Are the estimated IT costs in the proposal credible?

Why this question is important:

The financial benefits of the proposed amalgamation are paper thin at $10m gain over ten years. Any significant change in transition costs nullifies an already very weak business case. 

The updated IT Costs Report

This report was prepared in February 2017 just a few weeks before the the draft proposal was published.

This report was instrumental in creating a major shift of financial outcome for the draft proposal in comparison with the previous year's option papers in which it was shown that over ten years there was no financial benefit from amalgamation.

"a high level preliminary allowance only" 

This report states on page 3, "As there is no firm scope of work and there are no comparator examples of this work this should be considered a high level preliminary allowance only."

What does this mean?

  • that with an undefined scope, the estimate is a best guess of what might be required
  • "no comparatpr examples" means that the estimate produced couldn't be assessed against similar work to see if the estimate was similar or reasonable

It means that a "high level preliminary allowance" is a ballpark quote of questionable accuracy.

However, on page 5 of the same report it says:

"For the mid-point scenario ($2.3 million), the net operating result for the Combined Wairarapa District Council option (Option B) is approximately $10 million higher than the Status Quo (Option A) over the ten year period."

There is no mention of this $10m being a "preliminary high level estimate"; it is reported as the gain over a ten year period that you woldn't get with the Status Quo.

The last page of the report makes the big admission

In the report, "Update to combined Wairarapa District Council costs Local Government Commission February 2017" the consultants completed their report with this sentence:

"Should a combined Wairarapa District Council be progressed, we recommend that a full IT transition scoping and costing exercise be commissioned to provide more accurate costs."

Why didn't the LGC follow the recommendations of their own consultants and complete that work before issuing the final proposal?

Without the full IT transition scoping and costing exercise
the IT costs estimates are not reliable.
This means that the $10m figure quoted as the gain over ten years is equally unreliable.

 

The context for focusing on the IT Costs

The shift in estimates for IT Costs moved a financially neutral proposition to one in which it is claimed that there will be a $10m gain over ten years. Given the big changes in estimates, by an order of magnitude, over the three published estimates it is necessary to do a complete study to provide confidence in the numbers. 

1. The huge changes in estimates over three years - from $25.5m down to $2.3m.

  • In 2014 $25.5m, the estimate was published in the so-called Supercity Draft Proposal (p218-219 6.377 Draft Proposal for Reorganisation of Local Government in Wellington Table 38).
  • In 2016 $10m, the estimate was published in the report "Wairarapa Local Government Assessment of Options June 2016". On page 49, 4.5.5 Corporate Support it states, "Previously Deloitte had identified a cost of $21M for this; based on the fact that the councils have similar IT systems and on recent experience in identifying an enterprise reporting system we have assumed a cost of $10M." (emphasis added)
    Note that it states $21m not $25.5m.
    To be fair, the report later states (page 51, 4.9 Financial), "Transition to single IT systems ($10 million). In its 2014 report to the Local Government Commission, Deloitte estimated that the cost to transition the three Wairarapa Councils to a single IT system would be in the order of $21-30 million." 
  • In 2017 $2.3m, the estimate was published in "Update to combined Wairarapa District Council costs Local Government Commission February 2017".

2. The $2.3m estimate doesn't at all cover the range of areas required for an IT system integration.

IT consultant and ex CIO at Wellington City Council pointed out in his verbal submission to the LGC that there are eleven components to integration of IT systems and that the estimates published by the LGC didn't cover them at all.

 

Some links to associated material

Shonky cost assumptions - analysis of the weak job on IT Costs

From zero to 10 in 6 months - how did the LGC get an estimated $10m return from amalgamation after reporting zero return 6 months prior?

The variable estimates of the LGC - the estimates have changed significantly from 2014 to 2017

Watch David Maclachlan's verbal submission to the LGC - outlining the 11 componnets of IT systems integration.

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