UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 592 - iii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

TRADE AND INDUSTRY COMMITTEE

Europe MOVES EAST:

THE IMPACT OF THE 'NEW' EU Member States ON UK business

Tuesday 19 JUNE 2007

MR NICK KALISPERAS and MR NIGEL HARTNELL

Evidence heard in Public Questions 132 - 180

USE OF THE TRANSCRIPT

Oral Evidence

Taken before the Trade and Industry Committee

on Tuesday 19 June 2007

Members present

Peter Luff, in the Chair

Mrs Claire Curtis-Thomas

Miss Julie Kirkbride

Judy Mallaber

Mr Mike Weir

Mr Anthony Wright

________________

Memorandum submitted by Intellect

Examination of Witnesses

Witnesses: Mr Nick Kalisperas, Director, Intellect and Mr Nigel Hartnell, Executive

Director, Ffastfill PLC, gave evidence.

Q132 Chairman: Gentlemen, thank you very much indeed for coming into this evidence session and we are taking the advantage of your presence here to tack on a few questions relating to another inquiry that the Committee is pursuing as well, on public procurement; so we are doubly grateful to you. As always, we are grateful for your very helpful written brief, which sets out the importance of your sector for the UK economy and your highly representative nature of that sector. Can I begin, as I always do, by asking you to introduce yourselves for the record?

Mr Kalisperas: Good morning. My name is Nick Kalisperas; I am Director for Delivery at Intellect with responsibility for transformational government, transformational business, defence and security, ID and information management.

Mr Hartnell: I am Nigel Hartnell; I am a Director of an application services company called Ffastfill PLC, providing services to the derivatives capital markets in London and Chicago. I am Chair of the of the Intellect software group and recently appointed to the Intellect Board.

Q133 Chairman: But you are here representing Intellect rather than your company today?

Mr Hartnell: I will obviously use my own experience.

Q134 Chairman: Excellent, that is really helpful. Can I ask you first of all actually how important are the new accession countries to the European Union to your sector and how do they compare with other major markets to the UK, like India and China?

Mr Hartnell: Let me start with that. There are two aspects. The first one is as an expert market and clearly as a potential expert market they are just that - they are a potential market. None of them in the A8/A2 are particularly large at the moment, so from that point of view I think it is more to do with potential and future opportunity. Certainly the scale of those markets will never rival the scale either of the Indian market today or even the Chinese market today, let alone the potential of those two markets. From a sourcing point of view, what we tend to refer to as off-shoring, they are potentially very important. They have good skills; they are significantly lower cost than Western European equivalent skills; they have a very good work ethic from my experience, and I suppose some of the big advantages compared with, say, India and China, as off-shoring locations are that they are in the European time zone and so from a management point of view you can visit, review, discuss in a day as opposed to three or four days, and from a cultural point of view clearly their legal systems, taxation systems and those sorts of things progressively align themselves with the rest of the European Union, which clearly does not apply to India or China.

Chairman: That is a very useful introduction; thank you very much, Mr Hartnell. Julie Kirkbride.

Q135 Miss Kirkbride: I want to ask you how you think it differs from country to country in the accession countries? How would you describe your experience of them? If you could take us through the differences.

Mr Hartnell: I could not take you through all of them, to be quite honest. I could give you both experience and perceived information on a number. I think the first thing to remember is that all of these countries have had relations with countries in Western Europe for many years. So if we start, for example, with the Baltic States - Lithuania, Latvia and Estonia - they have had cultural, economic and in some cases political ties with the Nordic countries for a very, very long time - not surprisingly. In fact certainly three of the Nordic countries have fathered, parented each of these into both the European Union and in terms of economic growth. I cannot remember which one Finland has spent a lot of time with, or Sweden or Norway, but essentially each one has a sphere of influence, and so you tend to find that the companies from those countries are more represented in each of them than any other country from the European Union. The same thing I think applies in other States. Clearly the Romanian links with France and French culture clearly has a part to play, although my only experience - I do not know of any other experience - of Romania was 12 years ago and it was really just starting to emerge from behind the Iron Curtain. If you look at the Czech Republic and Slovakia, clearly closer ties with Germany, and if you look at Poland I would suggest much closer ties with the UK. So I think the first thing is that you therefore get different national players and countries having influence in the accession States. I think then there is a different approach which different types of companies take, so if you consider the three main economies, which I would regard as Poland, the Czech Republic and Hungary, then you will see that the multinationals, both the American nationals and also Asian multinationals and European multinationals have sought to establish a basis of operation in those three States as being potentially important to them in the longer term, and having larger and deeper pools of skills. So there are clearly differences. But if you take the Czech Republic, which is one of which I have particular knowledge because we have a captive off-shore software department team in Prague, Prague acts almost as a magnet for talent in Eastern and Central Europe, so whilst there are a lot of Czech nationals there are also a large number of Russians, Ukrainians and other very technically skilled people, so you get different types of pools of labour. Whereas if you look in Poland at the moment there is a shortage of labour in our sector because in fact many, many Poles have a propensity to travel and clearly a lot are travelling into the UK. So that is not an off-shore opportunity, it is actually a UK skills opportunity. I hope that gives you some sense of some of the differences.

