Best wishes for a Merry Christmas and, perhaps more importantly, a prosperous New Year to all our readers.
We will be in the UK over the Xmas/New Year break, so will be around to report on anything significant (I can only see the results of the Constellation/Gladstone bid being announced - but who knows what may happen.....). But frequent posts will restart from 5th January.
Tuesday, 23 December 2008
Monday, 22 December 2008
FiReControl – success or failure?
One question I was asked following my blog post on Fatally flawed Audit Commission report on Fire Services, given my experience in supplying mobilisation systems to Fire Brigades when in IAL, what was for my view on the current FiReControl project to close 46 emergency fire control rooms in England and move to 9 high-tech regional centres?
I think it’s too early to say whether the project is a success or not. Operationally, I think there is a very strong argument for having just 9 regional centres. Given the likely use of leading edge technology, and availability of specialised, well-trained control room staff, in the long term the project should both improve operational efficiency and save on annual running costs (although the Government appears to have now conceded that costs will actually increase by over £3.5m per annum).
However, the project itself smacks of Government’s usual inability to follow best practices when procuring new IT systems. As with the current ill-fated NHS computerisation projects, I’m told it has failed to involve key users in its design early enough, initially imposed a massively optimistic timescale for implementation, and seemingly failed to allow any contingencies in its plans and budgets.
The project is currently way over budget and running some 3 years behind schedule, such that there is now a serious risk that it will not be completed in time for the 2012 Olympics. As I understand it the design of some of the key software is still at a prototype stage, a stage which is throwing up serious gaps between the initial statement of requirements and what operational users actually need.
Apart from the obvious problems of getting systems from several suppliers working properly together, the main problem appears to be with the core Mobilisation & Resource Management System (MRMS), which records incidents, identifies and mobilises appropriate resources, and supports these resources during the incident. Although the MRMS is already in use with the Swedish Emergency Services and all police forces in Romania and Spain, it apparently lacks exposure to the UK market. So I wouldn’t be surprised to see even more delays announced...
So, overall, my answer is that long term FiReControl should be a success, but in the short-term I predict further delays, significant technical and operational problems during the first months of operation, and consequent pressure from interested parties to stop the roll-out. I just hope that I’m wrong, the technology works, and that the project is successful – we need it to work.
I think it’s too early to say whether the project is a success or not. Operationally, I think there is a very strong argument for having just 9 regional centres. Given the likely use of leading edge technology, and availability of specialised, well-trained control room staff, in the long term the project should both improve operational efficiency and save on annual running costs (although the Government appears to have now conceded that costs will actually increase by over £3.5m per annum).
However, the project itself smacks of Government’s usual inability to follow best practices when procuring new IT systems. As with the current ill-fated NHS computerisation projects, I’m told it has failed to involve key users in its design early enough, initially imposed a massively optimistic timescale for implementation, and seemingly failed to allow any contingencies in its plans and budgets.
The project is currently way over budget and running some 3 years behind schedule, such that there is now a serious risk that it will not be completed in time for the 2012 Olympics. As I understand it the design of some of the key software is still at a prototype stage, a stage which is throwing up serious gaps between the initial statement of requirements and what operational users actually need.
Apart from the obvious problems of getting systems from several suppliers working properly together, the main problem appears to be with the core Mobilisation & Resource Management System (MRMS), which records incidents, identifies and mobilises appropriate resources, and supports these resources during the incident. Although the MRMS is already in use with the Swedish Emergency Services and all police forces in Romania and Spain, it apparently lacks exposure to the UK market. So I wouldn’t be surprised to see even more delays announced...
So, overall, my answer is that long term FiReControl should be a success, but in the short-term I predict further delays, significant technical and operational problems during the first months of operation, and consequent pressure from interested parties to stop the roll-out. I just hope that I’m wrong, the technology works, and that the project is successful – we need it to work.
Friday, 19 December 2008
FiReControl – success or failure?
One question I was asked following my blog post on Fatally flawed Audit Commission report on Fire Services, given my experience in supplying mobilisation systems to Fire Brigades when in IAL, what was for my view on the current FiReControl project to close 46 emergency fire control rooms in England and move to 9 high-tech regional centres?
I think it’s too early to say whether the project is a success or not. Operationally, I think there is a very strong argument for having just 9 regional centres. Given the likely use of leading edge technology, and availability of specialised, well-trained control room staff, in the long term the project should both improve operational efficiency and save on annual running costs (although the Government appears to have now conceded that costs will actually increase by over £3.5m per annum).
However, the project itself smacks of Government’s usual inability to follow best practices when procuring new IT systems. As with the current ill-fated NHS computerisation projects, it has failed to involve key users in its design early enough, initially imposed a massively optimistic timescale for implementation, and seemingly failed to allow any contingencies in its plans and budgets.
The project is currently way over budget and running some 3 years behind schedule, such that there is now a serious risk that it will not be completed in time for the 2012 Olympics. As I understand it the design of some of the key software is still at a prototype stage, a stage which is throwing up serious gaps between the initial statement of requirements and what operational users actually need.
Apart from the obvious problems of getting systems from several suppliers working properly together, the main problem appears to be with the core Mobilisation & Resource Management System (MRMS), which records incidents, identifies and mobilises appropriate resources, and supports these resources during the incident. Although the MRMS is already in use with the Swedish Emergency Services and all police forces in Romania and Spain, it apparently lacks exposure to the UK market. So I wouldn’t be surprised to see even more delays announced...
So, overall, my answer is that long term FiReControl should be a success, but in the short-term I predict further delays, significant technical and operational problems during the first months of operation, and consequent pressure from interested parties to stop the roll-out. I just hope that I’m wrong, the technology works, and that the project is successful – we need it to work.
I think it’s too early to say whether the project is a success or not. Operationally, I think there is a very strong argument for having just 9 regional centres. Given the likely use of leading edge technology, and availability of specialised, well-trained control room staff, in the long term the project should both improve operational efficiency and save on annual running costs (although the Government appears to have now conceded that costs will actually increase by over £3.5m per annum).
However, the project itself smacks of Government’s usual inability to follow best practices when procuring new IT systems. As with the current ill-fated NHS computerisation projects, it has failed to involve key users in its design early enough, initially imposed a massively optimistic timescale for implementation, and seemingly failed to allow any contingencies in its plans and budgets.
The project is currently way over budget and running some 3 years behind schedule, such that there is now a serious risk that it will not be completed in time for the 2012 Olympics. As I understand it the design of some of the key software is still at a prototype stage, a stage which is throwing up serious gaps between the initial statement of requirements and what operational users actually need.
Apart from the obvious problems of getting systems from several suppliers working properly together, the main problem appears to be with the core Mobilisation & Resource Management System (MRMS), which records incidents, identifies and mobilises appropriate resources, and supports these resources during the incident. Although the MRMS is already in use with the Swedish Emergency Services and all police forces in Romania and Spain, it apparently lacks exposure to the UK market. So I wouldn’t be surprised to see even more delays announced...
So, overall, my answer is that long term FiReControl should be a success, but in the short-term I predict further delays, significant technical and operational problems during the first months of operation, and consequent pressure from interested parties to stop the roll-out. I just hope that I’m wrong, the technology works, and that the project is successful – we need it to work.
