Thursday, 29 January 2009
As I understand it, one of the two problem projects still under investigation by BT to decide on provisions against overruns (see my updated post BT deep losses illustrate NHS IT problems) is their London £966M LSP contract. But at the same time the NHS is still negotiating with BT for BT to take on some of the projects that Fujitsu walked away from last year (although Fujitsu is caretaking the support of these projects until a new supplier is found). My understanding is that BT has not been able to assess its exposure to the London LSP as it is playing hardball with the negotiations over the Fujitsu projects, and linking the London LSP into the negotiations.
In return, presumably to keep up the pressure on BT, the NHS is preparing contingency plans both for the failure on negotiations on the Fujitsu contract and BT walking away from the London LSP contract. If both were to happen, the NHS NPfIT would effectively be over – with CSC the only remaining supplier – currently contracted as LSP for England outside London and the South – and the NHS is (rightly) unwilling to have a single, monopoly supplier.
As I have predicted almost since the NPfIT projects were let, these are projects destined for failure, the only question is when they will fail. It would appear that it may be sooner than I previously thought.....
At the moment, unless an NHS trust has foundation status it has a duty to buy the NPfIT Care Records Service software from its local service provider. But if the LSP projects failed and this mandate were removed, the NHS would need to control/supervise the way individual trusts procured systems so that their vision of truly interoperable access to records across the UK is still achievable.
However, given a free hand, would Trusts purchase the (iSoft) Lorenzo system – a system that is way behind schedule, currently has limited functionality (with promises of increased functionality over the coming years) and a tarnished track record to date – or the Cerner system - that has been a successful product in the US and elsewhere, but has required substantial modification to meet NHS requirements (with more changes yet to come), is a 1990’s developed client/server system without a very intuitive user interface, and requiring massive amounts of training for end users before it can be implemented live.
I’m not sure what the NHS’s contingency plan will be – but I would be looking to ensure that there were at least three potential suppliers of core software rather than just Lorenzo and Cerner – hopefully the NHS might follow some of my recommendations in recent post How NHS NPfIT should have been procured.
P.S. I recommend the following Holway’s post for further information on BT’s position - BT Global Services and the NHS - Part 3 – it’s also worth following his links to the Ovum article.
Wednesday, 28 January 2009
But I do disagree with his comments on Open Source software – I think they are a major mistake – and suggest that when in Government the Conservatives will continue the focus on upfront costs than longer-term value. One only has to look at the recent Socitm report to see that, in UK Local Government, only 12% of the £3.2bn spend is on software, whilst over 60% is spent on the costs of internal and external services – and I suspect that Central Government’s split of costs is even more biased towards staff and services costs.
I firmly agree with his comments on open IT procurement, but I believe it should be on a “level playing field” that recognises not just the upfront cost of the software, but also the ongoing support costs, including the training/support costs for the end users and how well the software meets the end user requirements. If one focuses on the overall value and quality of the proposed solutions - rather than just the upfront costs – then Open Source solutions can still win business - provided they can show that they are better than the proprietary software in more than just upfront cost.
The problem is that Open Source software is, by its very nature, starved of significant speculative investment to make it better than proprietary software. Why should developers invest money in software unless there is a return on that investment – the problem is that many such “returns” are hidden in the sale of their hardware and support services – hence the need to take all these costs into consideration – rather than just the upfront software costs.
Yes, we have historically allowed monopolies to grow and exist in the software market, be it from Microsoft, Oracle, SAP or many others, and we would be better off if such monopolies had not been allowed to grow (I prefer to think of them as ‘dominant suppliers’ as there is competition against all of them – it’s just that dominant suppliers have been better, both commercially and technically, to achieve their dominance). Love them or hate them, one has to accept that they have invested vast sums in developing their software, on the back of protected IPR, and without that the software world would be much weaker than it is currently.
The trick is to learn to live with these global giants (accepting that the UK Government software market is a significant, but still very small percentage of their overall business) rather than avoid them – cue OGC to get their act together better?
I am trying to get hold of a copy of Mark Thompson’s full report, and will update this blog if/when I get to read the full copy.
As I noted in my blog on Tribal’s acquisition of Newchurch Ltd, I would expect an annualised profit of around £12M (eps around 14p) – and with the new acquisition, annualised revenue in excess of £200M going forward.
However, I note some caution, both in the wording of the trading statement – e.g. “our business model continued to prove resilient” - and the statement that Tribal entered “the new financial year with approximately 38% of 2009 planned revenue already committed”, disappointingly less than the 40% reported going into 2008 and, given Tribal’s supposed focus on longer-term projects, a figure that I would regard as quite low. I feel that Tribal’s confidence on its ability to achieve significant organic growth in 2009 is somewhat muted.