Q136 Miss Kirkbride: It is interesting how you say history explains quite a lot of what is happening. What about the comparison between those who have been quite advanced and who have really gone for this, like Estonia, who have invested heavily in high-tech industries versus - and you mentioned Romania - those that certainly relatively speaking has been quite backward in its economic development. How does your industry look at that? Do they want to get into the hiring market or do they see now more growth in the ones that have been slow to get on with it?

Mr Hartnell: I think it is very specific to what your business objectives are, so if you are looking maybe for a potentially large, medium, long-term market then you might decide that Romania was an opportunity for you. For example, if you were operating in the capital markets, where we operate, you might look and say that the Romanians are only one of three countries in Europe that have legislated for the new Financial Industries Directive, which is going to be pretty crucial to the development of capital markets. So, if we were thinking maybe to move into a country like that then from an export point of view that might be an interesting one to look at, whereas if you were looking for people who were particularly skilled maybe in advanced IT you might say - I do not know Estonia, I have to say - if that is where a lot of skills are because of the investment that the government has made, probably it reflects either Sweden or Finland's influence, to be quite honest, because they have always been very, very much at the front end of the technology revolution.

Q137 Miss Kirkbride: How has the Act of Accession changed the way that you are doing business in these markets?

Mr Hartnell: Separating out the Act of Accession as opposed to the breakdown of the Soviet Union, I find it quite difficult.

Q138 Miss Kirkbride: You do not find that easy.

Mr Hartnell: Pre-1990, if you wanted to trade - and I will take Poland as an example that again I have direct experience of - then you had to set up special mechanisms in order that you could effectively return hard currency to the UK. So there were all sorts of mechanisms which were set up, which would end up having electronic goods and software going into Poland and maybe furniture coming out and hard currency being generated in the middle. Clearly the breakdown of the Soviet Union and the progressive de-optimisation and introduction of capitalism into those countries had an effect so that in the 1990s you could trade in a different way, so you did not have to do that any longer - you could trade. Then you get an impact of the fact that the countries are preparing to accede, so everybody knows that they are preparing to accede and everyone knows they want to and they know that the Union wants them to. So it is an attitude thing, I think; so people then are more interested in investing. If you take the issue of travel visas, you did not need a visa to travel from Poland or the Czech Republic - and I cannot remember exactly when it was, some time in the mid-90s, maybe late 1990s - you did not need a travel visa to come to the UK, but clearly you still needed a work permit. Now, of course, as soon as the accession comes in you do not need a work permit and I think probably that is the only difference that actually happened on accession, but a lot of things have been changing pre-accession and continue to change post-accession in terms of legislation, frameworks for taxation and so on and so forth.

Q139 Miss Kirkbride: Given that progress that has been made what remains as to what it is that it is difficult to do business with in these countries? What are the problems and obstacles?

Mr Hartnell: I think there is nothing specific which is more difficult to do business in, say, Poland or the Czech Republic than there is maybe in Germany, France or Spain, or the UK if of course you were not a UK company. Every country has its customs and customer practice and every country still has its tax regime. I can take a specific example here: certainly in the Czech Republic, as the example that I am facing today, they do not use general accounting principles as we would use them, so they do not use UK GAAP and they do not use US GAAP, and they are unclear when they are going to move into International GAAP. So that is a specific. But they have local regulations with regard to intellectual property, which actually are more like German regulations than they are like British regulations. They still have food stamps; they have much higher national insurance at 35%. So you think you are paying X amount for a member of staff and actually it is 35% more, which is quite a significant uplift, as you will appreciate. So there is customer practice, local laws and local regulations and those really are the things. They are different for every country, but of course they are still different for every country within the older Union, but they are less different probably from the older Union as harmonisation has progressively been brought into effect.

Q140 Miss Kirkbride: So there is nothing to which you would draw our attention to on the legal processes of bureaucratic processes, bearing in mind that they came out of the Soviet style system? The new countries are the same as the older countries, but is every one different?

Mr Hartnell: Yes, they are not the same but every one is different. So there are an awful lot of bureaucratic issues if you want to establish operations, shall we say, in France, and larger ones if you want to dis-establish an operation in France. The same is true in the accession States and I am sure the same is true if you are a French company - you would feel that there were some regulations that you were not used to, and clearly we pride ourselves on the fact that our regulations are lighter touch and clearly in some instances they definitely differ.

