A Look Behind EDS' Takeover of the UK Government

By Simon Davies

Data processing companies around the world have been buying up up vast chunks of government data and are taking over the responsibility for running traditional public sector activities such as social welfare and taxation. The boom in outsourcing of government services is taking hold in most industrialised countries, but the activity is often outside public scrutiny. The outsourcing process has been described as the quietest privatisation in history.

The implications of the outsourcing boom are far reaching and serious. Privacy, security, sovereignty and accountability are substantially affected. In this article, Privacy International's director, Simon Davies, investigates the British operations of the world's largest outsourcer, Electronic Data Systems (EDS), and explains how the industry is changing the world.

BIG BROTHER plc

Right now, I'm standing in a dimly lit passageway deep inside this unchartered facility, accompanied by its Supreme Commander. We've successfully negotiated two security points, including one of those annoying bullet-proof glass turnstiles. Now we can go no further. Even the boss can't get to the next level because the passcode changes every hour. Hes growing impatient waiting for help. For something to talk about he sweeps his hand in the direction of a neon studded metal map of the world.

We manage this he says. He reminds me strangely of P.T.Barnum.

In time we file into an observation gallery. Stretching into the distance is a scene that vaguely resembles something out of Battlestar Galactica. Rows of workers are dwarfed by vast screens displaying unintelligible flow charts and maps. Behind a wall-size window just a grenades throw away is one of the grandest computer rooms Ive ever laid eyes on: 70 terabytes (70,000 gigabytes) at the last count, enough to give god himself a momentary headache. The organism grows constantly. At the moment of writing it boasts 50,000 MIPS processing power and services 400,000 terminals around the world.

It looks like enough crunching power to run a government. Which is fortunate, because that's exactly what it does.

This is one of the two international hubs of EDS, the biggest information management organisation on earth. Banks, airlines, oil companies and myriad multinationals depend on EDS to move, sort and make sense of their data. And so do governments. It's not just the Bank of America, France Telecom, General Motors, Sony and Philips in there. It's the US Immigration Service. And the government of South Australia. And your tax records.

You may not have noticed it, but there's a slow privatisation going on that could be worth many many times the value of British Rail - and could carry far more important implications. This isn't about last century's infrastructure. Its about next century's.

At the moment EDS is handling at least some of the data needs of the Child Support Agency, the Driver and Vehicle Licencing Agency, the NHS, the Department of Social Security, and the Inland Revenue, among others. Its contracts with the British government are worth billions. And it's not just a matter of money. EDS is part of a fundamental change in the nature of government services and government accountability.

In some respects, the outsourcing boom is nothing new In the eighties many people with uniforms or gardening shorts found themselves on the front page of a private sector employment contract. In this first phase of outsourcing, government agencies were divided into core functions (collecting tax, paying welfare benefits) and peripheral or support functions (mowing lawns maintaining building security). The core functions were maintained.

In the 1990s, the equation took another step. Agencies evolved a more complex division : Executive functions (manufacturing and issuing passports, issuing ID cards, processing data), and Judgmental functions (issuing documents of identity in transit, granting asylum). In this second phase of outsourcing, the judgmental functions are maintained by government.

This current distinction is a line drawn in sand. There is no policy - only what Oughton describes as Developing Practice. This leaves the way open for a third phase of outsourcing involving core functions of the 102 Executive Agencies (Central Statistical Office, Employment Service, Customs and Excise, Patent Office etc). The entire Paymaster General went this way last month and more agencies will soon follow.

So it sees that Orwell was wrong. Big Brother doesn't have a party apparatus, and he doesn't wear a uniform (except perhaps for the obligatory tie). He doesn't care what you believe. He just sits in West London piling up the data and trying to make an honest buck. Just a conscientious partner in the great national enterprise. You could almost get to like him.

The market forces mantra

It's hard to say though. EDS does not go out of its way to let people know what it thinks (unlike its founder, Ross Perot). And while its a big company, it knows how to keep out of the public eye.

