IBM-led SAP "model" business venture makes loss

Southwest One, a ground-breaking IBM-led venture, has made a pre-tax loss of £16.5m. In the previous financial year, 2008, Southwest One made a pre-tax loss of £2.5m and filed its company accounts three months late, incurring fines from...

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Southwest One, a ground-breaking IBM-led venture, has made a pre-tax loss of £16.5m. 

In the previous financial year, 2008, Southwest One made a pre-tax loss of £2.5m and filed its company accounts three months late, incurring fines from Companies House. 

The company is 75% owned by IBM. It was set up in 2007 as a a unique collaboration between IBM, Somerset County Council, Taunton Deane Borough Council and Avon & Somerset Constabulary. 

The venture's objective is to save £200m over 10 years, mainly by cutting staff and bringing together services including IT, financial and human resources. 

The Audit Commission reported in September 2010 there is “still a lack of clarity as to how the partnership will secure benefits”.

To IBM the venture has much potential: it is marketing Southwest One as a means by which public authorities can enact the Coalition's cost-cutting plans. 

There has been no rush to join the venture, perhaps because public authorities have seen it weighed down by difficulties bringing together different organisations, cultures and systems under the umbrella of a SAP-based transformation.

Since the transformation began the accounts of Somerset Council have become partially jumbled: duplicate payments, over-statements of income and spending, and other errors have been reported.

In response council officers, councillors and Southwest One have defended the SAP programme.  

In a statement on its accounts in September, Somerset council said that errors such as duplicate payments have been corrected. They are “not closely related to SAP functionality or expertise but they are basic accountancy treatment issues”.

Now, in an email to council staff, Southwest One’s CEO Fiona Capstick says that the company’s losses were expected.

“As you all know, we have focused on preparing and developing a shared services structure for our partners as well as implementing major transformation projects. Much of the investment costs for these were incurred in 2009.  Therefore, as anticipated these accounts report a loss. It is important to note that this has no impact on local council tax payers. 

“Partnerships like this require up-front investment in the early stages, as major new systems and working practices are introduced.  These results are therefore broadly in line with our expectations. 

"The transformation has been one of the largest and most complex anywhere in the public sector …We now look forward to delivering significant savings and efficiencies in staff productivity for the three partner authorities.

"We remain confident the long-term objectives for Southwest One will be met and, after a demanding set-up period, we believe that we are now well positioned to deliver continued benefits for our joint venture partners, and the wider public sector in the South West…”

David Huxtable, the Conservative councillor responsible for resources at Somerset County Council, defended the Southwest One deal in an interview with the  BBC:

"I don't have any concerns or fears about the ability of the company to deliver our services because we made sure we partnered with huge international business and I have security in that.

"We asked people to bid to run our services at less cost to us and that's what they did. 

"It may be that they over or under bid for the contract but I feel that is their problem, and not necessarily ours."

A spokesperson for Avon and Somerset Constabulary told Policeprofessional.com that Southwest One’s loss was a matter for the company and IBM; the company was expected to lose money in its early years.

“The contract makes it clear that any losses will not impact on council tax payers or police services,” said a spokesperson.

When the Tories gained control of the county council, leader Ken Maddock announced that there would be an inquiry into the contract. The results of that is expected within the next two months. 

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Fiona Capstick, talking about the company on its website, said: “It’s unique in the market because of the way we have the joint venture: the seconded employee model where we have 1,300 employees working from the different authorities and from IBM. 

"It’s quite unusual for two tiers of government to be working together but certainly when you bring in the police to the mix it becomes a very powerful and unusual partnership.

"We have managed to bring together many of the services, so we have collected HR, finance people, CRM contact centre people but also we have transformed many of the core systems of the authorities by bringing in SAP and delivering a common system across all three organisations.

"Obviously in two years it has been challenging in making sure we bring in the systems and changing the way in which the different organisations work together, and bringing together the different cultures: IBM, new hires to Southwest One and the people from the different authorities. Often they do the same things and they say the same things but the language is different." 

Comment:

The business model that is Southwest One seems ideally suited to the Coalition's cost-cutting plans. It brings together public authorities that are, in essence, doing the same or similar things. It is simplifying business processes - which is commendable. 

But there's a lot wrong. The deal was rushed: the contract had to be signed so quickly that it contained hundreds of typos and literals on completion - the number was exceptionally high even for a large and complex contract. 

And the deal was done in much secrecy which antagonised staff whose support was crucial.

That said large savings can be made if business processes are simplified and IT is standardised. IBM and Southwest One could greatly benefit potential buyers of shared services if they were to publish what has gone wrong, why and what they would do differently today. 

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