Chairman: Before we move on, Claire Curtis-Thomas wants to ask a supplementary.

Mrs Curtis-Thomas: Forgive me for asking this, but you said right at the beginning about the importance of off-shoring for these developing countries. This Select Committee has done an inquiry in India ---

Chairman: I am going to ask Tony Wright to ask his question and then I might bring you in.

Mr Wright: If you carry on and I will come in.

Q141 Mrs Curtis-Thomas: I am conscious of the fact that my colleague is about to ask you a question in relation to this but I would like you to add into the response the duration of time you think that Europe offers us in terms of an advantage for off-shoring and how that compares and contrasts with India?

Mr Hartnell: An advantage for off-shoring?

Mrs Curtis-Thomas: No, let me be quite specific. How long do we have in terms of time for off-shoring in Europe in comparison to the amount of time available to us for off-shoring in India?

Chairman: The cost advantages.

Q142 Mrs Curtis-Thomas: Yes.

Mr Hartnell: The question, I think, comes down to one of how quickly will Eastern European wage rates, as you might say, catch up with Western European wage rates? That is, I think, the essence of it. Wage inflation - and again it is different across all the countries - seems to be fairly stable, around 5% or 6% in most of the countries that I can see of the acceding States. So given that the relative costs are probably 25% of the UK costs at the moment - maybe 30% - and UK wage inflation is running at whatever the latest figure is, say 3% or 4%, you can see that it takes quite a long time. I am not an economic forecaster; I cannot say when that will change. I do know that in India the highly skilled people with lots of experience are now starting to command already western-style salaries.

Mrs Curtis-Thomas: That is all I wanted, thank you.

Chairman: Tony Wright.

Q143 Mr Wright: On the same lines in terms of the off-shoring and near-shoring, as we would term it, you put your evidence forward as very strongly supporting the concept of off-shoring and near-shoring. Can you outline what are the advantages and, of course, the disadvantages, specifically in this particular area for the A8/A2 countries?

Mr Hartnell: The advantages as against India, do you mean, or China, or generally of doing off-shoring?

Q144 Mr Wright: Generally, yes.

Mr Hartnell: There is the obvious one of cost, which I suppose is the first one that people address and in one sense this is a very significant opportunity for small companies, high growth companies, even start-up companies in order to compete with the large multinationals, who are absolutely exploiting global sourcing in order to bring their own costs and, as a result, prices down in the global market. The IT industry is a global industry and we have to compete with everybody and anybody - no markets are closed. So cost is a very important part of it. The second part is the availability of skills. In the UK we have a substantial shortfall of skills in the IT sector and by IT skills I mean real computing skills, I do not mean that I know which key to press in order to get Word to do whatever it happens to be. So I mean genuine computing, mathematical computational skills. We have less people going through those particular courses at university, we are producing less graduates and as a result the industry is experiencing a shortfall in this area. So as a pool of skills Eastern Europe is very attractive. People often say that they feel - or certainly they did feel - that Eastern Europe had rather backward skills in this area, but actually if you think of both the mathematical skills and the science programmes, and also the things that the Soviet Bloc was able to do with very, very poor electronic technology, you can see that an awful lot of that came out of the software skills that were being put to use in those programmes. So skills, cost and there is a very positive image for technology and in particular information technology and computing, so people want to be in this industry in the accession States; they see it as a way to earn a good wage, a way to participate in a global industry. They have, as they see it, grown up in a hidden economy and they now want to participate in the global economy and they find it attractive. That contrasts quite substantially with the UK where the image of IT, I would say, has progressively declined as an attractive career option over the past ten or 15 years substantially - so much so that you find very few parents would encourage their children necessarily to go into the IT industry.

Q145 Chairman: That is a fascinating observation - if I could just stop you in mid flow there. You say that very few British parents would encourage their children to go into the UK IT industry.

Mr Hartnell: That is exactly what we are finding, yes.

Q146 Chairman: I am bewildered, amazed.

Mr Hartnell: So are we. Obviously that is particularly true, dangerously true of girls, but it is also significantly true of boys now.

Chairman: You learn something every day. I am going to take the liberty of cutting off there and asking Tony to move on in his questions as well because we are slightly up against time on the questions on procurement.

Q147 Mr Wright: Continuing along those lines, you have put the disadvantages, but you certainly seem to be very assertive in your view that the government should be doing more to promote more off-shoring from the companies. Really it goes against what my principle would be. I have a number of electronic companies in my constituency, who may well be members of your organisation, and I would certainly be averse to telling them to off-shore their work to another country because it would mean a loss of jobs in my constituency. So what you are saying is that because of these problems the government should be promoting more off-shoring and near-shoring to obviously increase the business of the particular companies. But it could be to the detriment of the UK as far as the employment opportunities are concerned, and that in itself would be a double whammy because then there would be fewer opportunities for IT graduates so therefore the parents would then say there are fewer opportunities there. Surely the other way round should be for you to promote and to encourage those parents and indeed the education establishments to push more students through into IT and encourage them into the UK companies rather than trying to off-shore or near-shore the business that we can see. Surely it goes against whom we should be pushing?