Capita/IBS – Competition Commission sets timetable
The Competition Commission has published the timetable for their investigations into Capita’s acquisition of IBS. The target is to publish their final report by the end of April 2009.
Unfortunately, the main terms of reference for the CC investigation and report are for the CC to answer the question of whether or not the merger has resulted, or may be expected to result in a substantial lessening of competition. Personally, I don’t think it will take long to conclude that there has been a substantial lessening.
However, as I noted in my blog post Capita/IBS – OFT’s final text - what next? I believe that there is much more to be considered by the CC – if only it was allowed to. Given the specialist nature of the R&B market and the control that central government retains over it, the CC should make a rapid decision to allow the acquisition to proceed with some levels of protection as offered by Capita in its submissions to the OFT.
I still believe that it will require a senior government decision, taken quickly, to resolve this situation – and that seems unlikely at the moment.
Unfortunately, the main terms of reference for the CC investigation and report are for the CC to answer the question of whether or not the merger has resulted, or may be expected to result in a substantial lessening of competition. Personally, I don’t think it will take long to conclude that there has been a substantial lessening.
However, as I noted in my blog post Capita/IBS – OFT’s final text - what next? I believe that there is much more to be considered by the CC – if only it was allowed to. Given the specialist nature of the R&B market and the control that central government retains over it, the CC should make a rapid decision to allow the acquisition to proceed with some levels of protection as offered by Capita in its submissions to the OFT.
I still believe that it will require a senior government decision, taken quickly, to resolve this situation – and that seems unlikely at the moment.
Thursday, 18 December 2008
Constellation fires last(?) salvo in battle for Gladstone
Constellation has issued what I suspect will be its last letter to shareholders about its current bid for Gladstone. The letter makes it clear that the 25p offer is final and will not be increased unless a competitive situation arises.
The letter makes no new points, but re-emphasises the existing arguments. Quoting from the RNS:
“the Gladstone Board has failed to provide Gladstone shareholders with any quantitative assessment of what the future might hold. In particular the Gladstone Board has:
· made NO forecast for profits in the future
· given NO quantitative assessment of the future trading potential that will result from its 'significant investment programme'
· given NO quantitative support to its statement that 'Gladstone has excellent growth prospects'
· given NO specific timing for the commencement of dividend payments
· produced NO details about any possible alternative offer for Gladstone”
Again, no one can dispute their points. But likewise, I don’t think anyone can dispute Gladstone’s Board’s view that the bid is “opportunistic and wholly inadequate”.
As noted in my previous posts, with acceptances – at 11.5 % above Constellation’s current 29.9% shareholding - it seems likely that their offer will not succeed at its current level.
My expectation is that the current bid will lapse, the share price will drop back to c 18p, but that later in 2009 there will be another bid, either from Constellation, or another company that has been able to acquire Constellations 29.9% shareholding (always assuming that Constellation is willing to sell it). If Gladstone’s Board get their act together, this could be for significantly more that 25p – or if not, Constellation may get Gladstone at even less than the 25p currently bid.
The letter makes no new points, but re-emphasises the existing arguments. Quoting from the RNS:
“the Gladstone Board has failed to provide Gladstone shareholders with any quantitative assessment of what the future might hold. In particular the Gladstone Board has:
· made NO forecast for profits in the future
· given NO quantitative assessment of the future trading potential that will result from its 'significant investment programme'
· given NO quantitative support to its statement that 'Gladstone has excellent growth prospects'
· given NO specific timing for the commencement of dividend payments
· produced NO details about any possible alternative offer for Gladstone”
Again, no one can dispute their points. But likewise, I don’t think anyone can dispute Gladstone’s Board’s view that the bid is “opportunistic and wholly inadequate”.
As noted in my previous posts, with acceptances – at 11.5 % above Constellation’s current 29.9% shareholding - it seems likely that their offer will not succeed at its current level.
My expectation is that the current bid will lapse, the share price will drop back to c 18p, but that later in 2009 there will be another bid, either from Constellation, or another company that has been able to acquire Constellations 29.9% shareholding (always assuming that Constellation is willing to sell it). If Gladstone’s Board get their act together, this could be for significantly more that 25p – or if not, Constellation may get Gladstone at even less than the 25p currently bid.
Wednesday, 17 December 2008
Fatally flawed Audit Commission report on Fire Services
The Audit Commission has released a new report, Rising to the Challenge in which it claims that fire and rescue services could save as much as £200m a year without threatening the safety of firefighters or the public.
Michael O'Higgins, chairman of the Audit Commission, said: "There is no doubt that firefighters do a great job but the best services have shown they can respond to incidents more efficiently without jeopardising safety. The rest must follow their example."
The report is, I fear, a typical finance person’s view of an emergency service that believes it can be represented by efficiency targets, KPI’s and utilisation rates. It is, in part, a worthy review of the historic statistics and finances, but should represent only one of the views that government, both local and central, uses to decide on the future direction of the Fire Service. The idea that an emergency service can be run just like a business – matching future resources to historic numbers of incidents – is positively frightening, as are the following quotes from the report:
‘What is needed now is a system which deploys the resources of people and equipment so they are prepared to deal with the most likely risks of fire in the most cost-effective way” – surely we’re more concerned with saving lives than money?
“capacity substantially exceeds the likely call on it” – good, long may it continue
“Fire services can do more to reconcile the mismatch between the availability of resources and the time when those resources are required.” – really, and which glass ball should they use to predict where/when the next major fire will occur?
What absolute balderdash – we need a fire service that can deal with incidents and emergencies that are, by their very essence, unplanned and incapable of being predicted accurately. Unusually for once, I concur with a union view, as expressed by Matt Wrack, the Fire Brigades Union General Secretary:
“It is clearly written by people with no knowledge whatsoever of firefighting... whose only interest is in finding ways to penny-pinch on public safety”
“It is true that you can strip fire stations of their night cover, so long as you are willing to risk lives because firefighters cannot get to fires fast enough. We know that the public wants to go to sleep at night knowing firefighters are ready if they are needed. But the Audit Commission does not seem to care what the public wants.”
“ .... more firefighters are being killed at fires than at any time for 30 years. I find it incredible that, in the face of this information, they still put forward proposals which will place firefighters in even greater danger.” (In the five years since 2003, at least 22 firefighters have died while on duty, significantly more than in the previous five years.)
In the face of a 10%+ growth of the population in the UK, firefighter numbers have remained unchanged. The report rightly points to the more efficient use of firefighters – the numbers staying roughly the same but with around 1,000 firefighters moving from full-time to retained – and with more flexible rostering.
But the report chooses not to investigate nor report on the several major incidents which have highlighted shortages of personnel and equipment that has lead to inadequate responses by the fire services to those events and, in some cases, to the deaths of firefighters.
Throughout the majority of its 108 pages, the report focuses on front-line firefighters numbers and efficiencies, whilst avoiding any investigation of the 35% growth in non-firefighting members of staff over the past 7 years. A major omission - why? Surely this is an area where efficiency savings can be made without affecting the front-line services? Or is one set of civil servants trying to protect another? When/if I need the fire service I’d like to have a properly trained firefighter please – not another pen pusher.
Turning back to inappropriate comments from the Audit Commission, Michael O'Higgins said: "In today's financial climate the fire service, like the rest of the public sector, must rise to the efficiency challenge."