Realistically, I suspect that this is no more than would expect in the current financial environment, and I would fully expect Tribal to use its “resilient” business model to help it avoid cost wherever possible and achieve some profit growth in 2009. Tribal has made great steps forward since the disposal of it Mercury Health venture, and I remain a strong supporter of its abilities in the UK Public Sector.
Monday, 26 January 2009
Firstly, I need to put my approach into context – I come from a background of software application package development, roll-out and support – and from a market where multiple software houses compete against each other to supply their products and services. I do not come from a Central Government services background which, I believe, is focussed on big bespoke solutions for single departments with large end-user counts. I believe that the NHS fits better into the former market rather than the latter “big bespoke project” market.
Unfortunately, the current NPfIT has tried to treat the procurements as big bespoke projects (yes, those procurements are planned to use software products – but in a manner totally different to the normal way that software packages are developed and sold in a competitive environment).
One of the aims of NPfIT should have been to develop a competitive environment where software houses compete with each other the basis of price, quality and innovation – a self-managing environment where success is driven by meeting end-users needs accurately, introducing innovation, delivering quality products on time, and implementing projects to budget.
The Central Government services approach discourages suppliers to innovate, but encourages the identification of opportunities for changed requirements to justify price increases – effectively stifling innovation by both supplier and end user – and leading to drawn-out change control procedures, demands for increased funds and even more delay – let alone the deterioration in relationships between customers and suppliers.
No – the NHS should have adopted a totally different approach to procurement. On the back of realistic budgets and timescales for development, testing, implementation and roll-out, there should have been a central body responsible for the setting of common standards for security, data storage and interoperability between systems, and the coordination of the production of baseline statements of requirements for individual applications – to include the areas that must be capable of customisation, without programming changes – i.e. where additional charges are not due from multiple customers in the future.
The NHS should have procured/funded demonstrator projects from at least three separate suppliers in each application area. (I would also state that I think they should have given preference to smaller, more innovative suppliers - ideally with track records in both the UK NHS market and the development of package software– rather than bigger, more established software developers with little or no track record in the development of application packages for the health market). Where necessary, this should have extended to providing support to the best developers through consultancy or the promotion of partnerships with other suppliers. Above all else – although difficult in a Government environment – the selection of suppliers for the demonstrators should not be decided on price, but on quality and value, and on the likelihood of getting quality solutions that would meet end user requirements.
The suppliers of those demonstrator projects should have been encouraged, within reason, to respond to the changing requirements identified during the development (and subsequent) phases through the availability of limited contingency funding, available to all suppliers, that could be drawn down quickly without high levels of bureaucracy to cover significant changes to the requirements identified initially (although with some controls to avoid excessive requirements creep). To a certain extent, the projects would become self-managing – suppliers would recognise that the true value of each project would not be the profitability of the demonstrator, but the opportunity to build the best product that would be sold to multiple trusts later during the roll-out – and would look to self-fund some of the innovations to ensure that they maintained a competitive edge over the other suppliers.
With the NHS managing standards and interoperability centrally, final acceptance tests would include confirmation of adherence to those standards, through the use of published test plans. There would be the need to manage changes to those standards – and where necessary in the early stages, through the provision of limited funding to suppliers to make the necessary changes. (Although, hopefully, by the end of the demonstrator projects, further significant changes would not be necessary, and the detailed changes required on a year-by-year basis would be funded by the suppliers themselves and supplied to all customers under software maintenance agreements).
After completion of the demonstrator projects, the NHS would have a centralised library of baseline requirements for individual trusts to use in their own individual procurements of new systems. Each competitive procurement would be decided locally, based on the relevance (commercial and functional) of each supplier’s offering to each Trust/department – although the NHS would have to manage the adherence to standards through mandated phases of acceptance test – possibly once per supplier/release rather than per Trust/customer.
Major infrastructure projects could still be let centrally or regionally against the standards laid down centrally, allowing for subsequent individual trust/departmental procurements to bring in servers, specialist hardware, and possibly communications requirements.
This approach does at first sight to have many drawbacks – timetable (although I would argue that this approach would at least succeed in delivering a solution for the whole of the UK – and most probably in a shorter time than the current project – if were ever to succeed), and the perceived extra costs of multiple procurements (and here I would point out that this additional cost could be mitigated through good centralised support, and even then is most probably significantly less that the current cost of the existing projects’ management infrastructure).
Going forward though, the potential is dramatic. A strong UK software industry in the health market, possibly leading the world and opening up the export market for us, motivated by competition to embrace innovation and keep its products up-to-date both functionally and technically. And an NHS that has systems that meet the varying needs of its many users, who are able to have their systems customised easily to reflect local requirements and working practices.
Meanwhile, the NHS retains control and polices centrally adherence to standards in all the major areas, including security and interoperability. In the end, a true partnership – between local departments, trust managers and centralised NHS directors, working with the software industry, (rather than in a combative environment where each seeks to get the best financial deal out of the current procurement), to implement a set of systems that will yield real benefits for the NHS generally, and end users locally.
