Post Office Horizon scandal: four reasons why the government’s model for outsourcing is broken

For over a decade, the Post Office and its supplier, Fujitsu, insisted that the Horizon system used in its branches was completely “robust”. When discrepancies appeared in hundreds of branch accounts across the country, the Post Office refused to believe the system was at fault and didn’t challenge the information it got from Fujitsu. Instead, it blamed the shortfalls on sub-postmasters, made them pay the losses, and prosecuted over 700 of them.

The multimillion-pound contract between the Post Office and Fujitsu is at the heart of the scandal. The way the contract worked meant that Fujitsu was incentivised to fix bugs quickly rather than well. The Post Office didn’t have the expertise it needed to understand what was going wrong. The Post Office’s dependence on Fujitsu also meant that it protected its relationship with them at the expense of sub-postmasters and the public.

The problems with the Horizon contract underpin one of the most widespread miscarriages of justice in UK history. But they are also replicated across thousands of other government contracts, including for many essential services, from hip replacements on the NHS to school PE lessons.

These problems are in fact produced by fundamental features of the UK’s outsourcing model.

1. The systems are too complex to understand

The Horizon system was incredibly complex. It had to process all kinds of transactions, from selling travellers cheques to managing rent payments, across tens of thousands of disparate branches, using a complicated web of communications systems.

The problem is, by outsourcing such a complex service, the Post Office ended up without the expertise to understand how it worked and what Fujitsu was (or wasn’t) doing. The contract also limited the amount of information they could get from the system. This all meant that the Post Office lacked the understanding and information about Horizon it would have needed to challenge the story it was getting from Fujitsu.

In its most recent statement on the inquiry into what happened at the Post Office, Fujitsu said “the inquiry has reinforced the devastating impact on postmasters’ lives and that of their families, and Fujitsu has apologised for its role in their suffering … Fujitsu is fully committed to supporting the inquiry in order to understand what happened and to learn from it.”

2. Contracts generate perverse incentives

If a service is complex, like Horizon was, it is impossible to specify everything in a written contract. Any buyer has to miss things out. But then how do they get a supplier to do everything they need and not just the things in the contract?

One of the reasons Horizon had major problems was that it was impossible to say in advance how each bug in the system should be fixed. Instead, the contract just stipulated how quickly Fujitsu needed to resolve problems. Bugs either weren’t fixed properly or the fixes introduced different bugs into the system. This kind of “service level agreement” is still standard in many government contracts.

3. The buyer is locked in

Complex services also require a supplier to invest in things like software, equipment and training that are specific to that service. There’s an idea in economics that if a supplier needs to make these “specialised investments”, it’s very difficult to get rid of that supplier. They have a huge advantage over their competitors, because anyone else would need to make these investments all over again.

This is what happened with the Horizon contract. Once Fujitsu had built the system, it couldn’t be replaced by another supplier, even when things went wrong. In the original procurement, it scored bottom on eight of the ten quality criteria, but won the contract because it said it would pay for the up-front development costs. The contract has since changed, but Fujitsu carried on and has just had its contract renewed up to 2025.

Getting locked into complex contracts is quite common for government. In 2014 HMRC announced that it would end its £8 billion contract with Capgemini for the UK’s tax collection system. It had to assign a budget of £700 million just to pay for the cost of transferring the contract to new suppliers. Now, ten years on, Capgemini is still the supplier. Apparently unable to find an alternative, HMRC ended up extending the contract to at least 2025.

4. Suppliers are prioritised over workers and the public

Because it couldn’t replace them, the Post Office depended on Fujitsu. This was compounded by the fact that Horizon was also essential to the Post Office’s business. Horizon was responsible for processing all branch transactions and keeping track of all money coming in and going out.

Losing Fujitsu would cause huge cost and disruption to an essential system. The Post Office depended on keeping Fujitsu onside during contract negotiations and making sure they were financially healthy. Predictably, they protected that relationship over sub-postmasters, who were individually expendable. This also came at the public’s expense, who got a poor service and have had to foot the bill for the Post Office’s mistake.

Essential public services across the UK rely on a few “strategic suppliers”. Government bodies are dependent on protecting their relationships with these suppliers and are invested in their financial stability. The collapse of Carillion in 2018, at a time when it was contracted to build NHS hospitals, brought home just how bad things could be if a major supplier went under.

How far the government would go to protect other strategic relationships remains to be seen. But as long as UK government bodies outsource complex, essential services, it’s unlikely that the Horizon fiasco will be the last public scandal with a government contract at its heart.