But, according to the report, “expenditure by individual fire services in England varied from just under £30 per head of population to just under £60 per head”, and is exhorting the fire services to save a further 10% of their costs. At a time when Central Government is throwing £1,000’s per head of population into the banks, I’m happy to pay the extra £6-£12 per annum to have a fire service that is more likely to be there quickly if/when I may need it.
Michael O'Higgins, chairman of the Audit Commission, said: "There is no doubt that firefighters do a great job but the best services have shown they can respond to incidents more efficiently without jeopardising safety. The rest must follow their example."
The report is, I fear, a typical finance person’s view of an emergency service that believes it can be represented by efficiency targets, KPI’s and utilisation rates. It is, in part, a worthy review of the historic statistics and finances, but should represent only one of the views that government, both local and central, uses to decide on the future direction of the Fire Service. The idea that an emergency service can be run just like a business – matching future resources to historic numbers of incidents – is positively frightening, as are the following quotes from the report:
‘What is needed now is a system which deploys the resources of people and equipment so they are prepared to deal with the most likely risks of fire in the most cost-effective way” – surely we’re more concerned with saving lives than money?
“capacity substantially exceeds the likely call on it” – good, long may it continue
“Fire services can do more to reconcile the mismatch between the availability of resources and the time when those resources are required.” – really, and which glass ball should they use to predict where/when the next major fire will occur?
What absolute balderdash – we need a fire service that can deal with incidents and emergencies that are, by their very essence, unplanned and incapable of being predicted accurately. Unusually for once, I concur with a union view, as expressed by Matt Wrack, the Fire Brigades Union General Secretary:
“It is clearly written by people with no knowledge whatsoever of firefighting... whose only interest is in finding ways to penny-pinch on public safety”
“It is true that you can strip fire stations of their night cover, so long as you are willing to risk lives because firefighters cannot get to fires fast enough. We know that the public wants to go to sleep at night knowing firefighters are ready if they are needed. But the Audit Commission does not seem to care what the public wants.”
“ .... more firefighters are being killed at fires than at any time for 30 years. I find it incredible that, in the face of this information, they still put forward proposals which will place firefighters in even greater danger.” (In the five years since 2003, at least 22 firefighters have died while on duty, significantly more than in the previous five years.)
In the face of a 10%+ growth of the population in the UK, firefighter numbers have remained unchanged. The report rightly points to the more efficient use of firefighters – the numbers staying roughly the same but with around 1,000 firefighters moving from full-time to retained – and with more flexible rostering.
But the report chooses not to investigate nor report on the several major incidents which have highlighted shortages of personnel and equipment that has lead to inadequate responses by the fire services to those events and, in some cases, to the deaths of firefighters.
Throughout the majority of its 108 pages, the report focuses on front-line firefighters numbers and efficiencies, whilst avoiding any investigation of the 35% growth in non-firefighting members of staff over the past 7 years. A major omission - why? Surely this is an area where efficiency savings can be made without affecting the front-line services? Or is one set of civil servants trying to protect another? When/if I need the fire service I’d like to have a properly trained firefighter please – not another pen pusher.
Turning back to inappropriate comments from the Audit Commission, Michael O'Higgins said: "In today's financial climate the fire service, like the rest of the public sector, must rise to the efficiency challenge."
But, according to the report, “expenditure by individual fire services in England varied from just under £30 per head of population to just under £60 per head”, and is exhorting the fire services to save a further 10% of their costs. At a time when Central Government is throwing £1,000’s per head of population into the banks, I’m happy to pay the extra £6-£12 per annum to have a fire service that is more likely to be there quickly if/when I may need it.
Will 3i’s financial woes affect Civica?
In the Telegraph today entitled 3i tumbles amid fears over its future, Ben Harrington notes that JP Morgan Cazenove analyst Christopher Brown yesterday warned: "There is clearly a risk that 3i – like any geared company – could go bust if current conditions persist for several years and refinancing is no longer possible."
However, whilst 3i’s carries high levels of debt, it seems unlikely that there will be any major problem much before the end of 2010, when there is a major debt repayment due. By then, hopefully, we will be seeing the light at the end of the tunnel and nearing the end of the current recession (depression?). It would appear that all 3i’s need to do is to ensure that its cash generation is on target, and that it is able to maintain current cash levels.
But will that suggest that its companies, including Civica, will not have access to significant funds to make further acquisitions? Certainly they’ll be under pressure to generate cash from their existing businesses, but further significant acquisitions may be off the agenda for the next couple of years.
Which might make it difficult for Civica to bid for IBS should it come back onto the market (and should Capita allow Civica to bid for it – something that I noted in yesterday’s blog post is unlikely to happen). This would be a major blow to Civica, which has grown successfully out of well timed and executed acquisitions.
However, whilst 3i’s carries high levels of debt, it seems unlikely that there will be any major problem much before the end of 2010, when there is a major debt repayment due. By then, hopefully, we will be seeing the light at the end of the tunnel and nearing the end of the current recession (depression?). It would appear that all 3i’s need to do is to ensure that its cash generation is on target, and that it is able to maintain current cash levels.
But will that suggest that its companies, including Civica, will not have access to significant funds to make further acquisitions? Certainly they’ll be under pressure to generate cash from their existing businesses, but further significant acquisitions may be off the agenda for the next couple of years.
Which might make it difficult for Civica to bid for IBS should it come back onto the market (and should Capita allow Civica to bid for it – something that I noted in yesterday’s blog post is unlikely to happen). This would be a major blow to Civica, which has grown successfully out of well timed and executed acquisitions.
Tuesday, 16 December 2008
Just how bad is Civica’s Revs & Bens offering?
That was one of the questions raised after my blog item commenting on the OFT’s full text of their decision to refer Capita’s acquisition of IBS to the Competition Commission.
Yes – I was the Director responsible for Civica’s Revenues & Benefits products (for a short time) and yes, in my defence, my main business recommendation on what to do with the R&B developments was not accepted by the Board. But no - I’m not about to reveal confidential information about my previous employer.
All I will say is that, immediately after acquiring responsibility for the products I met with (amongst others) two authorities that used the same Civica R&B products on the same day. One loved the product, the other didn’t. The one that loved the product spent little more than the annual maintenance fee with Civica, the other entered into projects worth £100k’s – showing just how unpredictable customers can be.
I gave up responsibility for the R&B products some two years ago and I don’t know how they have progressed since my departure - other than the OFT’s comment that it found that “third party responses did raise serious questions in relation to Civica's position in the market, highlighting its limited intentions with regard to competing for new work and perceived shortcomings in the quality of the product on offer which would require significant investment.”
So, I can but recommend that you talk to Civica’s existing customers (more than one) to find out about the products.
However Civica, like Anite with Pericles, lacks the market share and apparently the reputation to succeed in pure R&B applications – witness the lack of new sales activity identified in the recent OFT reports. In the Local Government market the saying goes that “good news travel slowly, whilst bad news travel like wildfire”. Both are/were in the same boat.
But should Capita be forced to divest IBS, I would guess that Civica could potentially be in pole position to pick it up, were a trade sale route followed. With Comino’s successful workflow and document management applications in R&B departments, a Civica/IBS R&B offering would be serious competition for Capita and Northgate – perhaps another reason why Capita will fight to retain IBS (and if not, to ensure it doesn’t fall into Civica’s hands)?