44% staff costs
13% external services
9% data and voice communication
As in previous years, I would not recommend using the absolute figures as entirely accurate, but use the report - as its title suggests - to identify trends. In this area it is interesting to note that hardware spend seems to be relatively static, whilst expenditure on data and voice communication has reduced slightly – but given the price competition in both these areas, this would suggest that LA’s are buying more in both these areas, but at lower prices. The report attributes this to the need to replace technology bought as part of the e-government programme, but I suspect the price reductions disguise an even bigger increase in procurement than e-government replacements.
External services and consultancy seem to be on the increase, but I suspect that the figures do not take into account the amount of ICT spend that has been outsourced as a result of BPO (Business Process Outsourcing) and departmental initiatives (like BSF – Building Schools for the Future – for secondary schools). Overall, I believe that the real increase in ICT spend (i.e. above the rate of inflation) is therefore even larger than identified in the Socitm report.
Is the increased spend on ICT delivering real benefits for LA’s?
The report suggests that it is - noting that “a range of initiatives are being pursued to deliver efficiencies both at the tactical and strategic level” and “new technologies could offer opportunities to deliver more radical changes in public service provision”. However, I suspect that the comment “ICT is too often regarded as a utility rather than a means to transform public services” reflects more the frustration of IT Directors and Managers that end-user departments are not seeing the full potential of investments in ICT.
John Serle, editor of IT Trends, noted: ‘There remain some big opportunities for ICT to transform local public services. The things that were easy to do have been done. Organisations will need to be bold and ambitious with their use of technology in the next few years. Some of the new emerging technologies can be exploited to transform local public services, delivering better more cost effective customer service’.
I believe that this emphasises the importance of ongoing education of Officers and Managers in departments outside ICT. There is no doubt that ICT is an enabler in the current move to transformation of services and processes. Unlike some colleagues in LA’s, I do not see it as the driver – to be truly successful, that drive must come from end user departments – it is the role of ICT directors and managers to educate those non-ICT staff in the opportunities and benefits offered by ICT.
Friday, 23 January 2009
BT’s Chief Exec Ian Livingston yesterday confirmed that the charge only relates to 15 of the largest 17 contracts in BT Global Services – as I understand it, the last two are NHS projects, where Ian has indicated further substantial provisions might be required – and possibly “many hundreds of millions of pounds”.
Update - it would appear that only one of the two remaining projects relate to the NHS - which I find surprising, unless BT has lumped more than one of its NHS contracts together.Regular readers will know my view on these NHS contracts so I won’t repeat it here, but where now for the main contractors that entered into these disastrous projects? Will the Government (NHS) bail them out?
Some of my colleagues believe that BT should be penalised, along with the other remaining suppliers, for being so foolish to enter into contracts which everyone recognised were fatally flawed. IT professionals saw this – but the businessmen carried on bidding – now those responsible have moved on – and the companies are left with major headaches.
Personally, I think that Government has a moral responsibility to help these suppliers out – the procurement was fatally flawed – with large, existing suppliers to the NHS knowing that if they didn’t bid against the flawed requirements and harsh contract terms they would be writing off that market for the next decade. I wouldn’t suggest writing a blank cheque – but introducing new, realistic targets, and recognising significant changes in requirements, would start to help.
But in practice, I believe that the suppliers only need to hobble along for another 18-24 months (possibly less) on these projects before the existing contracts are terminated, and a professional approach is adopted for the procurement of systems that reflect health professionals true needs, against realistic budgets and achievable timescales for implementation....
Thursday, 22 January 2009
Although that article was written a few years ago, its message still rings true today. From the authorities that I’ve been in contact with lately, supplier adoption remains at the top of the list of factors preventing the realisation of the full benefits of e-procurement.
Commercial organisations have tended to use their commercial strength (“if you want to remain a supplier to us you must use our e-commerce facilities”) to ensure speedy take-up by their suppliers, but many authorities seem unable to go down that route as their political leaders are (possibly rightly) against using compulsion of this sort. However, given the potential savings in LA back office costs, I would argue that all major suppliers to a LA should be compelled to go down this e-commerce route.
For smaller suppliers to local authorities, I have long supported the principle of the carrot rather than the stick in this area. LA’s should encourage their suppliers to adopt the LA’s e-commerce systems through offering tangible benefits, not forcing them to pay to join a supplier database, and certainly not just the promises that some LA’s project.....
Yes – it may cost LA’s in the short term, but the long term benefits of having the majority (all?) of their suppliers using e-commerce fully, will vastly outweigh the short term costs.
