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The renegotiation of the IT contract between EDS and the Department for Work and Pensions is the latest a sign that shows the Dallas-based computer services giant is very much back in favour in Whitehall.

Only two years ago the company had a poor reputation as a reliable provider of public sector IT services. Its contract with the Inland Revenue (now Revenue & Customs) to administer the Gordon Brown’s new tax credit system was cancelled in December 2003 after computer errors led to large overpayments to families on low incomes, money that the government will struggle to claw back. Dawn Primarolo, the paymaster general, has threatened to sue if EDS does not pay compensation.

Delays, complications and flaws in EDS’s £456m IT system for the Child Support Agency plunged the already troubled organisation into deeper chaos, prompting Alan Johnson, then work and pensions secretary, to threaten to pull the plug on the system once and for all.

Sir Richard Mottram, the permanent secretary at the DWP, is frank about the problems of the past. “The DWP’s relationship with EDS say a couple of years ago was not good,” he told the Financial Times.

“We felt we weren’t actually recognised and treated as though we were one of their top three customers worldwide.” But since then, he explains, there has been a change of management at EDS and the relationship between the company and its client is a “much more constructive one”.

EDS itself described the loss of its contract with the Revenue as the company’s “Dunkirk”. The episode also reassured the government that there was a functioning market in IT support and that a failing provider could be punished with the loss of business with little interruption to services.

Meanwhile IT service providers are shifting to a standardised model – offering simplified, off-the-shelf systems that are cheaper to install and run. The government too has concluded that it can no longer afford to order sophisticated, tailor- made computer systems. One of the reasons that EDS’s computer system for the CSA went so badly wrong was that the government ordered 2,000 design changes.

The shift to simpler computer systems and single contracts covering all of the DWP’s agencies follows the Gershon review of public sector efficiency. Sir Richard believes the revised contract with EDS could set the standard for Whitehall. “If we can make this work, it is going to be a very significant model for the public sector going forward.”

The new contract will cost the DWP £180m a year less than previously envisagedbut will deliver better standards of service. The department has imposed stricter conditions on the company with larger penalties for bad performance.

EDS believes that the new contract gives it clarity over future revenues, allowing it to “book” an additional £800m over the next five years.

But Mike Caruso, its managing director for the DWP contract, acknowledges that by improving its relationship with one government department it will boost its chances of winning new business. “With your premier clients if you are not doing the right things then we won’t have opportunities to both grow our business or maintain our businesses.”

Despite the ongoing problems with the CSA – the contract constitutes only 10 per cent by value of its work for the department – EDS has begun to win new business from the public sector.

EDS, along with Fujitsu, was earlier this year awarded a £4bn contract to supply a unified computer system for the Ministry of Defence. A bigger prize for EDS would be a slice of the government’s identity card scheme, which is estimated to cost between £6bn and £18bn over 10 years.

Critics may continued to argue that EDS is being rewarded for failure. But other will point to the capacity of IT service providers to turn around their performance . Siemens was widely condemned for early IT failings at the Passport Agency, but the agency now wins awards for its fast and efficient service.

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