Perot founded EDS in 1962 with a US$1,000 cheque. In 1984 he sold it for an undisclosed sum somewhere in the very low billions to General Motors, a customer which by then accounted for nearly three quarters of the company's revenue, and which, ironically, had no intention of handing over the administration of its business to an outside organisation. Since then it has blossomed into a multinational with an annual turnover on the better side of thirteen billion dollars and growing at 25 percent. EDS activities span IT provision, system integration, data processing and business consultancy. In June of this year it became a listed company on the New York and London stock exchanges. It has 100,000 employees in 42 countries and it has contracts for 40 billion dollars worth of business.

Heady days

To some extent, the EDS phenomenon is a child of a world- wide mania for corporate re-engineering. Over the past fifteen years, in an effort to maximise profit and efficiency, businesses and government agencies of all types have been systematically downsized, asset-stripped, delayered and rationalised. Company departments unexpectedly become profit centres, while government agencies face radical change as their functions are market tested against the price offered by private sector competition. No longer satisfied to protect inefficient areas of their organisation, bosses were encouraged to identify their companies core competence, and farm out the rest of the business to specialist outside organisations. The most visible example of this activity is when the local council contracts a private company to handle garbage collection. This process is known as outsourcing, and its an industry that is growing at around thirty per cent a year world wide.

The principle of outsourcing runs along these lines: a bean bag manufacturer knows heaps about making bean bags, but precious little about anything else. To make the organisation run better, break it into component parts (bean bag factory, bean bag data processing, bean bag marketing and bean bag distribution). Identify the single element that forms the companies key expertise. Finally, farm the rest off in packages to specialist outside organisations that can do the work cheaper than you could do it yourself. Simple.

It doesn't detract from EDS's success to point out that it was the right company at the right time. The currents which swept it to its current prosperity were strong and deep. In the 1970s some companies - and investors - began to see that the creative use of data might matter as much or more than the creative use of raw materials. That meant they needed information systems. Big ones. Complicated ones. Temperamental ones. Data handling systems require expertise. Most companies dont really have it. And once the system was there, a lack of expertise was potentially fatal. There was a need for a safe pair of hands.

By getting there early, by having clearly impressive clients, and being reliable, EDS became the first choice for organisations wanting help with their data management. Because of the militaristic culture that Perot had inculcated in the company, clients called it sending for the marines.

But the marines were not just an expeditionary force. They stayed on. Outsourcing information sources to experts became seen as a wise thing to do, allowing companies to concentrate on the business they knew best. And EDS became the place that companies outsourced to.

As with companies, so in time with governments. Civil services have all the problems with data systems that corporations do. That alone might lead to outsourcing. And it was not alone. In the UK the forces of outsourcing had Margaret Thatcher on their side.

in 1979, Thatcher told colleagues that no government agency - not even defence and treasury - should be spared the market test. But it was not until 1991, with the publication of the White Paper Competing for Quality, that her vision finally materialied. In this new policy, all departments and executive agencies were required to set targets for the testing of new areas of activity against competing bidders in the marketplace. If a private company could establish that it can perform the role of government more cheaply and efficiently and with a higher quality of service, the job was theirs. Information management was always one of the new policy's prime targets. Its privatisation was not likely to be a political issue, since few people understood the esoteric domain of data processing. And there was genuine need. While some government agencies such as Inland Revenue consistently scored highly in international tests, other organisations such as DSS were hopeless. Internal barriers and ancient tradition prevented sensible integrated policy. The outsourcing mania had struck all areas of government, from driving licences and welfare benefits through to health and police. Ministers, MPs, media and corporations all began chanting the Market Forces Mantra. That meant a field day for EDS. As the process began to pick up steam, bigger and bigger prizes were offered. Eventually the Inland Revenue itself, exemplary record notwithstanding, was offered up for outsourcing. In the mind of the Thatcherites, the privatisation of tax administration would be the toughest of all challenges and the sweetest of all victories. For the big outsourcing companies like EDS, Andersen and CSC (Computer Sciences Corporation) it would be the mother of all public sector contracts.

Taking over taxes

Thorpe is less cocksure than the guys out in West London. Likeable and easily distracted, not really much of a marine. He explains how EDS's business is changing. EDS doesn't want subcontracted chores. It wants partnerships. That's one of the reasons why it sought out Kearney, one of the world's top ten management consultancies.

