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British electronic network cause of U.S. vendor's losses

Accenture says it will lose $450 million on contracts to design and implement a health care computer system for Britain's National Health Service.

By Tyler Chin — Posted April 17, 2006

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The effort to build an electronic health network in Great Britain -- a system linking doctors and hospitals, which the United States also is planning -- has received another blow thanks to a recent financial report from one of the project's U.S. vendors.

Accenture Ltd. announced March 28 it was posting a $450 million charge against quarterly earnings for losses it expects to incur on two contracts to build part of the national health network Britain is implementing. Profits for the quarter ended Feb. 28 were $69.7 million, down from $209.8 million for the same period a year earlier. Revenues were $4.5 billion compared to $4.2 billion a year ago.

In a conference call with Wall Street analysts, Accenture, one of the world's largest technology outsourcing services companies, partly blamed its drop in earning on Manchester, England-based ISoft Group PLC's failure to develop and deliver on time health care software solutions.

ISoft is part of the consortium formed by Accenture that in 2003 won contracts worth $3.5 billion from NHS Connecting for Health. As part of the National Health Service's $11 billion initiative to implement a national health network for Great Britain, the agency carved up the country into five regions. Accenture won contracts covering two regions, while consortia led by Computer Sciences Corp., BT Group and Fujitsu Ltd. received contracts valued at $7.5 billion covering the remaining three. Under the contracts, vendors aren't paid unless they deliver systems that work.

The "significant delays" ISoft is experiencing led Accenture to set aside $450 million to cover losses over the next three to four years on contracts with NHS, said Michael McCarthy, Accenture's chief financial officer. The company also will lose money on the contracts, because it expects physician demand for the electronic medical records systems it is selling to doctors to be lower -- and slower -- than it had forecast, McCarthy said. Under the contracts NHS awarded in 2003, physicians could buy EMRs from only two companies that had the contracts in the region where doctors were based. General practitioners complained about the lack of choice, and after a yearlong discussion, NHS announced March 21 that GPs could choose any system that met the agency's minimum criteria.

"When Accenture signed its contracts with NHS Connecting for Health, it was expecting to basically have a monopoly on the suppliers of GP systems in those two regions where it is the local service provider for. But under this new system, they won't have that monopoly," said Tola Sargeant, senior analyst at Ovum, a London-based consultancy.

Accenture also says it will lose money on its NHS work because of higher development and integration costs related to software deployment delays. The company will seek to renegotiate the terms of its contracts, Accenture CEO William Green said, suggesting but not explicitly saying, it might walk away from the contracts if NHS doesn't agree to better terms. "Our preferred path is to come to an agreement that delivers the results they are looking for and treats Accenture [and its shareholders] fairly," Green said. "That's the path we're going to head down, but of course, we have all of our options open."

In an interview with the Financial Times, Richard Granger, director general of information technology at NHS, said the agency will not renegotiate contract terms. He would consider that option only if the other three prime vendors were suffering similar financial pain, but that hasn't been the case, Granger told the British newspaper.

In a statement posted on its Web site, NHS Connecting for Health said it expects Accenture to fulfill its contractual obligations.

So far, the company is the only prime vendor that has publicly disclosed it's losing money on its contract, Sargeant said. She added that El Segundo, Calif.-based CSC could be facing "a similar issue" albeit to a lesser degree than Accenture, because ISoft is also one of its technology suppliers.

"CSC is not impacted by the same issues identified in recent press articles due to differences in approaches and terms of the respective NHS contracts," company spokesman Jim Swords said.

BT told the Financial Times it's not losing money on its contract. Fujitsu told the paper it took a small write-off last year, but did not expect further losses.

ISoft told local newspapers it didn't have a response to Accenture's comments beyond a statement released Jan. 30, in which it warned the London financial market that software delivery delays related to the NHS project would hurt its fiscal year 2006 sales and profits.

Unlike the British, the U.S. model for a national health network comes from physicians and hospitals on up, rather than the government on down. Physicians and hospitals would connect locally to form regional health information organizations, and those RHIOs would link to form the national network, which President Bush said he'd like to see in operation by 2015. In the U.S. model, physicians and hospitals can choose their systems, rather than being forced to purchase from a specific vendor.

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