COMPANY SECRET
FUJITSU SERVICES HOLDINGS PLC
FUJITSU SERVICES LIMITED
FUJITSU SERVICES (INVESTMENTS) LIMITED
(the “Companies”)
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Minutes of a Meeting of the Fujitsu Services Management Committee
Present:
In attendance:
05/29
05/30
of the Boards of Directors of the Companies
Held at 1.30 pm on Thursday 17 November 2005
‘Irrelevant.
Mr. R. Christou (Chairman)
Mr. T. Adachi
Mr. D. Courtley
. Madarame
. Hirata
. Harris
. Nagai
. Moriya
. Nagano
Mr. T Yurino
=
<H>wOit
. H. Kinoshita
. H. Kubo
K. Kubo
t (Acting Secretary)
. T. Nagayama
. S. Takeichi
. S. Yamasaki
Introduction and Minutes of Meeting held on 18 August 2005
The minutes of the 18 August 2005 meeting were approved and the
Chairman invited to sign them on behalf of the meeting.
Chief Executive Officer's Report
The Chief Executive Officer, Mr Courtley, presented his report. He
added that the cash position had been improved by an advance
payment by the NHS of £58M. The full year forecast was
unchanged but there was a possible exposure to revenues in the
current and future years due to benchmarking on the HM Customs
and Excise account — a provision would be necessary unless this
was resolved by negotiation by the year end. The overall SLA
achievement figures were slightly down; this was largely due to the
position on the Lloyds TSB account which had experienced service
delivery issues owing to the discovery of a greater number of
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desktops within the service than had been initially identified.
05/31 Mid-Term Plan FSMC/05/31
The Chairman asked that this item was taken before the report of Mr
Harris in order that the meeting could consider it before an
adjournment for a presentation to Mr. N. Akikusa, chairman and
chief executive of Fujitsu Limited.
Introduction. The Chairman introduced the Mid-Term Plan ("MTP")
by explaining that FS was stabilising as a business. Its exceptional
growth in revenue and profit in 04/05 and 05/06 had been fed by
major transaction wins and the acquisition of FC, FTSI and Spain,
and would level off. The MTP did not feature any comparably size
increases. The benchmarking issues on HMCE were also faced to
a certain extent on the Post Office account, with potential reductions
in profit and revenue. EMEA was planned to reach break-even but
any significant return from the business would require acquisitions.
Overview. Mr Courtley presented the MTP. This showed a 5% p.a.
growth in income across the plan period, ahead of analysts’
projections for the industry as a whole. The cash positions would
improve as the large projects moved into delivery phase.
Competitive analysis. Analysis of competitors’ positions showed a
fragmented picture with some tier one competitors doing well and
others in reverse. BT's 19% improvement in particular was in part
attributable to the reclassification of certain of their revenues. This
analysis did show that FS needed to grow its commercial business.
Growth in specific business units. The investment in Retail was
beginning to pay off with pipeline and some _ well-defined
propositions; there was a need to replicate this approach in other
industry verticals. The EMEA business unit was a particular
challenge; set to break even next year it would require to make
acquisitions in order to achieve substantial growth. There was
optimism in the UK Central Government business that its growth
would not be constrained by the near saturation point level of
traditional IT infrastructure services contracts it enjoys, and that
further growth could be achieved in business process outsourcing
contracts.
Specific measures for growth. FS would continue to explore
offshoring capabilities in response to customer appetite, as currently
with the Automobile Association. FS's collaboration with Fujitsu
generally was seen as a differentiated approach by the market and
FS wished to continue this collaboration and expand it especially in
relation to applications development.
Acquisitions. Achieving tier one status in major markets would
require inorganic growth. It was recognised that the track record for
acquisitions in the IT industry was varied. However care taken on
the analysis of key factors would enable a positive review of
opportunities for acquisition in the market to be taken and it was
intended to bring forward proposals for acquisition to future
meetings.
