BT NHS contract value up £546m, despite delays

OvumThe value of BT’s Local Service Provider (LSP) contract with NHS Connecting for Health (CFH) has increased by over £500 million over the last year to cover work it is taking on in the south of England. Assuming BT eventually delivers working systems – and according to the original terms of the deal it won’t get paid if it doesn’t – the extra £500 million will go some way towards plugging the ‘profitability gap’ in the LSP contract.
For NHS CFH, the revelation that BT has secured such a large increase in its contract value at this stage is a blow, suggesting the vendor came off best in the latest round of contract renegotiations.

Change comes at a hefty price for NHS
Written parliamentary answers from 1 June revealed the lifetime value of BT’s LSP contract is now expected to be £1,567 million (at 2004–05 prices). That is over £500 million more than the original contract value of £1,021 million (also at 2004–05 prices) quoted in the National Audit Office’s May 2008 report on the controversial National Programme for IT in the NHS (NPfIT). According to the parliamentary answer, the new contract value “includes an addition for work in the south [of England] now transferred by Contract Change Notice (CCN) to BT”. BT declined to comment on ‘the commercial detail’ of its contracts.

The long-running contract renegotiations, which resulted in the CCN in question, were concluded at the end of March. Under the CCN, BT agreed to support the so-called ‘Live 8’ – eight NHS sites in the south of England that had already received Cerner systems from former LSP Fujitsu Services, which left NPfIT in May 2008. In addition, BT is responsible for four new Electronic Patient Record (EPR) implementations in the South of England (on top of the rollout of such systems in London) and for the rollout of smaller systems at 25 mental and community health trusts.

BT had NHS CFH ‘over a barrel’
An extra £546 million seems a hefty price tag for these limited additions. For comparison, the original contract covered the deployment of EPRs to 31 acute trusts in London, ten mental health trusts and 31 primary care trusts. No doubt there were other changes in scope too – more tailoring of systems, for example – but it’s still an unexpectedly large jump in contract value.

The price is evidence of a number of things. Firstly, that BT underpriced the contract originally: remember that at the time rival IBM’s bid for the London LSP contract was rumoured to have been £1.4 billion. In its haste to secure a landmark IT services deal, BT underestimated the challenge the London LSP contract represented.
Secondly, that the vendor had NHS CFH over something of a barrel during contract renegotiations. As one of just two remaining LSPs, BT’s very public threat to walk away from the contract carried real weight. Had BT followed in Accenture and Fujitsu’s footsteps and walked away from its LSP contract, the National Programme as we know it would have faced a very bleak future. Of course, the new contract value might also be evidence of a more pragmatic approach from NHS CFH; a realisation that suppliers work best when they are paid a fair price for the work required.

Extra cash sorely needed at Global Services
Whatever the reasoning, the extra £546 million will be very welcome at BT (assuming, that is, that it completes the contract and gets paid the full value). BT’s LSP contract is widely reported to be one of two contracts at the centre of problems with its Global Services division, which reported a £1.3 billion write-down and £700 million restructuring last month. Whether £546 million will be enough to make the contract profitable remains to be seen, but it will certainly help.

Health minister Ben Bradshaw’s response to the parliamentary question also revealed that BT’s spine contract is now worth £889 million (up from the original contract value of £620 million over ten years) and that CSC’s three LSP deals are worth an estimated £3 billion to the company over their ten-year lifetime (in line with the original value of the three contracts, two of which were initially let to Accenture).