CSC boss reckons on deal with government in June

The Cabinet Office might be none too keen on CSC's proposed NHS IT contract renegotiation proposals, but that message doesn't seem to have made it back to the firm's CEO Mike Laphen  who reckons a deal will be done next month.

A leaked memo from the Cabinet Office has disclosed that CSC has proposed a £264 million cut in its bill to carry on with the National Programme for IT in return for a longer contract and a massive cut in the number of Trusts it has to work with from 220 to 80. The Cabinet Office memo calls this unattractive, noting that if such a deal were to be accepted it would effectively double the cost of work at each Trust and called the negotiating skills of the Department of Health into question.

But just days after the Public Accounts committee accused CSC of having the NHS "over a barrel", CSC CEO Laphen told Wall Street analysts that a Memorandum of Understanding (MoU) is on track to be signed next month. "We're awaiting the final approval process to go through," he said. "There is a review underway as we speak, and we would expect that that will be finalised in the June timeframe. But of course, the government runs its own timetable so I can't guarantee that...But that's what our expectation would be, around the June timeframe."

He explained: "We've been in protracted negotiations on a non-binding agreement in principle or MoU to realign our contract with the direction the NHS wants to take the programme. The UK government is currently conducting a review of the entire NHS national programme. The proposed MoU terms are included within the scope of this review and, therefore, signing an agreement is dependent upon the completion of the government's process."

There seems to a be a lot riding on achieving this goal as CSC's guidance to Wall Street seems to be based on that MoU coming through on time and - reading between the lines - with minimal changes to what CSC has proposed. Laphen confirmed: "Our guidance assumes the terms that we have negotiated on the pending MoU. So whatever adjustments would come along with the signing of that MoU have already been incorporated in our fourth quarter and fiscal year '11 results. So given the signing of the MoU as it stands today, there would be no further adjustments."

It might be argued that this is a case of putting the cart firmly before the horse as the Cabinet Office reaction to the current proposals suggests there will be considerable opposition to them within government at large, while PAC Committee Chair Margaret Hodge has already declared: "There is no way these guys ought to be working for the government."

But Laphen seemed to regard the current NHS troubles as a bump in the road. Questioned about prospects for the forthcoming first fiscal quarter, he told analysts: "NHS is budgeted at the revised MoU rates. So no, that's not impacting it...it's a typically normal Q1, just a little bit more aggressive than some of the rightsizing. On the Commercial side, our Business Solutions and Services side, we're expecting some good growth numbers on that side of the business...if we complete the MoU in a timely way with the NHS government, we would also expect an uptick in revenue on the NHS contract as well."

It's difficult to get too clear a picture of just how the NHS situation is impacting on CSC's business at present as an ongoing Securities and Exchange Commission investigation into the firm led to less than normal levels of disclosure in their latest filing with the SEC. Indeed CFO Mike Manusco explicitly stated: "With regard to NHS, we will not get into the details of the MoU-related changes."

But others drew their own conclusions. "The guidance assumed no change to the NHS deal (puh-leaze!) and excluded the proposed acquisition of SOFT whose software is arguably the root cause of much of the problem," argued Anthony Miller of research firm TechMarketView. "CSC has since come under extensive fire in the press, with allegations that cancelling the contract will cost more than seeing it through to the bitter end. This is, of course, complete and utter rubbish. Has the Government no idea about the concept of 'cutting your losses'?"

He concluded: "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."