Yes – I was the Director responsible for Civica’s Revenues & Benefits products (for a short time) and yes, in my defence, my main business recommendation on what to do with the R&B developments was not accepted by the Board. But no - I’m not about to reveal confidential information about my previous employer.
All I will say is that, immediately after acquiring responsibility for the products I met with (amongst others) two authorities that used the same Civica R&B products on the same day. One loved the product, the other didn’t. The one that loved the product spent little more than the annual maintenance fee with Civica, the other entered into projects worth £100k’s – showing just how unpredictable customers can be.
I gave up responsibility for the R&B products some two years ago and I don’t know how they have progressed since my departure - other than the OFT’s comment that it found that “third party responses did raise serious questions in relation to Civica's position in the market, highlighting its limited intentions with regard to competing for new work and perceived shortcomings in the quality of the product on offer which would require significant investment.”
So, I can but recommend that you talk to Civica’s existing customers (more than one) to find out about the products.
However Civica, like Anite with Pericles, lacks the market share and apparently the reputation to succeed in pure R&B applications – witness the lack of new sales activity identified in the recent OFT reports. In the Local Government market the saying goes that “good news travel slowly, whilst bad news travel like wildfire”. Both are/were in the same boat.
But should Capita be forced to divest IBS, I would guess that Civica could potentially be in pole position to pick it up, were a trade sale route followed. With Comino’s successful workflow and document management applications in R&B departments, a Civica/IBS R&B offering would be serious competition for Capita and Northgate – perhaps another reason why Capita will fight to retain IBS (and if not, to ensure it doesn’t fall into Civica’s hands)?
Monday, 15 December 2008
Decision time for Gladstone shareholders
It’s decision time for Gladstone shareholders. Constellation has announced a final, extension (to 30 December) for its bid for Gladstone and has made it clear that the 25p offer is final and will not be increased unless a competitive situation arises.
Acceptances – at 11.5 % - have not grown dramatically, and with Constellation’s own 29.9% holding, amount to just over 41% - so it seems likely that their offer will not succeed at its current level. Given the time of year, I would be surprised by anyone else entering the bidding now, so it looks as if shareholders have to accept either 25p now, or face the share price dropping back – to, say, 18p – after the bid lapses.
It will be interesting to see what Constellation does with its 29.9% shareholding if their bid lapses – my guess is that it will retain it, wait 6 months to see how the current Gladstone Board manages the business in a declining market, and possibly bid again if the Board does badly.
Yes – they might be persuaded to part with the holding for a short-term profit (and most probably an immediate bid from the purchaser), but my guess is that they’re in this for the long-term.
Acceptances – at 11.5 % - have not grown dramatically, and with Constellation’s own 29.9% holding, amount to just over 41% - so it seems likely that their offer will not succeed at its current level. Given the time of year, I would be surprised by anyone else entering the bidding now, so it looks as if shareholders have to accept either 25p now, or face the share price dropping back – to, say, 18p – after the bid lapses.
It will be interesting to see what Constellation does with its 29.9% shareholding if their bid lapses – my guess is that it will retain it, wait 6 months to see how the current Gladstone Board manages the business in a declining market, and possibly bid again if the Board does badly.
Yes – they might be persuaded to part with the holding for a short-term profit (and most probably an immediate bid from the purchaser), but my guess is that they’re in this for the long-term.
Ten or more layers of management
Friday saw Newcastle City council announced that it is to shed 270 management jobs to save over £9m next year.
The council explained further that it “employs around 10,000 staff (excluding teaching staff, which are not covered by these plans), of whom around 1,400 are managers. Over half of these 1,400 manage four or fewer people, and in some areas the Council has ten or more layers of management between the Chief Executive and front-line staff directly serving the public. The new plans intend that managers will each lead teams with a minimum of seven staff each, and often up to 12.”
One can but wonder how such a management structure was allowed to grow, but full marks to the council for addressing it – always assuming that it actually achieves it, and doesn’t just retain the staff but in the same job roles without the title “manager”.
From my experience there are many larger authorities – Mets, Unitaries and London Boroughs that can follow Newcastle’s example and shed several layers of (unnecessary) management. With the proper implementation of modern technology it is possible to have much flatter management structures; most times with faster, better communication that older, more hierarchical structures.
Surprisingly, from my experience, I believe that many counties also have more efficient structures (except possibly in the larger departments of Education and Social Services), and district councils have, in general, already taken such steps and have much better management structures.
It will interesting to see how many larger authorities bite the bullet and follow Newcastle’s lead....
The council explained further that it “employs around 10,000 staff (excluding teaching staff, which are not covered by these plans), of whom around 1,400 are managers. Over half of these 1,400 manage four or fewer people, and in some areas the Council has ten or more layers of management between the Chief Executive and front-line staff directly serving the public. The new plans intend that managers will each lead teams with a minimum of seven staff each, and often up to 12.”
One can but wonder how such a management structure was allowed to grow, but full marks to the council for addressing it – always assuming that it actually achieves it, and doesn’t just retain the staff but in the same job roles without the title “manager”.
From my experience there are many larger authorities – Mets, Unitaries and London Boroughs that can follow Newcastle’s example and shed several layers of (unnecessary) management. With the proper implementation of modern technology it is possible to have much flatter management structures; most times with faster, better communication that older, more hierarchical structures.
Surprisingly, from my experience, I believe that many counties also have more efficient structures (except possibly in the larger departments of Education and Social Services), and district councils have, in general, already taken such steps and have much better management structures.
It will interesting to see how many larger authorities bite the bullet and follow Newcastle’s lead....
Saturday, 13 December 2008
Thursday, 11 December 2008
Capita/IBS – OFT’s final text - what next?
The OFT has finally published the text covering their decision to refer Capita’s acquisition of IBS to the Competition Commission.
In my mind, the text does little to change my views expressed in my earlier blog item that, based on the criteria used by the OFT, it had little choice but to refer the acquisition to the CC on the basis of the reduction in competition. However, there is some interesting narrative on the various arguments and discussions that have clearly taken place during the investigation period.
One such discussion was clearly about Civica’s position in the Revenues & Benefits market and the competitive nature of their offering. “Capita submitted that Civica is a longstanding competitor in the market for R&B software services and that 3i Investments plc's recent acquisition of Civica would give Civica access to substantial capital for business development. Capita also stated that the Civica product has received good ratings and therefore has good referenceability.”
However, in discussions with others, OFT found that “third party responses did raise serious questions in relation to Civica's position in the market, highlighting its limited intentions with regard to competing for new work and perceived shortcomings in the quality of the product on offer which would require significant investment. The OFT has no evidence on which to conclude that Civica is likely to present an increased competitive constraint in the future. [REDACTED].”
(By the way redacted – I had to look it up – means ‘confidential information that has been removed from a document’). I can but guess at the further information, presumably about Civica’s product, that was removed.
Further on there is discussion about new entrants to the market:
“Capita considered that the most likely new entrants to the market are companies which already supply software, particularly financial software, to local government. Capita also stated that providers of software for use in social care have the necessary expertise to enter. Capita estimated the costs of entry for these players to be in the region of [<£2 million] as they already have the necessary expertise. It argued that a new entrant could enter the market within a year to 18 months given the pool of available staff.”
However, “the OFT's investigations have cast significant doubt on the potential for new entry into the R&B segment. Specifically, the OFT has been made aware that the costs and time involved in entering the market with a new product are significant at around £2-10m and two years respectively.”