Mr Hartnell: What I would say to that is that we neither promote near-shoring, off-shoring, nor promote the use of local skills. Clearly that is a choice for each individual firm to take. The thing that concerns us is that we have a shortage of skills; that is an absolute fact and all our members have continued to tell us that, that they cannot find the skills that they want and therefore they cannot grow the business, which is not good for the UK economy. We need to find other sources of skills, particularly in the short-term, and there are these other sources of skills. The thing that concerns us is that there is very poor information in this debate about whether off-shoring is a good thing, whether it is for the national economy or not, and the danger is that it tends to be portrayed as that if you off-shore you are doing damage to the UK economy, and that is not the truth as we see it. In the Paper we ask very much that there should be a detailed survey and study of off-shoring and its impact on the UK economy because this is not just going to impact on the IT industry - the whole of the southeast of England is a services economy. It is progressively being off-shored, yes, whether you like it, I like it or anybody else does, to places like India and to the Eastern European States. We should understand the impact of that and we will all benefit from it. The most important thing as far as we are concerned is that firms are educated of the opportunities that they could have to off-shore, the benefits that they would get, the disadvantages that it might hold, and we have started to do that with our small companies because we think it is important that they have the facts as we see them in front of them and they can make those choices.

Q148 Chairman: Your evidence is slightly contradictory if it is misread, I suspect. Earlier on in your evidence you asked government to do more to produce evidence, objective data on the effects of off-shoring and near-shoring, and in later evidence you asked the government to do more to promote the benefits. So the reason you want the work done on the evidence is that you believe it will show how beneficial it is and therefore how much more it should be promoted, is that right? Just reconcile the contradiction.

Mr Kalisperas: Fundamentally the debate around off-shoring, outsourcing, is a sub-set of the wider debate about effectively what sort of economy is it that the UK is becoming or needs to become in order to remain competitive. One of the points that we make in the Paper is that in order for SMEs, particularly, to make informed decisions about where their businesses should be located they need to have access to all the relevant information in order to either access new markets or to remain in the UK. In the short-term it is recognised, as Nigel has mentioned, that we have a problem with skills, so therefore companies need to understand either how they can get skills from abroad into their organisations or what their other options are, in other words off-shoring. What we are saying in the paper is that our members - and probably wider than our membership - need access to the right information in order to make the right decisions for their companies. As Nigel has mentioned, it is in our interests for the UK to have a flourishing economy, but we need to address both the short-term and structural problems and the longer-term issues, and we have seen - just building on the point that Nigel has made - around skilling we have done some work which we can make available to the Committee that the IT industry is not doing enough to retain and recruit women into the workforce, so after they leave to become mothers we are not doing enough to get them back and we are not doing enough in terms of retraining, and there need to be more incentives in that regard.

Chairman: We are going a bit wider now. I understand what you are saying and if I had time I would explore it in more detail, but we are going to move on to Mike Weir.

Q149 Mr Weir: Following on from this question of off-shoring and near-shoring, a recent report commissioned by the DTI found that IT companies were not making use of the knowledge in the accession countries gained through near-shoring to develop export markets in these countries. Do you agree with that assessment and, if so, what do you think should be done about it?

Mr Hartnell: I can only give my own personal view on this. As I think I said in my opening remarks, in the main the accession countries are small economies; they are, in some cases, growing fast but they are small economies and therefore in terms of the attraction to companies who wish to develop export markets they have great difficulty in competing as an attractive opportunity with the Asian economies in particular, because we are all talking about India, China, South America and so forth. That does not mean to say that they are not attractive, but it does mean to say that they are not high on the list. In terms of using off-shoring as a way into an export market, quite clearly it is theoretically a way into an export market, but I do not think you would off-shore in order to enter that market - that would not necessarily be the right approach to this.

Q150 Mr Weir: From what you were saying earlier, presumably there is a large amount of off-shoring going on for the skills that you mentioned. These people are presumably developing their skills, developing products or whatever within these markets, so does it not make sense to then look at developing the export markets from that base? We talk about small markets but the whole of Eastern Europe presumably together must make a very substantial market?