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Questions. At Mr Madarame's request, Mr Courtley clarified that FS
did both require to continue its growth in UK Central Government
and to expand its private sector business. The previous view that
UK Central Government would not show further growth had been
altered following a change in management and an increased
confidence that growth could be achieved through BPO contracts.
Pursuing these different market areas would be a hard journey but it
was important to maintain a portfolio approach and not de-
emphasise any area of the market. Mr Hirata noted that VME did
not feature in the Plan. Mr Courtley confirmed that this was a
declining business — it contributed £50M p.a. of profitable revenue
currently but this was being replaced and FS was not dependent on
VME revenues.
Financials — main features. The Chief Financial Officer, Mr Harris,
presented the financial figures supporting the MTP. These were
prepared under IFRS — the 2004/05 figures having been restated
under IFRS after being prepared under UK GAAP. The main
change is that under IFRS, revenue is recognised when the
associated cost is incurred, not later on customer acceptance. This
has the result of pulling forward £300m of revenues into earlier
years than shown in UK GAAP.
Revenues would increase by 5% p.a. across the plan period; gross
margin would also increase progressively to reach 20.8% by 08/09.
Opex will increase to reflect the expenditure necessary to support
investment in the Retail and Financial Services strategies, and
enhanced marketing and business engagement in Europe. Overall
profit before tax will increase strongly across the MTP period to
reach £183M in 08/09. The balance sheet will strengthen in the
period covered by the MTP. The increasing positive cash position
means that interest payment costs will turn into interest earnings
(£8M in each of 07/08 and 08/09) but under IFRS, notional interest
on finance lease payments will reduce this figure. Headcount will
also increase in the MTP period to 24,715 in 08/09 in line with the
increased revenues.
Specific business units. The annual growth projections in EMEA
(8%) and South Africa (15%) are ahead of other units reflecting the
contributions to pipeline brought by new management in EMEA and
the involvement of third party shareholder Yard Capital in South
Africa. The UK Public Sector business also shows the benefit of the
NHS project moving into delivery stage in the period.
UK Commercial will reduce its gross margin in 06/07; the current
year is inflated by a payment of £10M due from the Post Office
which is not reflected in future years. This should however be offset
by increased growth in the higher margin business in Central
Government.
By 07/08 all Business Units are projected to be in profit after when
profit increases are spread evenly across the UK and European
businesses. Plotting pre-tax profit figures from the period 02/03 to
08/09 showed an average of 30% increase per annum.
Balance sheet. The Balance Sheet for the MTP period recover, by
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means of increased profit, from the low of 04/05 caused by the
pension fund contributions. This is associated with increased cash
flow and positive cash balances, reaching £258M by 08/09. The
pension deficit will reduce steadily from the increased contributions.
Questions. Mr Adachi noted the sluggish performance projected for
the Japanese Enterprise Business (JEB) Business Unit. Mr
Courtley agreed that the unit was not performing well and was
losing ground — the plans to expand it were not working. Large
ambitions for the Unit were not realistic and it was important that the
Plan did not overstate the position. Mr Hirata added that there were
different types of business within the Unit and that different
approaches were required in each case.
Mr Hirata further noted the projected profit from EMEA, known to be
a difficult business area; what plan did FS have to achieve these
results? Mr Courtley commented that it was difficult but that the
new management had changed the focus from treating EMEA as a
problem and minimising losses to actively pursuing more ambitious
deals. There were no guarantees but greater ambition was being
shown at EMEA headquarters and in the countries. Winning some
significant deals would make a big difference to the Unit's
performance.
The meeting adjourned at 14:30 for a presentation to Mr. Akikusa.
The meeting reconvened at 15:50.
Chief Financial Officer's Report
Mr Harris presented his report.
Year to date. In relation to the year to date, he noted strong
revenue performances especially in Central Government and Spain.
The operating profit and PBT figures included a £6.8M gain on the
disposal of the shareholding in the Scandinavian company Infocare.
The orders received figure of £565M for Q2 included £209M from
the NHS. The NHS has also made an early payment of £58M (excl
VAT) included in the figures. On the other hand, on Aspire the
customer is still not calling down programmes which is inhibiting
revenue flows on that account.