Having had personal exposure to the costs of developing both financial and R&B systems, I would put the estimate at close to the £10m upper limit quoted by the OFT, and most probably an elapsed time well in excess of the two years quoted.
Given that there will be very few new tenders over the coming years (most Pericles customers will no doubt try to stay with Northgate, leaving only a small number of Pericles sites and the Civica sites yet to purchase new systems – Capita estimated “that the value of contracts expected to come up for renewal (where the OFT's concerns lay) was £[1-2] million for 2009”), I can’t see anyone producing a business plan that would be approved in a normal financial environment let alone the current financial climate.
However, an even bigger concern for new entrants (and existing suppliers considering a major speculative investment in the R&B market) is the serious risk that Central Government will totally change one or more of the areas (I suspect that the area of Housing Benefits is the one causing the most concern), potentially destroying the future market for new systems overnight.
And what would Central Government do if it were to introduce a new method of collecting revenue or supplying benefits (e.g. to replace HB)? Bearing in mind that many of the replacement R&B systems over the past few years have been largely funded by Central Government, no supplier is likely to start any development without their support. Given the current government’s apparent preference for single suppliers in such situations, no doubt there would be a competitive tender for a single supplier (I can’t see Central Government funding two or even three suppliers to develop competing systems to fulfil the same requirements).
So perhaps having two strong suppliers of R&B (i.e. Northgate/Sx3/Anite and Capita/IBS) is a luxury compared to the future of potentially having a single supplier....
Meanwhile, there will undoubtedly be many months (years?) of uncertainty before the CC rules on the acquisition and, if it rules against it, decides and agrees on the remedies. Then we may have a new government, possibly new R&B policies, and a whole new ballgame. In the meantime we will have one supplier hobbled with the costs of running two sales teams and maintaining separate teams with Chinese walls – inevitably incurring increased costs that will eventually be passed onto the customer....
Given the specialist nature of the R&B market and the control that central government retains over it, the CC should make a rapid decision to allow the acquisition to proceed with some levels of protection as offered by Capita in its submissions to the OFT. As with the OFT decision, my concern is that the CC will be constrained in what it is allowed to do, and that it will require a senior government decision, taken quickly, to resolve this situation – and that seems unlikely at the moment.
In my mind, the text does little to change my views expressed in my earlier blog item that, based on the criteria used by the OFT, it had little choice but to refer the acquisition to the CC on the basis of the reduction in competition. However, there is some interesting narrative on the various arguments and discussions that have clearly taken place during the investigation period.
One such discussion was clearly about Civica’s position in the Revenues & Benefits market and the competitive nature of their offering. “Capita submitted that Civica is a longstanding competitor in the market for R&B software services and that 3i Investments plc's recent acquisition of Civica would give Civica access to substantial capital for business development. Capita also stated that the Civica product has received good ratings and therefore has good referenceability.”
However, in discussions with others, OFT found that “third party responses did raise serious questions in relation to Civica's position in the market, highlighting its limited intentions with regard to competing for new work and perceived shortcomings in the quality of the product on offer which would require significant investment. The OFT has no evidence on which to conclude that Civica is likely to present an increased competitive constraint in the future. [REDACTED].”
(By the way redacted – I had to look it up – means ‘confidential information that has been removed from a document’). I can but guess at the further information, presumably about Civica’s product, that was removed.
Further on there is discussion about new entrants to the market:
“Capita considered that the most likely new entrants to the market are companies which already supply software, particularly financial software, to local government. Capita also stated that providers of software for use in social care have the necessary expertise to enter. Capita estimated the costs of entry for these players to be in the region of [<£2 million] as they already have the necessary expertise. It argued that a new entrant could enter the market within a year to 18 months given the pool of available staff.”
However, “the OFT's investigations have cast significant doubt on the potential for new entry into the R&B segment. Specifically, the OFT has been made aware that the costs and time involved in entering the market with a new product are significant at around £2-10m and two years respectively.”
Having had personal exposure to the costs of developing both financial and R&B systems, I would put the estimate at close to the £10m upper limit quoted by the OFT, and most probably an elapsed time well in excess of the two years quoted.
Given that there will be very few new tenders over the coming years (most Pericles customers will no doubt try to stay with Northgate, leaving only a small number of Pericles sites and the Civica sites yet to purchase new systems – Capita estimated “that the value of contracts expected to come up for renewal (where the OFT's concerns lay) was £[1-2] million for 2009”), I can’t see anyone producing a business plan that would be approved in a normal financial environment let alone the current financial climate.
However, an even bigger concern for new entrants (and existing suppliers considering a major speculative investment in the R&B market) is the serious risk that Central Government will totally change one or more of the areas (I suspect that the area of Housing Benefits is the one causing the most concern), potentially destroying the future market for new systems overnight.
And what would Central Government do if it were to introduce a new method of collecting revenue or supplying benefits (e.g. to replace HB)? Bearing in mind that many of the replacement R&B systems over the past few years have been largely funded by Central Government, no supplier is likely to start any development without their support. Given the current government’s apparent preference for single suppliers in such situations, no doubt there would be a competitive tender for a single supplier (I can’t see Central Government funding two or even three suppliers to develop competing systems to fulfil the same requirements).
So perhaps having two strong suppliers of R&B (i.e. Northgate/Sx3/Anite and Capita/IBS) is a luxury compared to the future of potentially having a single supplier....
Meanwhile, there will undoubtedly be many months (years?) of uncertainty before the CC rules on the acquisition and, if it rules against it, decides and agrees on the remedies. Then we may have a new government, possibly new R&B policies, and a whole new ballgame. In the meantime we will have one supplier hobbled with the costs of running two sales teams and maintaining separate teams with Chinese walls – inevitably incurring increased costs that will eventually be passed onto the customer....
Given the specialist nature of the R&B market and the control that central government retains over it, the CC should make a rapid decision to allow the acquisition to proceed with some levels of protection as offered by Capita in its submissions to the OFT. As with the OFT decision, my concern is that the CC will be constrained in what it is allowed to do, and that it will require a senior government decision, taken quickly, to resolve this situation – and that seems unlikely at the moment.
Wednesday, 10 December 2008
Insurance cover to end for HIPs search data
On Monday, Margaret Beckett, Minister of State (Housing), announced the ending transitional insurance cover provision for provision of search information in a HIP. She stated:
“This provision was intended to enable the private sector to conduct property searches in local authorities where access to relevant data were (sic) restricted. But in practice, too many search providers are using this provision even where the data are readily available. Lacking the relevant information, in some cases buyers have had to pay for a second search to be carried out by the local authority. This is not acceptable. Wherever possible, consumers need information rather than insurance; and they should not have to pay for it twice.
The Under-Secretary, my hon. Friend Mr. Wright, has already laid provisions introducing a new charging regime for local authority property searches data. As charges become fairer, private sector searchers will have easier access and should therefore not need this insurance cover, which will end on 6 April 2009, coinciding with the introduction of the property information questionnaire.
I want to make sure that consumers find property searches as informative and helpful as possible. I have asked Ted Beardsall, former deputy chief executive of the Land Registry, to convene a working group to consider how these might be made simpler and more easy to use.”
In practice, this date for ending is some 3 months later than expected – a short-lived reprieve for Personal Search Companies (PSCs).