Monday, 19 January 2009
I find the current situation with the banks and their toxic loans as analogous to bad projects (and, for that matter, bad company results generally). Looking at the banks, their managers and analysts know the potential depth of the problems with their toxic loans and derivatives, but when senior management add up all the bad news they arrive at a number that is unacceptably large – announcing it would be disastrous for the bank and its balance sheet – and even more so for the bank’s directors and managers.
This is why the concept of a “bad bank” has failed to get off the ground. Banks would have to agree a valuation of each toxic asset (and the Government – once bitten twice shy – with taxpayers in mind, would insist on a worst case valuation, or close to it); those valuations would be disastrous and so this option would inevitably lead to full nationalisation, and the demise of many senior bank staff. So let’s not value the assets but talk about risk levels and insurance premiums – that will let us off the hook for a few more months and, perhaps, we can get the Government/taxpayer to take on responsibility for some of the worst assets at a limited cost to the bank....
Bad projects tend to have the same problem, with the bad news dripping out – rather than the true depth of the problems being revealed in one major announcement. A lot of this is down to human nature – hoping against all odds that a miracle will happen on the project to turn it around – rather than biting the bullet, truly identifying and evaluating all risks, extrapolating current progress and coming up with realistic timetables and budgets to complete the project.
A good Project Manager will do this when he takes a project on board – the equivalent of “due diligence” on the project. Unfortunately, a good PM frequently comes into conflict with the director or senior manager that employed him to sort the project out – the size of the problems identified, and the costs of the resolution can sometimes be unacceptable to the individual and/or his company. So a plan is derived to let the bad news drip out – keeping the customer and company, hopefully, happy and sufficiently locked into the project to accept regular but small increase in budget and timetable. Until, possibly after months or years, the true depth of the problem is recognised publicly.
As many of you will know, one of my roles is as “fire fighter” on problem projects (advert – give me a call if you’d like an initial, free consultation). I’ve seen several where senior directors/managers find themselves unable to accept the truth/depth of the problems they’re in – and yet in many cases, were they to admit the truth, and do something about it whilst there is time, in the longer term they will come out of it better off. Curing the problem with surgery and a spell in intensive care can be a better than applying lots of sticking plasters and hoping that the core problem will go away.
With three of the “fire fighting” projects I’ve dealt with, I’ve recommended that the projects be halted, most of the work to date thrown away, and a new approach adopted to complete the project. Only one company took my recommendation, went to their customer with the truth – and was surprised that the customer already suspected the depth of the problems, was pleased that the company had come to him both with a full statement of the problems and a proposed new solution – and agreed to the new solution.
Needless to say, both the companies that carried on with the projects largely unchanged lost a great deal of money, time and respect with their customers. In the end, both incurred losses much greater than the option I recommended, and their businesses were irreparably damaged in their chosen markets – their project managers bore much of the blame - but the senior management survived....
So with the banks, how will it end up?
As I predicted last year, and repeated earlier this year, full nationalisation seems inevitable. I predict that the banks will be unable to agree risks and premiums with Government for the toxic loans that are to be insured by the taxpayer. It will take a few weeks or months, but in the end Government will call a halt, and nationalisation will go through as the only solution (and it doesn’t require the banks nor the Government to fess up to the true size of the banking black hole created over the past ten years).
Friday, 16 January 2009
Newchurch is effectively a supplier of consultancy services at a senior level to healthcare organisations, primarily in the Public Sector, although it has a significant presence in the private sector also.
This seems a useful acquisition for Tribal, extending the services offerings that Tribal has in the UK healthcare sector. The acquisition also increases confidence that Tribal will confirm that last year’s trading to 31 December 2008 has been firm and in line with expectations, with its trading statement due on 28 January – I would expect an annualised profit of around £12M (eps around 14p) – and with the new acquisition, annualised revenue in excess of £200M going forward. Tribal’s share price at the time of writing this post is 80.5p (down from around 140p in September), giving a market cap of c £71M and an enterprise value of c £93M.
P.S. I will own up to having sold my Tribal shares back in September, and have not yet bought back in, despite the share price having fallen to 66p late last year.
I agree with the comment I received that this could be applied to many Central Government projects – including the NHS’s NPfIT – it’s going to go wrong, but provided the manager can prove he's not to blame, let’s keep going.
In many cases, this is what separates a good project manager from a bad one – a good PM identifies risks and problems in advance, then works to minimise the risks and solve the problems – a poor PM might recognise the risks and possibly documents them, but doesn’t bother to take the necessary action (sometimes painful and unpleasant) to minimise the risks and solve the problems in advance of them actually arising.
Thursday, 15 January 2009
And so the National Programme for IT in the NHS must be a successful project....
Unfortunately not. Yes – the person who started it has moved on – and it’s now being run by others – but it is years late, £billions over budget, several contractors (and subcontractors) have come and gone, and there are serious doubts that it will ever meet its objectives. I don’t intend to pick over the bones of this project (there are far too many articles on the topic – I recommend Private Eye and e-Health Insider for some of the best), but how should it have been procured and implemented?