It is time to move he tells me, from outsourcing to co-souring. Cosourcing is a way for EDS to become a partner in some or all key areas of a business, reaping rewards across the entire spectrum. By the year 2000, Thorpe predicts, fifty per cent of EDS business will be based on this sort of partnership. The pace of change will be so great by then that companies will need a partner that brings more to the picnic than the unfeasibly overdeveloped expertise in operating systems and data architecture. That's what EDS wants to offer.

And it wants to offer it to governments too. Thorpe shares with his colleagues a deep cynicism about government. By its very nature it is inflexible - unable to meet the demands of a complex marketplace. EDS, he says, has streamlined the re-engineering of government, helped to develop a service culture within departments, and saved several hundred million pounds.

Sounds good. But it is not always that simple. Take the Inland Revenue contract, EDS's biggest UK contract to date, a strategic partnership that amounts to something not unlike cosourcing. The invitation to tender ended up about two feet thick and took eighteen months to produce. It described the exercise as a strategic partnership. In the end, only two organisations were seen as fit to tender for the job: EDS and a partnership of CSC and IBM. In November 1993, EDS became the outright victor, reaping a billion pound ten year contract to manage and control all IT business of the Revenue.

The Revenue's staff association tried to stop the deal. It planted questions in Parliament, mounted a strategic lobbying exercise, and wrote to the fifty biggest companies warning that tax data in the hands of an American private company may fall victim to industrial espionage, but all to no avail. The staff association couldn't successfully argue with a quoted 225 million pounds that the contract would save over its lifetime.

With the help of 2,000 former Revenue employees, EDS operates the day to day PAYE tax system on a daily basis. (The employees, says the union, get a better deal now though they are contractually barred from discussing the terms of their employment) It will engineer and manage new projects such as self assessment. But the precise details of how it does all this are unclear It is not that noone has tried to specify them - people have. Expected results, required process, record keeping, finances, staff transfers, confidentiality provisions, copyright conditions and so on are all laid out in an astonishingly long and complex contract, one that more than matches the tender in complexity. But you cant get at it. The contract is treated as commercial in confidence, meaning that noone has the right to view it. The government's documents leading up to its development are called working papers and are also exempt from disclosure.

So information is flowing more freely than ever around the Inland Revenue. It must be, after all. The contract requires it. But how it flows, and who controls the flow - that is now unknowable. If efficiency has been gained, then it has been at the expense of accountability.

Or, rather, at the expense of the notion of accountability. anyone who has had the misfortune to be stuck in a DSS office, or bungle, will laugh at the notion that the system is accountable to the public. In theory at least, there is a democratic line of accountability leading to the Minister. In the new deal, it is the contract, not the line of accountability, which forms the primary instrument of administration. Pathetic, unworkable and disreputable as the chain ay have become, it still carries some normative, ideological value. But not after outsourcing.

The not-so-odd-at-all couple

John Yard used to be in charge of the Revenue IT section with 2,500 staff under his control. Now he has no IT staff, but has responsibility, among other things, for managing the EDS contract. He likens it to running around with a pooper scooper.

Peter Clough is the EDS Group Director responsible for the private sector end of the contract. He and Yard enjoy a close working relationship - so close indeed that they compare it to a marriage. They've almost taken on each others' names. Clough's business card reads c/o Inland Revenue while Yard's boasts the impeccably corporate title of Director, Business Services Office. And if one of them is giving me a harder sell than the other on the afternoon I met them, it's civil servant Yard - in the nicest most convivial sort of way.

What, I ask them, about democratic accountability ?

"I think there was a key concern about whether (in outsourcing) we overstepped the boundaries and lost the benefits of the public sector doing this work. The key for us around all of that were security of taxpayer records and confidentiality. We were very concerned that the propriety that tends to be associated with the public sector should equally apply to any private sector organisation that gets involved in this work."

Propriety ?

"Basically that's honesty, and dealing with things in a fair and equitable way."

Hang on a minute. Whoever claimed, even in their wildest fits of loving kindness that government agencies were honest, fair and equitable. To the extent that they ever do display those qualities surely its merely because they are subject to democratic processes. But Yard is adamant.