What will be more interesting to see will be how Local Authorities price access to data for PSC’s compared to their own “official search” price. Now LA’s are able to use cost-recovery to increase greatly their charges for access to un-refined data (via the Internet or Personal Search companies), and drive down the differential in price between a Personal and an Official search (e.g. East Staffs BC apparently proposes to change their Personal Search Fee from £11 to £61 whilst reducing their Official Search fee from £90 to £75).
With Central Government having bottled out of setting charges centrally, and leaving LA's to set their own, I envisage a battle on pricing. But with the Local Authorities having the data (possession being nine tenths of the law), and the housing market in serious decline – unless Central Government steps in (I suspect not) - I wonder how much PSC’s will choose to fight rather than just fade away. One way or another I suspect that PSCs will be on their way out ....
P.S. I still think that HIPS will eventually be canned to be replaced by a much reduced requirement for an energy certificate, the newly announced PIQ and other minor bits of information – the only question in my mind is when?
“This provision was intended to enable the private sector to conduct property searches in local authorities where access to relevant data were (sic) restricted. But in practice, too many search providers are using this provision even where the data are readily available. Lacking the relevant information, in some cases buyers have had to pay for a second search to be carried out by the local authority. This is not acceptable. Wherever possible, consumers need information rather than insurance; and they should not have to pay for it twice.
The Under-Secretary, my hon. Friend Mr. Wright, has already laid provisions introducing a new charging regime for local authority property searches data. As charges become fairer, private sector searchers will have easier access and should therefore not need this insurance cover, which will end on 6 April 2009, coinciding with the introduction of the property information questionnaire.
I want to make sure that consumers find property searches as informative and helpful as possible. I have asked Ted Beardsall, former deputy chief executive of the Land Registry, to convene a working group to consider how these might be made simpler and more easy to use.”
In practice, this date for ending is some 3 months later than expected – a short-lived reprieve for Personal Search Companies (PSCs).
What will be more interesting to see will be how Local Authorities price access to data for PSC’s compared to their own “official search” price. Now LA’s are able to use cost-recovery to increase greatly their charges for access to un-refined data (via the Internet or Personal Search companies), and drive down the differential in price between a Personal and an Official search (e.g. East Staffs BC apparently proposes to change their Personal Search Fee from £11 to £61 whilst reducing their Official Search fee from £90 to £75).
With Central Government having bottled out of setting charges centrally, and leaving LA's to set their own, I envisage a battle on pricing. But with the Local Authorities having the data (possession being nine tenths of the law), and the housing market in serious decline – unless Central Government steps in (I suspect not) - I wonder how much PSC’s will choose to fight rather than just fade away. One way or another I suspect that PSCs will be on their way out ....
P.S. I still think that HIPS will eventually be canned to be replaced by a much reduced requirement for an energy certificate, the newly announced PIQ and other minor bits of information – the only question in my mind is when?
Tuesday, 9 December 2008
Who's next for nationalisation?
Regular readers will be aware of my views on the banks – after the sub-prime mortgages, CDOs and toxic loans, then the rusty car loans, we will have the rancid corporate loans. My view remains that most major banks in this country will wind up being fully nationalised – but what of major businesses?
I don’t believe in Government bailing out major companies. For instance I believe it is a major mistake by the US government to bail out any of their car manufacturers – they have become large organisations that are out-of-touch with their consumers and pursuing business strategies that were always destined to fail – credit crunch or no. As in nature, the rule of “survival of the fittest” is the best rule for businesses as well - artificially keeping weak businesses alive will, in the longer term, cause more problems than are solved by supporting them short-term.
But the UK Government seems destined to nationalise several major business over the next few months, many unintentionally. I believe that many highly leveraged organisations will shortly be defaulting on their loans to banks that will by then be partly- (or I believe fully) nationalised. Government will have difficult political decisions to make – let the companies fail, with the consequent loss of jobs amongst the electorate – or bail them out. In some situations the banks will have no choice but to take on ownership to try to recover some of their losses, but in a nationalised banking environment where politicians will undoubtedly make many of the decisions, I suspect more will pass into public ownership than would normally.
On Monday, Jon Mouton wrote an article in the FT about the £20bn of debt in the pub industry that he believes is currently “unsustainable”. One can but agree with his assessment that “the capital structures for a lot of pub companies have become desperately inappropriate in a falling market,” and that “the highly leveraged business model pioneered by the likes of Punch Taverns and Enterprise Inns was looking increasingly untenable”. Will the pub industry – so close to many of Labour’s supports – follow the automotive industry in seeking government funding?
What about other sectors? The retail sector is always one of the first to feel the effects of a recession – Woolworths and MFI had flawed business strategies and were early casualties – but even businesses with strong business strategies but deeply in debt may not survive. For example, Boots reputedly has c £8bn in debt – will it survive any downturn? – if not, there is little doubt that it would have to continue trading – but in whose ownership?
Yes - there will be several “vulture” debt funds in the Private Equity sector, but I don’t think their pockets will be deep enough for all the distressed debt that will be around next year. No – my money’s on several “nationalisations” during 2009....
I don’t believe in Government bailing out major companies. For instance I believe it is a major mistake by the US government to bail out any of their car manufacturers – they have become large organisations that are out-of-touch with their consumers and pursuing business strategies that were always destined to fail – credit crunch or no. As in nature, the rule of “survival of the fittest” is the best rule for businesses as well - artificially keeping weak businesses alive will, in the longer term, cause more problems than are solved by supporting them short-term.
But the UK Government seems destined to nationalise several major business over the next few months, many unintentionally. I believe that many highly leveraged organisations will shortly be defaulting on their loans to banks that will by then be partly- (or I believe fully) nationalised. Government will have difficult political decisions to make – let the companies fail, with the consequent loss of jobs amongst the electorate – or bail them out. In some situations the banks will have no choice but to take on ownership to try to recover some of their losses, but in a nationalised banking environment where politicians will undoubtedly make many of the decisions, I suspect more will pass into public ownership than would normally.
On Monday, Jon Mouton wrote an article in the FT about the £20bn of debt in the pub industry that he believes is currently “unsustainable”. One can but agree with his assessment that “the capital structures for a lot of pub companies have become desperately inappropriate in a falling market,” and that “the highly leveraged business model pioneered by the likes of Punch Taverns and Enterprise Inns was looking increasingly untenable”. Will the pub industry – so close to many of Labour’s supports – follow the automotive industry in seeking government funding?
What about other sectors? The retail sector is always one of the first to feel the effects of a recession – Woolworths and MFI had flawed business strategies and were early casualties – but even businesses with strong business strategies but deeply in debt may not survive. For example, Boots reputedly has c £8bn in debt – will it survive any downturn? – if not, there is little doubt that it would have to continue trading – but in whose ownership?
Yes - there will be several “vulture” debt funds in the Private Equity sector, but I don’t think their pockets will be deep enough for all the distressed debt that will be around next year. No – my money’s on several “nationalisations” during 2009....
Monday, 8 December 2008
Solid set of numbers from IDOX
IDOX has today published its results for the first full year with its CAPS acquisition and 8 months with Plantech. The results to 31 October 2008 show revenues up 65% to £34.0m (2007: £20.6m), and pre-tax profits up 267% to £6.6m (£1.8m). Normalised EPS is up 80% to 1.62p (0.90p) with basic EPS up 122% to 1.40p (0.63p).
