By Tony Collins
We trust the Cabinet Office more than the Department of Health to terminate or re-negotiate CSC’s £3.1bn NPfIT contracts.
- CSC’s strong position in NHS IT
- Could CSC claim hundreds of millions from DH?
- We’d be over a barrel, warns Connelly
- More expense to cancel CSC’s contract than complete it, says Connelly
- Are Connelly’s arguments flawed?
- What happened to the concept of cutting your losses?
- Remove life support for CSC’s contracts says Techmarketview
- CSC sees NHS IT as global reference site
- CSC MoU is “ready to go”
- Coalition reviews of CSC contracts a “stamp in the passport”
- CSC will split Lorenzo into smaller chunks
- No one NHS trust will dominate requirements
The share price of CSC, one of the biggest NHS IT suppliers, fell by 11% in New York trading this week, after its financial year-end forecast fell short of analysts’ estimates, according to Bloomberg.
Computer Sciences’ share price fell $4.76, or 11 percent, to $39.33 and although today [2 June 2011] the price is up slightly it is far below the 52-week high of $56.61. Bloomberg says that CSC has been hurt by delays in federal contract decisions and is also working to revise its NHS contract in the U.K. CSC has £3.1bn worth of NPfIT contracts.
CSC’s strong position in NHS IT
Despite the temporary knock in confidence for CSC over its share price, in part because of the NHS uncertainties, CSC remains in a strong negotiating position over the future of its work for the UK health service.
Could CSC claim hundreds of millions from DH?
Christine Connelly, the Department of Health’s CIO, told the Public Accounts Committee on 23 May 2011 that if the DH terminated its contract with CSC for convenience [rather than terminate for breach of contract] CSC could claim hundreds of millions in compensation.
Connelly also said there is the “potential that the supplier may then come to us and seek damages based on the work in progress that they have on their balance sheet today, with a view—not that I am saying at this point that we would share it—that we have impacted their ability to get return on that asset that we were holding.
“So they may come to us and seek damages as a proportion of that balance sheet value. Again, that may be several hundred million pounds”.
Further, by terminating CSC’s contract, the Department of Health would have to support NHS trusts that had bought CSC systems under the NPfIT.
“I am not talking about what it costs in terms of running those other systems, but there would be a cost if we decided no longer to have Lorenzo or [iSoft's] IPM or whatever. We would have to take the people who are currently using those systems and move them to something else; that would be a transition cost.
“There then is likely to be a period where we would still be running the systems that we had now terminated. If you look at what happened to us in the South with Fujitsu, Fujitsu increased the cost of supporting the systems. They almost doubled the cost compared to the contract that we had.
We’d be over a barrel, warns Connelly
“So for the period before we had transitioned the systems across, we would expect to pay some premium on that support and obviously we would seek not to do that, but given that we would then be over a barrel, because we are running systems that one supplier has provided and we have now terminated, if we do not manage that well that could be a very difficult position.
More expense to cancel CSC’s contract than complete it, says Connelly
“So potentially, if you ask me about the absolute maximum [the DH is exposed to on its CSC contracts] we could be exposed to a higher cost than the cost to complete the contract as it stands today.”
Are Connelly’s arguments flawed?
But Connelly’s comments appear to make several assumptions namely that:
a) the DH hasn’t a strong legal case against CSC for breach of contract. In fact the DH should be able to credibly contest any claim by CSC for hundreds of millions of pounds in compensation.
b) CSC could withstand a long legal case against the UK government. In fact Fujitsu wants to settle its legal dispute with the Department because the row could damage its relationship with the coalition. The policies of the coalition mean that suppliers no longer have isolated relationships with departments. Damage to a relationship in one department could affect a supplier’s relationship with government as a whole.
CSC is one of the top 10 suppliers to the UK Government. It will wish to avoid any dispute with the DH that could affect its relationship with the Cabinet Office’s new Crown representatives.
c) it would cost a fortune supporting NHS trusts that had bought NPfIT systems from CSC. In fact there are several healthcare suppliers – other than CSC and BT – that have been supporting and enhancing NHS trust systems outside of, and within, the NPfIT. They could support former CSC trusts at a fraction of the cost of BT [or CSC].
