Will CSC negotiate a new NPfIT deal?

CSC has told investors that its discussions with the UK government on an interim agreement for deploying Lorenzo to the NHS are “continuing positively”.CSC says that an agreement could commit a certain number of NHS trusts to take...

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CSC has told investors that its discussions with the UK government on an interim agreement for deploying Lorenzo to the NHS are “continuing positively”.

CSC says that an agreement could commit a certain number of NHS trusts to take Lorenzo. Some of those trusts would be named in the interim agreement and the remainder within six months. CSC refers to them as "committed named trusts".

[Such a legal commitment for named NHS trusts to take Lorenzo may run counter to the post-NPfIT coalition philosophy of giving trusts the freedom to buy what they want, when they want, and from whom they want. The named trusts might have indicated on a  DH questionnaire a wish to take Lorenzo but an agreement between the government and CSC would commit the trusts irrevocably, or the DH could have to pay CSC compensation for non-deployment.]

CSC says the deployed product would be categorized as “base product” or “additional product” for pricing purposes. The DH would commit money to the base product. Other funds would be available centrally available for “additional products,  supplemental trust activity and local configuration”.

The DH would give CSC a structured set of payments following certain product deliveries, as well as additional payments to cover various deployments for the named trusts and payments for work already performed.

If the government does not sign a new deal, and allows CSC’s existing contracts to run down until they expire formally in 2015, this could keep further NPfIT-related costs to the taxpayer to a minimum.  But it risks legal action from CSC, which says the NHS contract is enforceable and that the NHS has no existing right to terminate the contract, unless for convenience (which is unlikely).

If the government had terminated CSC's contracts for its convenience (as opposed to alleged breach of contract) it would have had to pay CSC a termination fee capped at £329m as of 29 June 2012. CSC would also have been entitled to compensation for the profit it would have earned for the 12 months after the contract was terminated.

If the contract is not terminated, a new deal not signed, and no legal action is taken by either side, the amounts the UK government would have to pay CSC are likely to be minimised.  It is in CSC’s interests to maintain and enhance Lorenzo for those NHS sites that have deployed it.

So will the government sign a new deal with CSC at least to reduce the risks of CSC legal action? Or could the government hold out not signing any agreement until expiry of the contracts in 2015 on the basis that CSC has not delivered all it promised?

If a new deal is signed - and CSC indicates that an agreement is likely - the government may face accusations that it has broken its undertaking to dismantle the NPfIT.

David Camerson intervened personally to have the Cabinet Office’s Major Projects Authority look closely at NPfIT commitments.  His “efficiency” minister Francis Maude is likely to resist the signing of any new agreement

But will CSC accept the government's refusal to sign a new deal, when such a deal could enable CSC to recover at least some of the $1.485bn (£0.95bn) it recorded as an NPfIT contract charge in the third quarter of 2012?

What CSC's CEO says

Mike Lawrie, CSC's CEO told investors last week he has been working personally with UK officials on a possible deal.

"We are, I think, pretty close to getting towards a tentative agreement with NHS. Once that gets done, we still have to have the government approval, so think of that as the Cabinet Office and so on and so forth in the UK government, and let me be clear: we do not have any approval at that level, but we have been working very hard making sure we've got definition on what the offering is going to be, definition on what the pricing for that offering will be, definition on all the outstanding puts and takes so that each side has been claiming and talking about, we've got very good agreement on that.

"We've got a lot of work that we have done on the forward approval process, so when trusts some into the NHS to get approval on their projects so that it can be funded by NHS, that requires approval process. We have made a great deal of progress on that.

"So I think we are making very good progress on this and I'm optimistic that we will be able at some point in time to conclude, but we have not concluded as of today."

UK CSC NHS IT jobs

Referring to CSC's NPfIT contracts, Lawrie told Wall St and other financial analysts that the company has "about 200 people or so in the UK that are an expense to us that we do not have revenue to offset that expense, and we are running that through the P&L, we are not capitalizing on that".

He added: "That's in our results this quarter and, yes, there's a certain period of time where you say, gee, if you can't get to a contract, what are you going to do with those people? We have use for those people.

"We have good demand for our iSoft software in other parts of the world. I have been reluctant to disband that UK team until we get to some conclusion, because once you disband them, you don't get them back together. So once some go here or there to support other projects you don't get them back.

"I am quite comfortable that those people can be quickly deployed against revenue-producing opportunities. So either we get to a contract here, we can utilize those people, we begin to actively sell in the UK market, we begin to generate revenue, we begin to make money, or we don't. And as you know we took most of those charges last year, so I don't anticipate that we would have any large cash charges associated with disbanding those people if that would be the point that we got to... The lever point is to be able to go out and compete in the trusts in the UK and as you know, there are probably 1,000 trusts out there.

"So the leverage point is we want to be able to go out and begin to sell our agreed upon solution in those trusts and the trust would come back and try to get approval for funding from NHS. That's what we want to get into, so we can begin to sell our offering and then begin to deliver that offering and then bill that offering and collect the cash for that offering.

"And that's why what we did last quarter, why I mentioned in my comments, here we shipped this care management module to three trusts and it went live, and we have got agreement to be paid for that. That's a major step forward in our progress with NHS."

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