Delving into the accounts shows that the company has used its two acquisitions to help maximise the profits reported – through the release of £0.6m provision from the CAPS acquisition and a £1m operating profit from the first 8 months of running Plantech (compared to the £149k profit in the 4 months prior to acquisition, and £294k for the last completed financial year prior to acquisition). On the basis that there’s not more in the accounts that I’ve failed to pick up in my quick review, these are not in my mind excessive – I’ve seen far worse in other acquisitive companies.
More importantly, IDOX now has net cash of around £1M and recurring revenues at 46% of core software revenues, a good position to be in today’s difficult financial climate.
IDOX is a company that has been able to successfully reposition itself on the back of a good acquisitions. For the first few years of its life it struggled to find a niche – now it is a dominant position in the Local Government land & property market – and despite growing pains from its acquisition of CAPS (now apparently overcome) it has made some significant contract wins in its own name over the past 12 months.
Unfortunately, its original core business units seem to be struggling. Although claiming 9% organic growth in core software business, its solutions business has declined in revenue and fallen into loss, and whilst its recruitment business is reported as “remaining stable”, I can’t believe that it won’t be hit significantly by the current financial climate. Personally, I would not be surprised to see the Solutions and Recruitment businesses sold off (perhaps to their management?), and for IDOX to become an almost “pure play” in the land & property market (most probably retaining its document management applications).
As I publish this blog item, the IDOX share price sits unchanged at 8.25p - a P/E of less than 6 - valuing the company at £28m, or approx. 80% of revenues – although this morning’s analyst’s meeting has yet to finish. In a normal credit market I would have expected IDOX to be under offer from one of the larger players in the Local Government market, or the possible subject of an MBO. I still think this is likely, but I suspect that potential predators will sit back and wait to see how IDOX manages the slow-down in its markets.........
P.S. I am a shareholder in IDOX.
Delving into the accounts shows that the company has used its two acquisitions to help maximise the profits reported – through the release of £0.6m provision from the CAPS acquisition and a £1m operating profit from the first 8 months of running Plantech (compared to the £149k profit in the 4 months prior to acquisition, and £294k for the last completed financial year prior to acquisition). On the basis that there’s not more in the accounts that I’ve failed to pick up in my quick review, these are not in my mind excessive – I’ve seen far worse in other acquisitive companies.
More importantly, IDOX now has net cash of around £1M and recurring revenues at 46% of core software revenues, a good position to be in today’s difficult financial climate.
IDOX is a company that has been able to successfully reposition itself on the back of a good acquisitions. For the first few years of its life it struggled to find a niche – now it is a dominant position in the Local Government land & property market – and despite growing pains from its acquisition of CAPS (now apparently overcome) it has made some significant contract wins in its own name over the past 12 months.
Unfortunately, its original core business units seem to be struggling. Although claiming 9% organic growth in core software business, its solutions business has declined in revenue and fallen into loss, and whilst its recruitment business is reported as “remaining stable”, I can’t believe that it won’t be hit significantly by the current financial climate. Personally, I would not be surprised to see the Solutions and Recruitment businesses sold off (perhaps to their management?), and for IDOX to become an almost “pure play” in the land & property market (most probably retaining its document management applications).
As I publish this blog item, the IDOX share price sits unchanged at 8.25p - a P/E of less than 6 - valuing the company at £28m, or approx. 80% of revenues – although this morning’s analyst’s meeting has yet to finish. In a normal credit market I would have expected IDOX to be under offer from one of the larger players in the Local Government market, or the possible subject of an MBO. I still think this is likely, but I suspect that potential predators will sit back and wait to see how IDOX manages the slow-down in its markets.........
P.S. I am a shareholder in IDOX.
Friday, 5 December 2008
Disc failure
Not a good week - first the burglar alarm develops a mind of its own (faulty door sensor eventually traced and replaced), then the hard disc on my laptop gives up the ghost.
Fortunately I take a daily backup and, after the local Dell engineer turned up to replace the disc, I've been able to recover all my data and e-mail. (I use Microsoft's Live OneCare product across all our PC's - and this is the second time I've had to reload from its backup - each time I've been able to recover everything successfully, including e-mail, tasks, calendar entries, Internet favourites, iTunes music, etc ... - however, it does take an overnight run to complete the recovery of my 130,000+ files).
But now the reloaded Outlook doesn't want to connect to my Office Live e-mail account, and I'm having to access my e-mail directly through my browser (the second beta of IE8 - which continues to perform so much better than IE7).
So, apologies for a lack of blog entries over the past couple of days. Hopefully I'll be back to full connectivity and productivity later today.....
Fortunately I take a daily backup and, after the local Dell engineer turned up to replace the disc, I've been able to recover all my data and e-mail. (I use Microsoft's Live OneCare product across all our PC's - and this is the second time I've had to reload from its backup - each time I've been able to recover everything successfully, including e-mail, tasks, calendar entries, Internet favourites, iTunes music, etc ... - however, it does take an overnight run to complete the recovery of my 130,000+ files).
But now the reloaded Outlook doesn't want to connect to my Office Live e-mail account, and I'm having to access my e-mail directly through my browser (the second beta of IE8 - which continues to perform so much better than IE7).
So, apologies for a lack of blog entries over the past couple of days. Hopefully I'll be back to full connectivity and productivity later today.....
Tuesday, 2 December 2008
Gladstone and Constellation slug it out
Unsurprisingly, Constellation has gone on the attack (see here for the text of its letter to shareholders) to try to support its low-ball offer of 25p for Gladstone, which has been extended to 12 December.
Much as I suspected in my previous post, the main attack has been on Gladstone’s poor cash generation, showing how net cash flow from operations (post-capitalised development expenditure) has declined from £1.4M in 2005 to £0.5M in 2008. Also, that “Gladstone has provided minimal returns to shareholders” and “has paid no dividend for the past five years”.
Constellation has also gone for the “fear and uncertainty” factor by pointing to the likely drop in Gladstone’s share price should Constellation’s bid lapse, and that despite the Gladstone Board stating that it is 'in discussions with interested parties about the possibility of an alternative offer for the Group', no offer has been forthcoming.
But I still feel that the 25p offer remains too low to win sufficient shareholder support for the bid to succeed at the current level. Yes – Constellation will undoubtedly drive the company to deliver better returns over the coming years – but those increased rewards will not be seen by the existing shareholders if their bid succeeds. As I noted previously the bid seems destined to fail at its current level, but I believe that Constellation will up its bid – 30p might succeed, but if they only bid the expected 28p then I suspect it won’t.
Seconds out ... let round 2 begin.....
P.S. I remain a shareholder in Gladstone.
Much as I suspected in my previous post, the main attack has been on Gladstone’s poor cash generation, showing how net cash flow from operations (post-capitalised development expenditure) has declined from £1.4M in 2005 to £0.5M in 2008. Also, that “Gladstone has provided minimal returns to shareholders” and “has paid no dividend for the past five years”.
Constellation has also gone for the “fear and uncertainty” factor by pointing to the likely drop in Gladstone’s share price should Constellation’s bid lapse, and that despite the Gladstone Board stating that it is 'in discussions with interested parties about the possibility of an alternative offer for the Group', no offer has been forthcoming.