Forecast for Q4. So far as the forecast for Q4 was concerned,
overall it is thought that Central Government will meet or exceed its
numbers but that UK Public Sector and UK Commercial may fall
short. The overall figure looks attainable. In Spain £3M of opex.
costs had been reclassified as cost of sales, with corresponding
decreases in gross margin and net opex. The risk associated with
benchmarking on the HMCE account should be noted. Meeting the
budget will require contracts with Walsall, Northern Ireland Civil
Service and Post Office Generation 2 to be signed by year-end.
Questions. Mr Moriya asked why the benchmarking risk in HMCE
had occurred and whether such provisions were common in
contracts of this nature. Mr Courtley explained that, so far as HMCE
was concerned FS was aware of the provision (which was a right of
the customer under the contract to invite a third party to benchmark
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FS’s charges), but surprised by the findings of the third party
benchmarker — the customer was also thought to have been
surprised. FS was already in negotiation with the customer because
of the integration of HMCE and the Inland Revenue (subject of the
Aspire contract) into HMRC; the finding was helpful for the customer
in that context. FS was considering action in relation to the third
party benchmarker as well as reaching an accommodation with the
customer, but the outcome was difficult to predict. In the wider
context, it was necessary to accept benchmarking provisions in
order to win business; FS has had two bad experiences and needed
to understand the implications of these clauses in the contracts
where they feature. Mr Courtley confirmed that FS and entered into
other contracts which featured benchmarking projects. However the
most material such contract was HMCE and it was considered
appropriate to highlight the risk in the forecast. Mr Moriya asked
further if the risk to revenue attributable to benchmarking happens
on other contracts and to competitors. Mr Courtley confirmed that it
did — the problem was often that benchmarkers took an over-
simplified approach, applying metrics from simple environments to
very complicated ones even though in practice the costs of
performance in the latter case were not comparable. He was aware
of other companies who had disputed the same benchmarkers'
reports. It was hoped that it would be possible to update the
committee on HMCE and other potential exposures arising from
benchmarking at the next meeting.
Major Bids Report
Mr Courtley presented the Major Bids Report and explained the
competitive position on certain of the bids referred to in it.
Update to report. As an update to the Report, he was able to
confirm that FS had been appointed as preferred supplier on the
NICS bid, in preference to Accenture for whom, as a BPO
transaction, this was their natural territory.
Specific bids. On existing bids, Mr Courtley noted that BAe's
existing relationship with CSC was very strong and that FS might
discontinue its bid. The M&S bid although referring to a five year
contract in practice entailed their choosing technology that would
last for ten years, so was a very strategic contract. Among the bids,
Barclays had approached FS following the successful LTSB bid.
The IKEA bid involved FTXS and self-checkout technology — they
had trialled other companies' solutions without success.
On the lost bids it was understood that the incumbent had retained
NOMS and United Utilities on price, and that DCA might have been
lost because of residual impact from the Libra project.
Major Accounts Report
Mr Courtley presented the Major Accounts Report.
Particular accounts. \n relation to the NHS, the PACS programme
was going well in delivery. On the main LSP programme, there was
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a perception that FS had done well in the renegotiation from IDX/BT
to Cerner. FS had facilitated a very good meeting with Cerner and
the customer in the USA. The relationship with the Home Office
was improved because of improvements in service delivery. On
MoD DIl, FS was performing well but prime contractor EDS was felt
to be experiencing difficulties — this might have an adverse effect on
FS. In addition to the accounts noted in the report, Lloyds TSB was
in reasonable shape with some incremental orders; LTSB had
acknowledged that early service issues resulted from more
equipment having transferred than was expected and delivery was
now stable.
Questions. Mr Hirata noted that the Home Office account was
difficult because of the effects of benchmarking there; Mr Courtley
agreed but said there was a very good account manager in place
who was on track with a profit improvement plan.
Long term model for major accounts
Mr Nagai presented the paper on the long term model for major
accounts. He additionally noted two issues on FS's major accounts.