What happened to the concept of cutting your losses?
Anthony Miller, managing partner at market analyst Techmarketview, says it is “utter rubbish” to suggest that cancelling CSC’s contract will cost more than seeing it through to the bitter end. “Has the Government no idea about the concept of ‘cutting your losses’?” asks Miller.
Remove life support for CSC’s contracts says Techmarketview
“It should be clear to everyone involved that CSC’s NHS IT programme has deteriorated from ‘walking wounded’ to ‘do not resuscitate’. The sooner life support is removed, the better for all concerned.”
CSC sees NHS IT as global reference site
CSC, however, continues to see the NPfIT and its NHS IT work as a global reference site for healthcare IT.
Guy Hains, CSC’s President, Global Healthcare, told analysts last month that the NHS component of its business “is still the largest programme globally [and] is the reference point for most of our conversations with other national governments”.
He added: “It’s that experience, the learning points, the good and the bad, that carry forward into most of our development work we are doing elsewhere…”
CSC MoU is “ready to go”
Hains appeared confident that a new memorandum of understanding on its NPfIT work would be signed imminently. “We’ve got government reviews to complete. That’s imminent. We’ve done a lot of work regarding alignment with the NHS, and the MoU in that sense is ready to go”.
Coalition reviews of CSC contracts a “stamp in the passport”
He referred to the reviews of CSC’s NHS contracts as a “stamp in the passport before we go forward”. He said that creating Lorenzo code is “80% done”, adding: “We’ve got some important work to do and it relates to the clinician use and the very much frontline use of the system, and we’ve been learning with the NHS about the better way that we can deliver that”.
CSC will split Lorenzo into smaller chunks
CSC is to release Lorenzo in smaller chunks. “We’re doing it in ten smaller delivery units rather than two major releases. And we’ll be able to deploy those in a separable, incremented way. There’s no question that that will help digestion as it goes into the NHS”. As for working with early adopters, CSC is going through a “radical change in development”.
Hains said that rather than develop the software and then go through extended testing, “we are bringing the engagement of those lead clinicians and lead trusts upstream right into the requirements, refinement and capture stage, so that will allow us to shorten the time to market for the whole programme”.
No one NHS trust will dominate requirements
CSC is putting “governance into the programme” that means that one single trust doesn’t dominate in its requirements. “We’re getting a more common requirement through an expert user group.”
The Department of Health gives the impression that it is over a barrel, that it cannot afford to fall out with CSC. But it’s clear to others that it is the Department’s commercial lawyers that are cringing before CSC, asking to be forgiven for being a nuisance. In essence the Department is saying to CSC’s lawyers: “Do with us what you will.”
Can public funds be entrusted to the Department of Health in such circumstances?
Richard Bacon, a Conservative MP on the Public Accounts Committee who has followed the NPfIT for many years, told ComputerworldUK that CSC’s contract should be abandoned. He said that the company “should not be rewarded for failure”. He reacted with disbelief to the suggestion that it would cost more to cancel the contract than complete it.
“I find that idea incredible, staggering,” he said. The Department’s comments could be a negotiating ploy to strengthen its arguments around the continuation of the programme, he added.
“If it’s actually true that it would cost more to cancel, then it’s a scandal. It would be an enormous indictment of [NHS chief executive] David Nicholson as the project’s Senior Responsible Owner, and of Connecting for Health, which allowed such a deal to be signed. “If it’s the truth, then those officials should be dismissed.”
It’s hard to argue with Bacon’s logic. Indeed we are not sure the Department should be taking a lead in any negotiations with CSC or BT. The NPfIT contracts should be in the hands of the Coalition government, via the Cabinet Office, not the Department of Health’s.
The Cabinet Office represents the taxpayer. The Department of Health’s informatics directorate represents a variety of interests including its own. Those interests seem tied to the continuance of the NPfIT.
*Thanks to David Moss for drawing my attention to the Bloomberg article on CSC’s share price.