"If we outsource, we have to enter into contractual arrangements which we believe will protect the public interest. We will then be accountable if that public interest isn't served." So you see. If the public interest is served, then the system is accountable. Even if no-one can hold it to account, and the public isn't asked. EDS appears to be cosourcing with Sir Humphrey.

I change tack, and come at the from the direction that matters most to the whole deal: money. Since the contract was signed some voices have started to ask questions about the decency of the outsourcing emperors exposure. In a report released earlier this year, Leslie Wilcocks, a fellow of Templeton College at Oxford analysed 61 outsourcing deals in Europe and the US. In about a half of these, the expected savings either did not materialise or were invisible. The report found that none of the Strategic Partnerships of the Inland Revenue/EDS type reaped the expected savings. The Oxford report also found that the deals with the greatest chance of failure were long term contracts in which all IT was outsourced. Sound familiar?

Yard and Clough contend that they're different. They've got a special relationship. EDS and the Revenue are on a profit split deal that divides the spoils if profits from the operation go above the 225 million mark. It's in EDS best interest to perform if they want an additional piece of the cake. Much the same synergy applied though to the outsourcing deal between IBM and an amalgamation of regional police fores for a fingerprint database system, an agreement which ended up in court. And it may have applied to EDS's deal with the Child Support Agency. EDS supplies all the CSA's technology and know-how, and has been responsible for designing and implementing the Agencies current computer system. In the middle of this year - for reasons that are largely shrouded by various layers of secrecy - the whole system collapsed. More than 350,000 cases were backlogged. An already miserable and unhappy staff found themselves (amazingly) even more unpopular than before. Then followed a rapid sequence of buck- passing, with both parties claiming innocence. John Staples, the man in charge of the contract at the EDS end, told me his organisation was blameless. We delivered exactly what the CSA asked for. The problem, he explained, is with an organisation that changed its administration and its policy after the system was implemented. There was simply too much paperwork (a child support application form is now 34 pages) and the government kept tinkering with its policy.

The view of almost everyone I spoke to at EDS was that they were the unwitting victims of a hate campaign against the the child support system. In reply, a CSA press officer told me I don't think there's anything we can say about this matter.

The Government of Florida certainly had something to say. It had contracted EDS in similar circumstances to build a Social Security system using the same systems that CSA uses. In the first year the system went haywire, causing massive logjams of cases and paying out 100 million dollars more than it should in benefits. The State stopped paying EDS, and EDS sued, arguing that the government had changed the system unexpectedly after implementation and - just like the case here with the CSA - seriously underestimated the amount of information it would need to process. We delivered what they asked for an EDS spokesman told local television.

In short, the EDS view is that these failures come from unanticipated changes in policy. In each case the contract, the technology and the special relationship could not withstand sudden changes in government policy. The company is not to blame: democracy is.

The contract defines the relationship between parties. It lays out the way tasks must be undertaken. If the people or their politicians decide, in their messy way, to ask for something else to be done, then the company is often unable to do it. This could yet be a serious problem in the Yard/Clough marriage. According to David Thorpe (father of the bride at EDS) the Inland Revenue contract was drawn up before Self Assessment - the most important change in taxation practice in fifty years - was developed. The part of the contract dealing with this fundamental change was simply an add-on. If self assessment was indeed an add-on then history points to a potential disaster that could at least partially paralyse the tax system. John Yard says that wont happen and that self assessment was factored in from the beginning. It would be nice to be able to check.

How bad can it be though? After all, the whole idea is to bring in the rigors of the market. in theory at least the government could find another supplier, or even take the work back in-house. In practice, this is unlikely to happen. Its the worst kept secret in the Inland Revenue that this is a marriage for life. Yard explains in understated language that it would be difficult for the Revenue to handle its own information in the future. We could buy our assets back from EDS, but we couldn't necessary get the people back. If the Revenue thought it lacked good staff before the transition, it is going to look pretty sad in ten years time. The bottom line, according to Revenue officials, is that within a couple of years the Department will not have the competence to frame the right IT questions, let alone find the right answers.