Mr Hartnell: The whole of Eastern Europe together absolutely, but we have to remember that it is five, six, seven, eight, nine, ten countries - it is a lot of countries and they all have different characteristics. So this is not a homogeneous market in the same way that Western Europe is not a homogeneous market. My company has had an off-shoring operation in the Czech Republic since 2001 and was probably one of the first in there, and so we are well established and well known to the establishment and we know the market. The Czech capital markets set up a derivatives market, which is exactly the area in which we trade, so we went along to talk to them thinking that here is an opportunity for us, and the answer was, "You are probably five years too early for us, we are so under-developed at the moment, but anything you could provide us with would be completely inappropriate. Why do we not talk every year and see if there is anything you can do?" I give that as a single example but my point generally is the fact that these markets are not of themselves very large yet. They will become so - Poland clearly will become so and over a period of time it will recover from economic stagnation of 50 years or 70 years and will develop and it will be an attractive market. But as with all export markets timing is crucial - you go too early and it costs you a lot of money and you make no progress.

Q151 Mr Weir: We hear in some markets about leaping development stages, not going through what we went through. Is there not a market for doing that in IT, for example? The derivative market is an interesting one and I would have thought that it might look forward to get ahead of the game in that respect.

Mr Hartnell: They might aspire to but I think they are probably pragmatic. The danger with the classic rush of growth is that that is what happens in economies - they have a rush of growth and then they have a fall-off. Again, I am not an economist but it seems to me that in a number of the major accession States in Eastern Europe that that is what happened in the immediate years, in the 1990s, and we have a more stable growth which is probably a good thing.

Q152 Mr Weir: You have talked a lot about skills and acquiring new skills by near-shoring but much of the evidence we have received for this inquiry suggests that UK business was slow off the mark when realising opportunities in the new Member States. Do you think that is true of your sector?

Mr Hartnell: I would differentiate between the major multinational companies and the SMEs probably. I think the multinationals, no; they have not been particularly slow off the mark. All the ones that you would know about are located in some if not all of those countries and have been now for a number of years, and a number of major corporates have established part of their own IT departments. I think the smaller companies, from the Small Medium Enterprise Sector have been slow and are slow to take up off-shoring at all. It is nothing to do with the accession countries, the same is true in India, which of course is where the vast majority of global off-shoring is taking place anyway, as you know. I do not think in any sense that that is slower than any other country. The UK clearly is off-shoring a lot of its software development, particularly, things like that as aggressively as any other country is doing it, including America. So I do not think in any sense that the UK is behind, but I think that there is an important opportunity for the small and medium enterprises at least to understand the potential benefits of off-shoring into the Eastern European countries because there is a lot of fear, uncertainty and doubt, particularly when you say to a small company, "Why do you not off-shore?" because the first thing that comes into their mind is India - everybody talks about India, the government talks about India, unless they are talking about China - so a small company thinks, "India, that is a very, very long way away, it is a very different culture, how do I control it, how do I manage it?" So it then goes into a "much too hard" box and having put it in the much too hard box that means that after that the SME does not think about off-shoring, whereas if they thought about off-shoring in Central Europe that is much more attainable for them and they would gain many of the benefits - not all of the cost benefits but most of the cost benefits - and they would gain some additional ones, like ability to travel in and out because of the European time zone and like the progressive harmonisation of regulation and standards, like the European culture and so on. So I do think there is an opportunity, very definitely.

Q153 Judy Mallaber: In your evidence you state that in the longer term the A8/A2 could prove to be a potential competitive threat to the UK. How long do you think it is going to be before that competition emerges and where do you think the competition is primarily likely to come from?

Mr Hartnell: All one can do in these circumstances is to look at some other examples. India is quite clearly a competitive threat now to the whole of Western Europe IT sector and to the American IT sector - it is a global power. I would say that the Indian IT industry has been growing and supported for probably 20 years, from my experience of operating in India, and that was with an awful lot of Indian government support. I do not see the IT sector in any of these accession States getting the sort of centralised government support that the Indian industry has been receiving, so I suppose given that they had in some sense a start I would say probably five to ten years. Let us say ten years.

Q154 Judy Mallaber: Keeping on my question of support, you do talk about requiring government support. What kind of support would that be to enable the sector to compete with those countries and for you yourselves to play the role that you suggest in your evidence, and is it realistic to think that the government might give direct support?

Mr Hartnell: We are not looking for support in probably the traditional way of asking for support - the support we think is required is first of all information and education support. The thing we ask for is a proper review of the benefits and issues, advantages and disadvantages of off-shoring, so that then sensible, rational, supported arguments can be placed in front of particularly the SME sector. The second thing that I think is important is that industry - in our case the IT industry - receives better information on the accession States. A lot of this is fear, uncertainty and doubt - people do not know what the impact of the taxation legislation in Poland will be on them establishing something in Poland. So the question is: does every small company have to go and find that out for itself or is there actually something that government information could provide?

Q155 Judy Mallaber: To clarify this again, when you were talking about competition you were talking about that we might lose out on the opportunities to off-shore and government should help do a review to enable British companies to offshore into A8/A2 countries?

