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US IT services giant EDS is seeking compensation from the UK Ministry of Defence (MOD) after being given bum orders for the delivery of a £2.3bn contract.

In the firm's annual report, filed with the US Securities and Exchange Commission last week, it said it was trying to get "adjustments" to compensate for the "financial impact" of the MOD having changed its mind about how it wanted its ambitious Defence Information Infrastructure (known as DII) built.

According to an MOD spokesman, the value of compensation sought by EDS was "in terms of the overall value of the contract...not significant". But EDS's SEC filing suggested the amount could be significant: "If we do not reach satisfactory resolution with respect to these matters...our revenues, earnings and free cash flow for this contract, or the timing of the recognition thereof, could be adversely impacted.

The statement also implied the MOD had failed to meet contractual responsibilities on which EDS was dependent to do its work.

In EDS-speak this was reported as "client driven program changes and inability to achieve dependencies". It expects to take a hit to profits and revenues if it fails to get compensation.

"We have met client expectations regarding key deliverables under this contract," EDS said, "despite program changes and inability to achieve certain related dependencies that have extended the initial development timeline."

The total value of this deal over 10 years, spread between a consortium of suppliers led by EDS, is £4bn. These issues have arisen just a year after the contract was awarded and the month before work was officially due to begin.

It was an ambitious project from the outset, and not just because of its size, involving 2,000 jobs and 70,000 desktop computers. It involved the assimilation of umpteen old computer systems into an all embracing network, the kind of task that complicates any IT project.

According to analysts at Ovum last year, DII was intended to "change the way the armed forces operate". EDS would be required to manage this organisational change, yet change management is time and again the spanner in the works of government IT projects. There is a severe shortage of people with the skills to manage this aspect.

There are other, more commonplace concerns raised by EDS's revelation. What, for example, will be the cost to the MOD of changing its mind about what it wanted from EDS, should it capitulate? According to analysts at Ovum last year, the project was estimated to bring savings of £170m within the first three years. £43m of this was expected to be gleaned in the first year. Will they still be realised?

Why did these changes have to be made and why weren't they spotted before? What impact will they have on project timescales and future costs?

The MOD provided written answers to some of these questions. The Gershon efficiency review had required some changes, but these had been anticipated, it said. Apparently, the contract "allows for a level of change".

It failed to say how changes in orders that had been anticipated and worked into EDS' contract would prompt the supplier to admit it was "working with the client to agree upon the appropriate adjustments provided for under the contract".

Contractual negotiations with the MOD prior to signings may have been "aggressive and confrontational", as said one source who had been involved in competitive negotiations for the MOD business before it was let this time last year.

"Once you get the contract out of the drawer and start poring over every sentence, then clearly the partnering has broken down," the source added. ®

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