'Nuclear option' threat to EDS as it races to sort out Child Support Agency fiasco

Minister considers withholding further payments if computer giant can't fix £456m IT systems, writes Clayton Hirst

Alan Johnson, the Work and Pensions Secretary, is considering withholding further payments to EDS, or even scrapping the contract altogether, after the disastrous introduction of a £456m computer system at the Child Support Agency (CSA).

Alan Johnson, the Work and Pensions Secretary, is considering withholding further payments to EDS, or even scrapping the contract altogether, after the disastrous introduction of a £456m computer system at the Child Support Agency (CSA).

The Government has already held back £12.1m from the Texan computer giant, which is headed by Mike Jordan. System failures have meant that, in the past 20 months, only one in eight single parents have received their payments.

But Mr Johnson, who described the IT system at the CSA as "problematic and unstable", is now considering imposing further penalties on EDS.

"Future deductions will depend on the level of performance achieved against the targets," said an official from the Department for Work and Pensions (DWP).

The computer system was supposed to be fully operational in April 2003, but it has suffered multiple failures. Most of the CSA payments are being handled on an old IT system.

Mr Johnson is also considering a "nuclear option" of scrapping the system, and with it the EDS contract, in its entirety. However, the DWP official said: "Our efforts are currently focused on making the existing service work better. We, of course, keep under review products available in the market in all areas of our activity."

EDS refused to comment, but it is understood that it will introduce a new piece of technology before the end of the year that will allow more CSA payments to be done on the new system. Its success will be critical in Mr Johnson's assessment of whether to pull the plug.

EDS's recent record in handling government IT projects has been patchy. Last week it wrote down $375m (£202m) on its biggest contract, an $8.8bn deal with the US navy. The announcement came as EDS reported a third-quarter net loss of $153m. EDS's European arm made a $177m operating profit, but this was down 5 per cent on last year after it was stripped of a £3bn contract to run the Inland Revenue's IT systems. This blow followed the bungled introduction of the tax credits system and marked the end of an era for the company.

In the 1990s EDS was the dominant government IT supplier. But by the turn of the century two things had undermined its position. First, companies such as Cap Gemini, Fujitsu and BT started to challenge EDS for the IT contracts, driving down margins. Second, the Government changed the way it bought IT systems, favouring smaller contracts. EDS was geared up for mega-IT deals, and so put at a disadvantage.

The Government has been quick to point the finger at EDS over the CSA fiasco. But there is evidence that it is equally to blame for the IT failures.

For the past three years the Government's procurement arm, the Office of Government Commerce, has attempted to reduce the risk of failure for IT projects through the introduction of a scheme called Gateway. However, earlier this month the National Audit Office said that many IT projects were still bedevilled by problems, reporting that: "The OGC has not been successful in achieving widespread dissemination of best practice."

At the root of the problem could be politics. Senior sources involved in government IT systems said that, in many cases, the goals set by politicians were unrealistic.

Commenting on the problems at the CSA, Richard Holway, director of the research company Ovum, said: "This was a hugely ambitious project. Right from the beginning it had an enormous amount of political overtones. In its manifesto, the Government promised that it would bring in the system by a certain time. EDS is not totally at fault; ministers make promises without considering the time it takes to implement the system."

If Mr Johnson does decide to go for the "nuclear option" and scrap the CSA system, he may well find that EDS will retaliate. One source said that EDS will consider taking legal action if the Government pulls the plug.