Mr Hartnell: To enable British companies to have the information in order to make the choice. This is about trying to give the Smaller Medium Enterprise Sector information so that they can make an informed choice about whether they should off-shore or continue to on-shore or a piece of both, given that there are skill shortages in the sector in the UK at the moment and that there are very large competitive threats in terms of pricing pressures from companies that operate from low cost economies.

Q156 Chairman: Can I test this a bit more? There is one report that the DTI has produced by a consultancy, Ovum, last year, The Impact of Global Sourcing on the UK Software and IT Services Sector, but how good is that report? Do you want more of that kind of thing? What exactly is it that needs to be done? I am not quite sure what you are asking for?

Mr Kalisperas: I think what we are asking for is not just the overall market, the top line financial stuff, but it is also if you are an SME one of the things that you need to do in the UK is to understand the tax laws here or regulatory laws were changed, employment law, et cetera, et cetera, et cetera, so that you need to get an accountant in or a lawyer in, et cetera. There is not a pithy amount of information readily accessible for an SME in this country, just to understand what is going on within the UK to keep up to date, whereas the larger multinationals have in-house resources which enable them, if they want to site an office in Poland or want to access European markets they would have done their research. For the SMEs, if an SME wants to say, "I want to do some work" or "I want to understand the market in Estonia," is the information there readily available from UKTI or DTI in an easily understood form? Also, if it is there in an easily understood form do they then have the opportunities to understand that market in terms of ongoing support, advice and guidance? In our view at the moment that information is missing, and for an SME, as Nigel has mentioned, if they want to make that decision they do not have the necessary information to make it.

Q157 Chairman: UKTI is not doing its job well enough in these Central European markets, because that is one of its core functions, to help people understand the way you do business in that market?

Mr Kalisperas: Yes, we think that more needs to be done and I think more needs to be done by better understanding the needs of that particular community. Fundamentally, yes, any community is very diverse; it has different needs and different drivers.

Q158 Chairman: You are asking for that and you are asking for the government to do more research on the overall benefits of off-shoring and near-shoring to the UK economy - more work done on that as well?

Mr Kalisperas: Benefits, disadvantages, there needs to be a review of how off-shoring in particular has affected the UK economy, what the benefits are and what the opportunities are.

Q159 Chairman: Last year's report is not good enough? It does not go far enough, it is not detailed enough?

Mr Hartnell: I have not read it myself.

Mr Kalisperas: It is a step in the right direction but it is not enough solely to publish a report - there needs to be an ongoing action plan in order to assist businesses.

Chairman: I am sorry to have interrupted; that is very helpful.

Q160 Judy Mallaber: I was moving on anyway. Looking forward to any potential future EU enlargement, do you believe that there are lessons that can be learnt by the IT and related sectors from the experience of the enlargement so far?

Mr Kalisperas: I think that where there are enlargements in the future - and it maybe further east, Turkey or the Ukraine, maybe possibly further east than that - there needs to be an earlier dissemination of the potential benefits of doing business with those countries, an earlier dissemination using the trades associations because they are entities that can facilitate a one to many engagement, in order to provide companies with the information they require and in order to make an informed decision as to whether countries such as Turkey or the Ukraine are the right sort of countries which they would like to locate offshore or would do business with as an export market.

Q161 Chairman: That draws the first and most substantial section of our evidence today, but my understanding of what I have heard from you is that Intellect sees the countries of Central and Eastern Europe more as an opportunity to enhance UK competitiveness by accessing their skills rather than as a market in their own right at this stage, at least in their development?

Mr Kalisperas: I think that would be a fair assessment, yes.

Q162 Chairman: Can we move to procurement, upon which you have kindly agreed to answer questions? A simple question first of all: government procurement is always about value for money, amongst other things, and it must be about delivering effective services, and it should also be about encouraging or assisting innovation, would you agree with that?

Mr Kalisperas: Theoretically, yes.

Q163 Chairman: So what is government doing wrong at present that is not encouraging enough innovation in your sector? How is it getting the procurement process wrong?

Mr Kalisperas: I think in the first instance you have to look at the public sector as the market place. It uses taxpayers' money, it is accountable to Parliament, it is governed by EU competition rules and it is very silo-orientated, so even within government departments there can be multiple silos and each government department, each agency, each unit within an agency tends to procure in a slightly different way. There is not a coordinated, joined-up approach on procurement across the public sector; there is not a coordinated strategy for the dissemination of best practice across the public sector; and there is not an overall attitude to encourage innovative solutions - procurements are based very much on the here and now more than looking five, ten years in advance to see (a) in the businesses of IT where the technology is going, and (b) to look at what are the solutions that could manifest themselves in terms of modernising services.