What about getting another partner ? The problem here is that the detailed knowledge of how the system works in now locked into one company, and very hard for an outsider to duplicate. The issue that will crop up on a re- compete is that if CSC wins, for arguments sake, they will need to negotiate with EDS for how they get the expertise, and I foresee an issue at that point which says that if the very best people are involved the losing company will be rather reluctant to let them go. EDS European Communications Director Mark Fox says he cannot recall when a major contract has changed hands.

One conclusion that might be drawn from all this is that a ruthless company could easily hold a government to ransom. With the competence extracted from the customer and with competition held at bay, a government's outsourcing partnership in an information age could quickly become a policy nightmare: a marriage made in hell.

As I leave the happy couple I find that some of what they say makes sense to me. But I still think the contract is a fundamental weakness. I don't think we can accept glib assurances that ministers will ultimately be held liable for their outsourcing decisions. If the EDS dream of Cosourcing takes off in the public sector, the old line of political accountability - weak as it already is - will collapse.

Wiring government

"I believe", he adds, "that we are close to decisions in government that will facilitate more integration of departmental systems." Australia and New Zealand, he continues enthusiastically, already have data matching system in which many arms of government are cross matched and linked. He agrees with Paul Clarke, the master of machines out Uxbridge way, that there is no technical reason why all EDS machines could be linked right now.

The Police National Computer could have better access to driver and vehicle licencing system tomorrow. Insurance companies could have better access to vehicle information, tomorrow. It isn't technology that's standing in the way. It's will. It's vision. It's an ability to implement it.

But we live through a period when there is enormous skepticism about anything like that in this country because it looks like Big Brother. That's why were going to have three or four identity cards in our pocket if were not careful.

He's right. This is definitely an area to be careful about. The matching of computers for fraud recovery and tax evasion is equivalent to the imposition of a general warrant upon the entire population - a point which has not escaped the constitutions of Germany, Hungary and Portugal, which impose strict limits on centralised numbering and matching systems. But Thorpe sees this as a simple matter of public opinion. It is possible to improve data matching: one system for government; one public file for people; shared access; reducing fraud; improving systems; less paperwork; more efficiency

Thorpe's views are reinforced with gusto by his boss, John Bateman, Managing Director for Europe, the Middle East and Africa. Part Australian, part South African, part British, the gravel voiced Supremo comes across as a bluff mixture of pragmatism and ruthlessness. The EDS vision, he tells me, is not merely national. It is global. It transcends boundaries of time, context and geography. Bateman believes that the localised way of doing business is disappearing. The way people work is transcending culture

EDS is, of course, at the cutting edge of this trend. Instead of considering local business in a local environment, what we do is provide a local front, but then all the solutions we can apply to those companies are regardless of geography. If we've done something very successfully for a company in any part of the world, we have an organisational structure which helps us apply that, tune it, localise it, and reapply it into a new situation in another part of the world.

In this truly multinational world, John Bateman believes data protection law is pointless. Everything is rising above the national consideration. Countries that try to protect data within the confines of their own borders are trying to legislate against the sea.

I have to agree. I've seen his world. I've seen the gleaming new buildings set into the solid traffic of Bangkok. One gun toting security guard per satellite dish. Container loads of sensitive personal information - health records, police files, insurance data, credit card accounts and government records - are despatched from all over the world for processing here. EDS, needless to say, is a player. Right now, investment is concentrated on American health and insurance industry, but the clients for data outsourcing come from all sectors and all countries - particularly Britain. Conventional borders disappear before our eyes, and where our most intimate personal details are shunted around the globe behind our back. Its cheaper for companies and governments. Its more efficient.

Bateman, like everyone else in this organisation, believes that efficient, market based information management is the only solution for a troubled economy. Governments are steeped in obsolescence. The civil service is an oxymoron. All things are possible through the application of logic, commonsense, innovation, partnership and passion. In EDS, such ideas are not discussion points: they are axiomatic truths. Without so much as a blush of reserve, people here will tell you EDS is creating templates for the worlds future.

I ask Bateman if he sees any role for government in the future.

"The role of government may well be associated with...", He pauses for reflection. "To be honest I really struggle to come up with a clear definition of ultimately what role government has."

And then he laughs.

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Simon Davies is a visiting fellow at the London School of Economics and Director General of Privacy International. An earlier version of this article appeared in the October 1996 edition of Wired (UK).