.

Performance management by the BBC also comes under fire from MPs in the PAC report. In the first year of the contract SBS reported 95 per cent of key service targets were met, but the BBC has now acknowledged that the validation of performance data provided by SBS was not sufficiently robust.

In fact, 60 per cent of the key technology projects SBS was responsible for in the first year of the contract suffered delays or went over budget, although for those going over budget the cost was borne by SBS.

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Despite the £1.5bn framework agreement substantial amounts of money are still being spent on other IT suppliers for services. In the financial year 2005/2006 £190m was spent by the BBC through the SBS contract, but a further £260m was spent on technology services from other suppliers. Around £50m of this was spent by BBC units procuring their own technology services that could have been bought through the SBS contract.

The BBC claims the contract will still hit the projected cost savings target over 10 years and is now forecasting average savings of £40m a year for the rest of the contract.

The PAC report, however, expresses doubt over whether this will be achieved and recommends a BBC internal audit to confirm the accuracy of the latest savings estimate and regular updates to the BBC Trust on progress against that target.

Edward Leigh MP, chair of the PAC, said in the report: "The BBC's approach to the contract has been distinctly second-rate. Its estimates of annual savings have fluctuated widely; many parts of the BBC are still using other suppliers; and there was no provision for the BBC to share profits above an agreed level. Indeed, the BBC has chosen not to check on how profitable the contract actually is for Siemens."