The Department of Health is doing the right things legally: on 4 February 2011 it notified CSC of a breach of contract, relating to a delay in achieving a milestone at Pennine Care NHS Foundation Trust.
The breach is disputed by CSC, so it looks as if the two sides are locked in a legal battle. Indeed it’s customary for the DH, when giving statements to the media, to say it will not discuss commercial negotiations. But this time a spokesman for the DH told E-Health Insider:
“We can confirm that the Department of Health is considering the options available under the current contract, including termination.”
Is this just macho talk, though?
Termination is not the desired option for either side, nor is it likely. CSC had to implement successfully Lorenzo at four named NHS sites to receive milestone payments and comply with its contract. None of the four sites has signed off acceptance - and indeed there is no guarantee that Pennine Care is going to take iSoft's Lorenzo. The DH seems in a good position to terminate CSC’s contract.
On the other hand CSC has hinted that it is willing to drop one of its main contractual holds on the NHS: a minimum revenue commitment. Under the original contracts, the DH guaranteed minimum volume payments to each local service provider.
In its negotiations with the DH, CSC may drop its contractual right to minimum volume payments. It may also comply with the DH's request to reduce the overall size of its £3.2bn NPfIT contracts by about £500m. In return CSC would have its commitments to deliver a fully-functioning Lorenzo to trusts in the Midlands, North and Eastern England much relaxed.
Mike Laphen, Chairman and CEO of CSC suggested during a conference call on the company’s third quarter results that CSC may take on the risk of selling to the NHS rather than receiving guaranteed minimum payments.
“We are still in discussions [with the DH]. I think it’s fair to say the customer has publicly said they want more flexibility. There’s a lot of ways to provide flexibility. I can’t tell you that there is no chance for some sort of a P&L [profit and loss] hit... There’s a lot of trade-offs.
“We haven’t included any numbers relative to that I think the area that probably will come in for most, for the biggest part of negotiation, is what volume. Right now we have pretty significant volume commitments and I think they would like to have more flexibility around that and have us [take] more risk in terms of selling rather than them guaranteeing.”
One question lingers: why did the DH guarantee its suppliers a minimum level of payments in the first place? It seems odd to commit the NHS to buying systems it may not actually install. Indeed the commitment weakens the DH's position in its negotiations with CSC.
Is CSC apt to be optimistic in its financial forecasts?
During the conference call on CSC’s third-quarter, an analyst from Credit Suisse, Bryan Keane, questioned Mike Laphen on the company’s forecast of growth of 4% to 7% in 2012.
Keane said: “ I guess I'm a little surprised that number [4% to 7%] seems a little bit aggressive, especially coming off some delays in contracts where your visibility is a little bit out of your hands why not take a more conservative approach, maybe more like flat revenue or something like that and then if there is some upside and these contracts come through then that will really help I think the shareholder base.
“Right now, a lot of people are just concerned that the numbers are always being set too high..."
Laphen replied that CSC tries to give analysts “the best visibility we can give you ”