Unfortunately, NPfIT was procured centrally, arguably by people who were out of touch with technology, the needs of the end users, and the basics of developing large computing projects successfully for multiple organisations. Major suppliers (and subcontractors) had no choice to become involved in the procurement if they wanted to remain in the NHS market, even though they saw the flaws in the way the programme was planned. As with many Central Government projects, they expected to be able to use the flaws to change the scope of the contracts once awarded, to both introduce delays and increase revenue.
In fairness to Granger, he setup the contracts in a very confrontational way (something that regular readers know I oppose), that has seen those delays and increases minimised (if one considers 100%+ over budget and years late as minimised) and two suppliers already withdrawing. Everyone in the IT industry knew that the plans for NPfIT were seriously flawed, many said so, but no-one in Government listened.
How should it have been done?
Rather than a number of centrally-procured, large contracts, the NHS should have seen its role as one of creating the framework under which individual Trusts, GP practices and other NHS organisations could have procured systems locally to meet their own specialised needs.
Initially, there should have been a major project for the collection of core requirements, involving end users from all levels, across most disciplines and geographic locations.
It’s been reported that NHS wished to use the introduction of the NPfIT systems as a way of imposing change of NHS working practices – something that IT professionals know is the way to guarantee end user resistance and a problem project – much better to develop systems that enable business process change rather than require it. Also, centralised requirement setting (with low levels of local and end user involvement) may be the quickest way to proceed initially, but as the current delays prove, it’s rarely the fastest way to implement new systems successfully.
In parallel with focussing on the core requirements, standards for interoperability and security, the NHS could have funded a number of demonstrator projects with smaller, specialised software houses to develop and trial the key applications. These would have allowed the developers to get closer to the eventual end-users, clarifying requirements and produce functionality that worked in practice before any attempt at large-scale roll-out.
Most importantly, the software houses should have been those companies that understand how to build packaged applications that can be easily tailored to meet the varying needs of multiple customers. Central Government typically procures large bespoke systems for individual departments from large IT service suppliers who are used to big one-off projects – i.e. not focussed on the production of easily customised, re-usable software modules. Using companies experienced in the development of application software packages would potentially avoid the current major excuse of "the customisation has been more extreme that we envisaged at the beginning of the programme."
The supply, installation and ongoing support of the core computing hardware (e.g. PC’s, network servers, etc ..) and network infrastructure could have been procured separately, leaving application servers and specialist hardware (e.g. handheld computers, scanners, etc ..) to individual local procurements - possibly against centrally procured call-off contracts.
Overall, such an approach would have delivered the new systems in a timetable far longer than the initial NPfIT schedule, but most probably earlier than the likely timetable for the current projects (which, already years behind schedule, will inevitably slip even further). Most importantly, such an approach is more likely to deliver systems that meet end user requirements and actually bring real benefits to the NHS.....
I think there is a serious risk that a change in Government will result in the abandonment of much of the current NHS NPfIT. In practice, this may be the cheapest option for the taxpayer, but if it happens, what a missed opportunity - £billions and years down the drain – money and time that could have been used, not only to have completed the groundwork for an integrated Health IT system, but also helped take UK software houses to the forefront of health applications software packages – and just think of the exports that might have brought.
Tuesday, 13 January 2009
John notes that IT contracts worth several billions of pounds may well be up for review within the next 12 to 18 months, including some contracts for new systems that a change of government would more than likely terminate, e.g. the ID cards scheme, the ContactPoint project and the Central NHS Spine – all projects that the Tories have already stated they are likely to chop.
Tory IT policy is generally aimed towards a more de-centralised approach – a policy that I believe is potentially far more successful than the current Government’s preference for large, centrally managed initiatives – many of which fail to involve local users sufficiently in their early stages of development (and tend to fail miserably when an attempt at roll-out is started).
Yes, there will be some new project cancellations, but there will be other projects to fill those gaps. However, I fear that in the early years of a new government, existing relationships between civil servants and the major service suppliers will drive the way new projects are procured – Ministers will be more focussed on policy rather than implementation – and it will be some years before we may see any fundamental changes to this market.
I think the buffers are still a long way away from the gravy train.....
Friday, 9 January 2009
Looking back, the initial months went extremely well. The screen display is superb and the touch user interface extremely easy to use. Within the first day I was able to synchronise with Outlook on my PC, giving me access both to my contacts and calendar on my iPhone. Collecting e-mail from my Microsoft Office Live email account was not so straight forward (the account supports neither IMAP nor POP access), and I had to use the Izymail service to gain access – and even then whilst access via WiFi was good, access via the Cloud (the 2.5G mobile network) was patchy and slow – so I tended to seek out WiFi sites to view e-mail on the go.