But I still feel that the 25p offer remains too low to win sufficient shareholder support for the bid to succeed at the current level. Yes – Constellation will undoubtedly drive the company to deliver better returns over the coming years – but those increased rewards will not be seen by the existing shareholders if their bid succeeds. As I noted previously the bid seems destined to fail at its current level, but I believe that Constellation will up its bid – 30p might succeed, but if they only bid the expected 28p then I suspect it won’t.
Seconds out ... let round 2 begin.....
P.S. I remain a shareholder in Gladstone.
Monday, 1 December 2008
OFT refers Capita/IBS merger to the Competition Commission
As I predicted last month (see here) the OFT has referred the completed acquisition of IBS OPENSystems by Capita to the Competition Commission. Quoting from the press release (we’re still awaiting the full text) from the OFT:
The OFT has significant competition concerns in relation to the supply of revenue and benefits software services to UK local authorities. Bidding data, supported by strong customer concerns, indicates that the merger combines two of only three successful competitors supplying such software, and that with the removal of IBS as an important rival, Capita would be likely to find it profitable to offer its own and/or IBS' products and services at less favourable terms in future bidding opportunities.
Although Northgate Information Solutions (Northgate) will remain a substantial rival to Capita, the OFT was not persuaded that two successful bidders competing head to head would give customers the same value for money as three, and new entry to restore local authorities' supply options is unlikely.
Based on the reduction in competition, I can’t see that this decision can be questioned.
However, there is a need to review (and I’m sure that the Competition Commission will look at), the specific nature of the UK Revenues & Benefits market – a relatively small market in national, let alone global, terms and one driven by Government policy – something that can impose severe constraints on suppliers’ abilities to be successful. Indeed, should Central Government decide to abolish Housing Benefits, and/or move to local income tax, then suppliers could see their market disappear overnight – not something that is likely to encourage multiple suppliers to invest their own funds in developing/enhancing their products.
One could argue that, given the size and nature of the R&B market, having two (rather than 3 or more) suppliers makes it easier and, potentially more cost-effective, for Government to make substantial changes to the associated legislation. (One supplier might be even better – but unlikely to happen in the current environment).
I’ll aim to return to this topic later, once the full OFT text has been published.
The OFT has significant competition concerns in relation to the supply of revenue and benefits software services to UK local authorities. Bidding data, supported by strong customer concerns, indicates that the merger combines two of only three successful competitors supplying such software, and that with the removal of IBS as an important rival, Capita would be likely to find it profitable to offer its own and/or IBS' products and services at less favourable terms in future bidding opportunities.
Although Northgate Information Solutions (Northgate) will remain a substantial rival to Capita, the OFT was not persuaded that two successful bidders competing head to head would give customers the same value for money as three, and new entry to restore local authorities' supply options is unlikely.
Based on the reduction in competition, I can’t see that this decision can be questioned.
However, there is a need to review (and I’m sure that the Competition Commission will look at), the specific nature of the UK Revenues & Benefits market – a relatively small market in national, let alone global, terms and one driven by Government policy – something that can impose severe constraints on suppliers’ abilities to be successful. Indeed, should Central Government decide to abolish Housing Benefits, and/or move to local income tax, then suppliers could see their market disappear overnight – not something that is likely to encourage multiple suppliers to invest their own funds in developing/enhancing their products.
One could argue that, given the size and nature of the R&B market, having two (rather than 3 or more) suppliers makes it easier and, potentially more cost-effective, for Government to make substantial changes to the associated legislation. (One supplier might be even better – but unlikely to happen in the current environment).
I’ll aim to return to this topic later, once the full OFT text has been published.
Gladstone puts up spirited defence
In Constellation’s attempt to win Gladstone at a knock-down price (25p), I see that Gladstone has come out with a fairly strong defence, based (on the face of it) on a reasonable set of preliminary results for the year to August 2008. Revenue was up 4% at £9.55M, EBITDA before exceptional items and share based payment charge was up £251k to £1.91 million, and operating activities generated £1.25 million of cash (in my mind, cash generation is always a good indicator of strength for a software applications company).
However, the £1.25M seems disappointingly low to me, and the preliminary results show that cash decreased by £400k to £4.6 million “due to development expenditure, purchase of own shares and investment in education business operations” and, more importantly, £521k of development expenditure was capitalised in the year (up from £100k in the year before).
Previous readers of this blog will know my concerns about the capitalisation of software development costs. Software application companies need to continually develop and enhance their products to stay competitive and there is a considerable debate about which development costs should be capitalised, and which costs should be written off as incurred.
The prudent approach of writing off development costs as they are incurred may not be an option if/when the company is trying to repel an unwanted bid (if the £521k of development expenditure had been written off, Gladstone’s EBITDA for the year would have been some £270k less than the previous year – not something that would help the company’s defence).
If, however, the £521k represents (part of) a planned development programme with a business plan showing realistically the returns to be generated from the development, and the development is going to plan, then capitalisation may be a reasonable step. The problem for Constellation is, I suspect, that it doesn’t have access to such information and it can but guess at the validity of the capitalised expenditure.
With only around 10% of acceptances from Gladstone’s other shareholders, although Constellation has extended its bid to 12 December, the bid seems destined to fail at its current level. As previously predicted, I suspect that Constellation will up its bid – if it were to go to 35p, then I believe it would be accepted – anything less is questionable – 30p might succeed, but if they only bid the expected 28p then I suspect it won’t.
No doubt Constellation is going through the results with a fine toothcomb, also trying to get some information on what business is really like for the Gladstone sales and development teams, and sounding out Gladstone’s major investors to see what has to be done to win them over. I suspect that there will be a higher bid, backed up by further arguments from Constellation – I don’t think Constellation, having gone so far, will give up now.
However, the £1.25M seems disappointingly low to me, and the preliminary results show that cash decreased by £400k to £4.6 million “due to development expenditure, purchase of own shares and investment in education business operations” and, more importantly, £521k of development expenditure was capitalised in the year (up from £100k in the year before).
Previous readers of this blog will know my concerns about the capitalisation of software development costs. Software application companies need to continually develop and enhance their products to stay competitive and there is a considerable debate about which development costs should be capitalised, and which costs should be written off as incurred.
The prudent approach of writing off development costs as they are incurred may not be an option if/when the company is trying to repel an unwanted bid (if the £521k of development expenditure had been written off, Gladstone’s EBITDA for the year would have been some £270k less than the previous year – not something that would help the company’s defence).
If, however, the £521k represents (part of) a planned development programme with a business plan showing realistically the returns to be generated from the development, and the development is going to plan, then capitalisation may be a reasonable step. The problem for Constellation is, I suspect, that it doesn’t have access to such information and it can but guess at the validity of the capitalised expenditure.
With only around 10% of acceptances from Gladstone’s other shareholders, although Constellation has extended its bid to 12 December, the bid seems destined to fail at its current level. As previously predicted, I suspect that Constellation will up its bid – if it were to go to 35p, then I believe it would be accepted – anything less is questionable – 30p might succeed, but if they only bid the expected 28p then I suspect it won’t.
No doubt Constellation is going through the results with a fine toothcomb, also trying to get some information on what business is really like for the Gladstone sales and development teams, and sounding out Gladstone’s major investors to see what has to be done to win them over. I suspect that there will be a higher bid, backed up by further arguments from Constellation – I don’t think Constellation, having gone so far, will give up now.
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