Q164 Chairman: I have heard it said by people in your industry - I do not know whether this is Intellect's view - that one of the problems is that government does not go out and say, "Hey, we have a problem, help us solve it," they go out and hire consultants to find the problem, to find the solution and then invite bids against a very tight specification, which means that your companies cannot offer the creative solutions that might be available to that particular problem. Is that fair?

Mr Kalisperas: That would be a fair assessment. The addition to that is that you then sometimes have Ministers standing up and saying, "We have announced this, we want it delivered by a certain date," and that automatically also curtails any sense of innovation because you are essentially delivering to a fixed timescale because that is the political dynamic currently existing at the moment. So, as I mentioned previously, you are very much procuring for the here and now without looking slightly further ahead, and also with the introduction of those deadlines you do not have adequate time to engage with the market to understand what solutions are out there, both from large multinationals and also from the smaller niche providers. That is the point at which innovation needs to come out. Once a tender is published it is too late - by and large the dye is cast. What needs to happen is a much better, a much earlier engagement between, obviously in our case, the technology industry and the procuring government department in order to understand not just the capability but also the capacity of the technology industry to deliver a solution.

Q165 Mr Wright: To continue along those lines, what we have to bear in mind of course is that the government, certainly in recent years, has procured an awful lot in terms of innovation, and of course we have always faced severe criticism from the general public. If we take just one example, the patients' electronic records in the NHS, and latterly when we talk about the ID cards. Anything that we do obviously creates a problem for us because the costing comes in and what we budget for increases and there are difficulties and problems, and so we get that criticism. So how do we overcome that argument where you have a government that wants to procure, they want to innovate, they want to invest in new technology, but we always get accused of wasting taxpayers' money and harming users of government outweigh any benefits from promoting innovation?

Mr Kalisperas: We have done a lot of work with the Identity and Passport Service on this sort of pre-procurement phase, that has been going on for four to five years now in terms of the National Identity Scheme, and there has been a very firm dialogue, I would say, a very honest dialogue between our members and the IPS about what sort of solution can be delivered and how should it be delivered.

Q166 Mr Wright: That is fine, but what I am saying is how do we go against our critics who say it is a waste of taxpayers' money?

Mr Kalisperas: I think it is very easy to criticise any IT project. If you take the National Identity Scheme, for example, much of the technology itself is already being used elsewhere and, to be honest, it has already been taken for granted by the general public particularly around the actual card itself in terms of chip and pin - we take that for granted when we use it in the financial services sector. The issue that we come up against is that we do not clearly communicate the benefits to the citizen in terms of any IT project. So financial services did a very good job in terms of introducing chip and pin; they said, basically, "If you use this technology it increases your security and it makes buying goods and services easier for you." Tesco, when they are using loyalty cards, in terms of the management of information they have communicated benefits clearly to the citizen. On the public sector IT projects by and large we have not done that, we have not articulated the benefits to the business community or to the citizen clearly enough, what it means for them - we talk about more general concepts around security, modernising public services, et cetera. Electronic patients' records by and large we take for granted now, that we can go into our local GP and he can look up our records - he no longer has that file of papers two or three inches thick because it is on a computer now. But we take it for granted and we do not articulate those benefits as effectively as we should.

Q167 Mr Wright: But the patient does not care whether the doctor has a pile of papers or has a computer screen, the patient is concerned about what the doctor tells that person about what is wrong with them, so how do we explain to that patient that it is going to cost billions of pounds for this technology?

Mr Kalisperas: Essentially if you take the National Programme the figure that is always quoted is the overall figure and when it breaks it down it is actually a smaller amount, but for the patient we have to say that, "Basically this is one step towards providing you with a better service, basically being able to provide you with an end to end service. If you go to see your GP you have to go into a hospital and then you have to have some after care after you leave hospital, with social services," and it should be the case that the technology should be there to enable better end to end tracking of the citizen, better benefits for them in terms of the care they will receive and how they are managed by healthcare professionals in the instance of electronic patient records because EPR should be just one component of a much wider solution, and that is where we are not at. As I said previously, we procure in silos so basically departments will look at what is important for them, and what we do not have is an implementation of the procurement strategy, which looks right across the board and says, "What are we trying to achieve through the procurement of these solutions? How can we best achieve that and how can we use organisations such as ourselves, the IT sector generally to deliver those solutions?" Fundamentally, the IT itself is just one component; there are significant cultural changes that need to take place within the public sector to use the technology, to realise that it is of benefit and it is not there to replace 80,000 civil servants, as we have been accused - it is very much about improving the service to the citizen, but we do not articulate it in those terms.

Q168 Chairman: Is there not always this tension in public procurement, about which you are expressing frustration, that playing safe is the easy option?

Mr Kalisperas: Yes.

Q169 Chairman: And that will always inhibit it because that way you are going to get less criticism in the media, less criticism in Parliament, but you will not get the innovation?