The Safari browser gave good, if somewhat slow, access to websites, although the lack of support for many standards, e.g. Flash, does restrict some content. The shares facility proved excellent, with both my portfolio and watchlist stored on the iPhone and giving me up-to-date prices on the go. Voice coverage on the O2 network proved (surprisingly) better than I had been getting on Vodafone, with a good voicemail service in the UK (but distinctly variable when abroad).
Then, around the middle of the year, the automatic update to the next versions of iTunes and iPhone software (for the release of the 3G phone) caused mayhem for a couple of months. The iPhone would no longer synchronise with Outlook on my Vista PC – hundreds of posters on Apple’s support site reported the same problem – and calls to the Apple support line generated the response that it was due to problems with Microsoft software, and came up with many different, time-consuming ways of configuring Outlook to try to sort the problem – all failing.
Two months later, after apologies from Steve Jobs, multiple updates to the Apple software, and after totally rebuilding my PC from scratch, the problem was fixed. I should have known that mixing Apple and Microsoft software was bound to cause problems.....
I've also been able to use many of the free iPhone applications - varying from the highly useful online Tube Status and BBC News Reader, through demonstrations of the iPhone technology like a spirit level and iPint (which still amazes anyone who has not seen an iPhone before), to a variety of games that occasionally keep me occupied whilst I'm travelling.However, Apple has hooked me on its iPod and iTunes store functionality. My PC now holds c 15Gb of music, from which I extract around 6Gb of playlists onto the iPhone – something that I’ve found of great use when travelling or on holiday. Most of the music is 60s/70s, and I’ve found the iTunes Genius service too tempting to ignore – it throws up tracks from the past that I’d forgotten, which I subsequently download and add to my growing collection of “old” music. So, although I have backed up all my purchases to audio CD, I guess Apple has succeeded in locking me in, and with the software having stabilised over the past few months, I suspect an upgrade to a bigger, 3G iPhone is beckoning.....
Thursday, 8 January 2009
"The Board of Gladstone announces that, on 6 January 2009, it received a letter .... requiring the convening of a general meeting pursuant to section 303 of the Companies Act 2006 (the 'Act') for the purpose of considering a resolution to appoint Mark Leonard, Constellation's chairman and president, as a director of Gladstone."
Clearly the current Board will not agree willingly to this - but it will be interesting to see if the major shareholders see this as a way of generating value for shareholders.
However, looking at Constellation's and Gladstone's markets, there is a major overlap with Constellation's Jonas subsidiary which supplies systems in similar leisure markets to Gladstone (albeit Jonas doesn't appear to have much market penetration in the UK). Thus the expected argument from Gladstone about "conflicts of interest" and "competitive information" are likely to ring true with many investors......
Firstly, some background - I count the majority of IT suppliers to Central Government as service suppliers, not software suppliers. Most Central Government systems are unique developments or heavily bespoked packages where services form the vast majority of the costs. Local Authorities (and other organisations such as the police) meanwhile tend to purchase software packages (with implementation/maintenance services) from software suppliers (and true services from services suppliers), although this whole area is being muddied by the supply of Managed Services and SaaS (Software as a Service).
LA’s tend to use IT service suppliers for outsourcing part or all of their IT department requirements (but noting that they can also outsource whole business processes, which include some IT elements), and the supply of support and maintenance services.
I’ll cover Health in a later post, but for the rest of central Government I see the current ‘gravy train’ of services work continuing at virtually the current levels – although, at last, I detect that Central Government will be less tolerant to poor performance by its suppliers. However, unless a change in Government brings in a change to the way Central Government procures its IT systems and services, I can’t see any fundamental changes in this market.
Amongst Local Authorities, I detect a move to bring IT back inhouse over the next few years. If I’m right, the impact will not be felt for some considerable time – most existing contracts are for multiple years, capable of early termination on the grounds of default or mutual agreement. But some of the LA’s I’m talking to are saying that they believe they can save significant costs by bringing the IT operation back inhouse and, perhaps more importantly, respond more quickly to the changing requirements of their departmental users.
Specifically, they point at the high fixed annual costs charged for some maintenance elements – where the costs were fixed some time ago when maintenance/support was more labour-intensive than it is now with modern technology. Existing suppliers therefore have the option of reducing their charges (potentially reducing their overall margins) or seeing contracts terminated – either way, I believe we will see service suppliers having an increasingly hard time with, no doubt, some notable terminations and company failures.
Then there is the area of Managed Services and SaaS. To my mind these are effectively ‘bureau’ services that remind me of the time the old Systemsolve ran a bureau, and then we went through an era of convincing those bureau customers of the benefit of owning and running their own systems. Eventually Systemsolve’s bureau closed and the company moved to being a traditional software house.
