The Perfect Storm and the UK NHS Programme for IT?

Summary

The NHS Programme for IT is faced with a perfect storm of programme delays, financial crisis in the public sector and the political uncertainty of a general election.
The two surviving contractors, BT (NYSE:BT) and Computer Sciences Corporation (NYSE:CSC), are renegotiating their contracts with the Department of Health (DH). But long term success depends upon programme delivery over the next 3-6 months.The DH has signalled greater local choice and this is an opportunity for specialist application vendors.

Analysis

Introduction
The NHS Programme for IT (NPfIT) was initiated in 2003/4 when contracts with a total value of over £7bn were let for terms of up to 10 years. Since the contracts were signed some of the contracts, such as the BT N3 NHS network and the Atos Origin “Choose and Book” electronic booking system have been delivered successfully. Some of the enterprise-wide agreements for Microsoft (NASDAQ:MSFT) and Oracle (NASDAQ:ORCL) software have delivered considerable savings to the NHS. The BT “national spine” contract has been successful to an extent but its most ambitious element, a national summary care record, is delayed and far less functional than originally planned.

But the largest and most ambitious contracts which were to replace information systems in individual NHS organizations, the Local Service Provider (LSP) Care Record Services (CRS) contracts, have suffered large delays. One supplier, Accenture Plc, negotiated an exit from their £2bn CRS contract in 2006 and this was transferred to Computer Sciences Corporation (with the exception of a PACS contract which was retained by Accenture). Another supplier, Fujitsu Services, had their £900m contract terminated in 2008 and are now in a legal dispute with the Department of Health.

The two surviving LSP contractors, BT (£1.6bn total contract value, deploying Cerner (NASDAQ:CERN) Millennium) and Computer Sciences Corporation (CSC) (£3bn total contract value, deploying iSoft Lorenzo), and the Department of Health body, Connecting for Health, which manages the contracts have come under increasing political attacks from the opposition parties and critical questioning from Parliament’s Health Select Committee.

In April 2009 the new Director General of Informatics at the Department of Health, Christine Connolly, said that unless significant progress was achieved in the acute sector then a new plan for delivering informatics to healthcare would be considered. The targets were a successful go-live for BT in an acute trust by the end of November; CSC’s Lorenzo live in a non-acute setting by the end of November and working smoothly in an acute setting by March.

BT completed a deployment of Millennium in a small NHS hospital trust in Kingston, London, in November. But there have been new delays in deploying to larger hospitals. In May 2009 it wrote down its LSP contract as a part of a programme review in its loss-making Global Services business. CSC successfully deployed Lorenzo in a primary care trust in Bury in November but will not have Lorenzo working smoothly in the Morecambe Bay NHS Trust by the end of March. CSC has not yet written down any of its contracts.

The Perfect Storm
The National Programme for IT and its major contractors are now facing a perfect storm generated by:

  • the UK electoral cycle, a general election must be held on or before June 3rd 2010 (most observers expect a date of 6th May and a coalition or Conservative government which would be hostile to NPfIT);
  • the financial crisis and recession of 2008/9 with the resulting leap in public debt and the inevitability of sharp cuts in government (including NHS) expenditure after an election;
  • a programme that is seen as failing by many NHS organizations because it is running very late and is not delivering the expected benefits to them which include improved productivity and cost savings.

The Department of Health are responding to the approaching storm by attempting to complete renegotiation or reprocurement of all their key contracts before the election, saving £600m on the current contract values and getting committed funding for NPfIT for the next 5 years:
1. Renegotiating the two LSP contracts with CSC and BT
2. Renegotiating the other national contracts
3. Renegotiating the enterprise wide software agreements
4. Complete negotiation of a replacement for Fujitsu in the South (a £500m contract with BT, PACS transferred to CSC and procurements for the rest of community and acute systems through a framework contract)

What will be left after the Perfect Storm passes and which companies will benefit?
There have been statements by opposition political parties to the effect that they would cancel the NPfIT contracts. But this is not really practical because the suppliers have contracts, the Department of Health is already in dispute with Fujitsu Services who are claiming £700m as a result of their terminated contract, and the services currently being delivered have value.

The outcome for CSC and BT does depend crucially upon their performance and the makeup of the new government after the election. The current renegotiations are believed to involve taking cost out of the contracts while reducing both suppliers future liabilities in terms of developing and deploying new functionality – suggested in the ratio of £1 : £2. They are also expected to reduce the number of deployments to NHS acute trusts of CSC’s Lorenzo and BT’s Millennium.

If the two companies cannot increase the rate of deployment of their acute systems then the pressure for local choice will increase, starting with Foundation Trusts which have greater freedom from Department of Health control, and their installed base at the end of the contracts in 2014 will be small. This pressure will arrive earlier and be greater if the election results in a coalition or Conservative government.

As more local choice is given to NHS organizations then the market will open up to the larger application vendors who can also provide services and supply through the existing framework contracts:
Cerner Corporation;
iSoft Plc;
McKesson Corporation;
Epic Systems Corporation;
Intersystems Corporation;
Siemens AG;
ALERT Life Sciences Computing SA;
Systems C Healthcare Plc;
CSE Servelec Healthcare Systems Ltd;
EMIS Ltd;
TPP Ltd.

Finally, the enterprise wide agreements with Microsoft, Oracle and others (www.connectingforhealth.nhs.uk/industry/ewa/) are well liked by NHS organizations because license costs are paid centrally. But they are also very beneficial to the vendors as they have proven extremely effective against competition from open source and non-EWA vendors. Microsoft have a 9 year EWA believed to be worth £500m, which is at its 2nd 3 year breakpoint/ renegotiation. They are seeking to extend the range of software covered by the EWA. Their competitive advantage will last beyond the end of the agreement because in-house NHS and ISV investments are now based almost solely upon Microsoft platforms. There are now just under 1m users of Microsoft desktops in the NHS.

First published in GLG News<?a>

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