Mr Kalisperas: Yes, and there is always the fear that for a civil servant they will be up before the Public Accounts Committee or they will be up before any other Select Committee having to explain themselves, and fundamentally it is far easier to name the failed projects than the successful ones. The NAO, at the end of last year we contributed very fully with them, produced the report which listed 25 projects that they considered successful, projects that we have taken for granted, and the media coverage it received was minimal. It is not a surprise, but that is the environment.

Q170 Chairman: You sound like the Prime Minister last week - the "feral beasts" are at you, are they?

Mr Kalisperas: No, we accept that there will always be criticism and that is rightly so. If we are engaged with taxpayers' money, utilising taxpayers' money and we are not collectively between ourselves and the public sector delivering the solutions which are expected, then there should be a level of scrutiny, there should be a level of criticism, but that should not hinder the development of innovative solutions and it should not hinder the early debate between ourselves and government over not just procuring for here and now but what is the bigger picture and what role should technology play.

Q171 Chairman: But your experience of the Immigration and Passport Service is that you are getting that level of early discussion?

Mr Kalisperas: We run a served called Concept Viability, which provides for an early interaction between government departments and the IT industry.

Q172 Chairman: So there are examples of good practice in government which need to be more widely shared?

Mr Kalisperas: Yes.

Q173 Mr Weir: How well does the government use public procurement to promote energy efficiency and sustainability?

Mr Kalisperas: At the moment it is an emerging issue. I do not think the issue on energy and efficiency has been done as well as it could have been addressed. I think more needs to be done there. Fundamental to that again is the dissemination of best practice and of coordinated approach. The issue on sustainability is essentially twofold, it is not just about ensuring solutions have a longer life span, it is also about making sure that solutions are effectively future proof, so you do have one eye on the future, and I think that is an area for further development from within the public sector.

Q174 Mrs Curtis-Thomas: On your website you comment about the best practice guidelines published by the OGC in 2004 and you said that they "do not accurately reflect the best interests of customers and ultimately those of the industry". Do you think that the OGC has done anything to address these deficits and, if not, what are the problems that remain?

Mr Kalisperas: I think the OGC has made significant strides in the right direction. Last year we published our best practice guidelines for contracting, which sought to highlight the industry perspectives on how to contract for successful outcomes. There is always going to be a tension. There is the contracting model which seeks to provide very stringent terms on the supplier and I think there is a general recognition that that is not the way to go; nor is it in the taxpayers' interests to develop contracting outcomes which overtly favour the supplier. I think we have to contract somewhere in the middle, where there is a balance between rewarding the supplier for the risks that they take and also recognising the responsibilities that the public sector has for utilising taxpayers' money. Ultimately there should be - and it is something that OGC have done - some standard Terms and Conditions which should act as a guide for specific government departments.

Q175 Mrs Curtis-Thomas: So would you say that the OGC is making progress in the light of your criticism or industry criticism and amending their practices iteratively to reflect the circumstances as they arise?

Mr Kalisperas: Yes, I would say that I have been in Intellect for seven years and in that time we have always had an open and very honest dialogue with OGC.

Q176 Mrs Curtis-Thomas: So they are moving forward then?

Mr Kalisperas: Yes, definitely.

Q177 Mrs Curtis-Thomas: In which case do you think you could change the comments on your website to reflect that?

Mr Kalisperas: Our website is currently being updated, so yes.

Q178 Chairman: Overall, public procurement by government, marks out of ten? I know it is a curate's egg, good and bad in parts, but an exam answer is good and bad in part - you always get a mark in the end. Overall, out of ten, how well does government do at procurement?

Mr Kalisperas: Six and a half with could do better.

Chairman: That is really helpful.

Mr Wright: That is not the answer the Chairman wanted, by the way!

Q179 Chairman: Given the political constraints and media constraints, what is the best score they could hope for - eight, nine?

Mr Kalisperas: I think it will be a path of steady improvement, but just probably as a closing comment one of the things I would say is that we generally take a far more cautious interpretation of the EU competition laws than a lot of our European counterparts and that has caused much creativity, so if there was a slightly more liberal interpretation of those rules - and I think a couple of years ago the Wood Review, from the Engineering Employers' Federation, to which we gave input, was very accurate, and it is a complaint we hear a lot from our members that other countries do much more in terms of assisting companies. If there were more liberal interpretation of the directives the mark would be higher.

Q180 Chairman: If you were able to give us any practical examples of how other countries are more flexible with the rules than we are we would certainly welcome that. There is always the constant cry from government, "Give us the evidence", as you know.

Mr Kalisperas: Yes.

Chairman: Thank you very much for giving us the evidence today, we are very grateful to you; you have informed our deliberations to you considerably and we express our gratitude to you, gentlemen.