Now many software companies are trying to persuade customers of the benefits of not owning the software and letting the supplier run the software on the customers’ behalf. For the Public Sector with internal departmental barriers to cross, this can put the procurement control back with the eventual end user departments; and, typically with a much shorter implementation time, I believe that we will see a growth in this area – be it labelled Managed Services, SaaS, Cloud Computing, Aspire or some other new name.
However, the accounting (particularly cashflow) problems for software suppliers are likely to keep this route for software supply limited to those suppliers who have the financial strength to support lack of large upfront fees. This may generate opportunities for service suppliers to act as managed service consolidators, although I think that this will generally be avoided by software suppliers who fear losing control of their customers. (There are other solutions to the financial challenges of SaaS - contact me if you'd like to discuss them).
Shared Services represent a variant of the bureau/managed services solution – and in some cases can extend to a full BPO service. Within local authorities, there is potential for tremendous benefits and cost savings – provided individual authorities are prepared to lose some independence, make compromises and accept changes to historic business processes..... which, of course, many Officers and managers within local authorities would never openly agree to .......
So, Shared Services should be a growth area – but won’t be - my cynicism tells me that it will never gain volume acceptance without significant carrots or sticks wielded by Central Government – something I don’t see before the next General Election (and possibly not afterwards either).
In summary – in Central Government the services ‘gravy train’ will continue with levels largely unchanged. Whilst in Local Government we will start to see a gradual decline as work is taken back inhouse (with a few notable hiccups).
Wednesday, 7 January 2009
The Satyam share price fell over 70% as a result, but more importantly, the disclosure has knocked the reputation (I think unfairly) of the whole Indian offshore software and services industry. This story can be found on the FT with some good coments on Holway’s TechMarketView.
Mr Raju describes the past few years as "like riding a tiger, not knowing how to get off without being eaten" – a comment similar to those I’ve heard from senior directors of UK software companies that have failed in the past. Although the Satyam problem does not appear to revolve around revenue recognition or capitalisation of R&D costs, these are areas open to easy manipulation in the accounts of software companies to give misleading results. Once started, it is difficult to stop without fessing up – unless there is an external reason or opportunity like a major acquisition to hide the problem.
With the current economic gloom, shareholders are expecting poorer results from companies. How many companies will use this current period to unwind some of their accounting excesses – revaluing assets, writing off capitalised developments or providing for bad debts?
Perhaps some other Chairmen will be taking the opportunity to step off the tiger over the coming months.....
In short – not a lot of new business from Local Authorities or Central Government. Local Government re-organisation in England in April 2009 offers some prospects for new business – but in many cases those procurements and decisions on systems to be adopted have already been taken. Systemsolve has been tracking tenders in the OJEU, and has seen a big decline in the number of OJEU advertisements for new systems over the past few months, a trend that we expect to continue throughout 2009, despite Central Government statements that it wishes to maintain levels of expenditure.
Areas where business is expected to grow (albeit only modestly) include Education (although yesterday’s Commons Schools Select Committee comments on BSF may suggest otherwise) and possibly Social Services (although I’ve received differing views on this), whilst the Housing area is expected to maintain its current level of new business. Most other areas are expected to see continuing reductions in the levels of new business coming out to tender.
The effect for most Local Authority software suppliers is that there will be harsh competition for any new business that does come out to tender, resulting in tough discounting and reduced margins. Long term, this can be damaging for the market, as it discourages all but the bravest established companies from putting extensive investment into developing new systems. But unfortunately, with the current financial situation and a General Election in 2010 (following which there will inevitably be significant reductions in Public Sector spending, irrespective of who wins), I fear that we will need to keep the hatches battened down for a few years to come.
Thus the focus for suppliers will be on ownership of the customer base, and looking for virgin areas for new applications or bolt-ons to existing applications. Weak suppliers (and even some strong, but smaller ones) are likely to become targets of the larger, more financially secure companies, and we will continue to see further consolidation.
Existing suppliers will continue to maximise revenue from existing customers, both through increased services offerings and new modules & functionality for existing systems. Larger suppliers will attempt to cross-sell between departments within existing customer sites with limited success, although customers will be tempted by the lower cost of procurement. Surprisingly, procurement routes like Catalist will remain under-utilised, despite their likely lower costs and shorter timescales in procurement.
However, the corollary to all this, particularly for the smaller or bolt-on applications, is that we may see the arrival of new, smaller players with new offerings that are significantly cheaper and potentially technically superior to existing suppliers who have not invested enough in their products. (These new suppliers eventually becoming of a sufficient size and market penetration to be acquired by one of the larger suppliers.......).
So 2009 – a tough year for the software suppliers.
The situation may be different for service suppliers - I’ll cover that and the move to Managed Services and SaaS in later posts...
Tuesday, 6 January 2009
A recession is when your neighbour loses his job.
A depression is when you lose your job.
The difference between the two terms is not very well understood for the simple reason as there doesn’t appear to a definition that has been universally agreed upon.
Before the Great Depression of the 1930s any downturn in economic activity was referred to as a depression. The term recession was developed in this period to differentiate periods like the 1930s from smaller economic declines that occurred in 1910 and 1913. This leads to the simple definition of a depression as a recession that lasts longer and has a larger decline in business activity.
Now, the common, accepted definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.
The widely accepted definition of a depression is now any economic downturn where real GDP declines by more than 10 percent.
So, is the UK heading for a depression? The last 6 months of 2008 is expected to see a decline in GDP of just over 1%, and whilst predictions for 2009 vary widely, the worst predictions seem to be a decline around the 3% mark, meaning that there would have to be a major adverse change in the UK’s fortunes for us to come anywhere close to a depression in 2009.
Even the pessimistic view that the recession will continue into 2010, at say another 3% reduction in GDP, would leave the UK avoiding a depression (although, were this to happen, there would clearly be a great cloud of depression across many households).
My own view remains that we will not enter a depression, but will remain in recession for the whole of 2009, with the green shoots of recovery visible towards the end of 2009, and the UK leaving recession around the middle of 2010 (just around the time of the next General Election) – something that I suspect Gordon Brown is gambling on....
However, once we start any serious recovery (and after the General Election), we as taxpayers will have to start paying back the huge public sector debt that we will have accumulated – so there will be no sudden boom in growth. My suspicion is that we will have several years of minimal growth amidst significant political turmoil as the parties argue who is to blame......
Sunday, 4 January 2009
In addition to their normal beers, every year they brew 12 monthly specials, that in the past have had interesting names like “Trolleyed”, “Overdrawn” and December’s “Roasted Nuts” and “Mince Spy”. For the coming year the 12 special beers will have the topical names of:
January - Weary Banker (no – not Beery......)
February - Bailout
March - Credit Crunch
April - Meltdown
May - Fat Cat
June - Market Collapse
July - Investors Revenge
August - Stockbroker Blues
September – Freefall
October - Liquid Assets
November - Recession Ale
December - Frozen Assets
So perhaps my predictions for 2009 have some liquid support .....
If you’re interested in further information on Rebellion, visit their shop or web-site at www.rebellionbeer.co.uk
Or, as a member of their beer club, I have a number of spaces available for guests to their members' evenings on Tuesdays (second Tuesday each month – including a tour of the brewery and all the beer you can drink between 7.30 and 9.30) – please e-mail me if you’d like to put your name down for one of them........
You may remember that I predicted the FTSE100 to be at 4,800 at the end of 2008 and at 3,200 by the end of 2009. Well it finished at 4434 on 31 December, so I suppose I wasn’t too far out.
In practice, the slump went faster than I predicted, and one could argue that, with the low spot of below 3,800 in November combined with a 25% reduction in the value of sterling, the FTSE dropped near the 3,000 level in real terms......
Looking forward, let me repeat my belief that the majority of UK banks will be nationalised over the coming months (with perhaps Barclays opting for middle-eastern sovereign funds rather than UK taxpayers’). They still haven’t come clean about the extent of their exposure to toxic loans, CDO’s etc ... and with the impending defaults on corporate loans by many UK companies they will just not have enough cash to survive.
With the banks nationalised, what will happen to some of the businesses that fail? As I’ve noted before, the UK Government seems destined to nationalise several major business over the next few months, many unintentionally. I believe that as highly leveraged organisations default on their loans to banks that will by then be 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.
My view is that the FTSE100 will drop to 3,200 – most probably around April – followed by a dead cat bounce, and then a return to around 3,300 by the middle of the year, with a recovery starting in September leading to the FTSE100 rising to around 4,200 by December.
For the sake of completeness, my other main predictions are:
* Sterling to remain at or below its current level for the majority of the year, with some improvement towards the end of the year, as...
* the Euro starts to fall apart, with Spain and Italy leading an exit from the common currency, most probably followed by Portugal and Greece.
* Oil to return to the $70 per barrel price by April on the back of political instability in the Middle-East (possibly higher if Iran becomes actively involved).
* House prices to continue to come down, most probably by around another 15% in 2009, continuing into 2010/11 until they bottom out at around 50% of the peak reached in 2007.
Note: This blog is not intended as investment advice – please DYOR (do your own research) on all topics covered.
Quoting from Gladstone’s own RNS: “The Board will continue to build on Gladstone's investments, which are not yet fully reflected in the trading results of the Company.” So it’s appendage on the block time – it’s time to deliver real growth (difficult enough without the existing credit crunch), or if the potential is really so great, could we see an MBO attempt?
My expectation is that, barring another bid, in the short term 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.