The first was the Post Office — the Japanese Post Office had visited
the UK body and been very impressed by the software FS had
deployed there — there may be some benefits for Fujitsu as a result.
The other was the recent technology alliance between EDS and
Fujitsu concerning Primequest and other technologies — this might
create opportunities in the MoD DIl account.
FS Sales Qualification Process
Mr Courtley presented the paper outlining the FS Sales Qualification
Process, called the Customer Solution Life Cycle (CSLC). This was
a mandatory tool used in FS to qualify sales opportunities and as a
result of its use FS was much less likely to bid for a project simply
because the customer invited us to do so. The tool sets quantitative
bid qualification criteria in the light of factors such as the
competition, and includes reviews by Mr Courtley, Mr Harris and the
Director of Legal and Commercial, Mr Peter Rowley, at prescribed
points. They may if not satisfied with the state of the bid require
more work to be done on qualifying the bid or that FS withdraws.
The tool has improved FS's win rate which in some areas was below
1 in 15 — UK Central Government is now at about 1 in 2 for
competitive business; UK Commercial at 1 in 5. FS was willing to
provide a copy of the CSLC tool to Fujitsu if this would be of
interest.
Questions. Mr Madarame asked if FS planned to present the tool to
Fujitsu, and Mr Hirata added that Fujitsu was trying to take
advantage of know-how from all of its Group in order to improve; he
asked how this related to the business approval review and contract
approval review process used by FS. Mr Courtley explained that
the CSLC tool added a numerical tool and an extra dimension of
thought to the review process over the BAR / CAR process and Mr
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Harris added that it required the sales force to understand the
competition better and that required them to get closer to their
customer.
Mr Nagano asked whether the tool was only useful for deals with a
minimum value. Mr Courtley explained that the tool could apply
irrespective of deal size, but that in some cases compiling it might
be uneconomic — these deals would rarely be appropriate for FS to
take anyway. The Chairman added that the success of these
processes depended on having a culture where management
believed in the process. Mr Courtley notes that similar tools were
used globally by competitors such as IBM and EDS, giving their
sales executives a common language. FS would not force CSLC on
Fujitsu but there were advantages to adopting common qualification
factors on international bids.
Mr Madarame asked why FS was still losing bids despite the tool.
Mr Courtley replied that if the tool suggested the opportunity was
good but the bid was still lost, it had not all worked — so continuous
feedback was essential in order to refine the tool. It had to be
acknowledged that in bids one never had perfect information. The
Chairman added that the tool was not akin to a computer program
that produced a given response to the inputs, but it did aid proper
thinking focused on the right issues.
Recapitalisation of South African companies
The Chief Financial Officer explained the requirement to inject
further capital into South Africa based on the tabled paper.
The meeting approved the injection into FS Infrastructure Holdings
(Pty) Limited of ZAR 72 million (approximately £6.35 million) using
ordinary shares.
Pension Deficit Update
The Chief Financial Officer provided an update on the current
position with the deficit based on the tabled paper. No action was
required in relation to the paper. This demonstrated that FS's plans
for addressing the deficit were working out.
Major disputes
The Chairman presented the report on major disputes. Mr Yurino
asked if FS maintained a single global provision for costs and
damages exposures on disputes. Mr Harris explained that instead
FS maintained such provisions on a project by project basis.
HR Manpower report
This report was noted by the meeting.
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Formation of Fujitsu Services OAO
The paper explaining this proposed company formation was noted
by the meeting.
Proposed Redeemable Preference Dividend
The paper proposing this divided was noted by the meeting.
It was RESOLVED THAT, subject to distributable reserves being
available, a dividend of £2,150,751.10 in respect of the period
ending 2 January 2006 on the Company’s 167,311,200
Redeemable Preference shares be declared on 3 January 2006 to
the holders of the said shares registered at the close of business on
19 December 2005. Such dividend will be paid on 3 January 2006.
Signed and sealed documents
The list was noted and the documents signed or executed as deeds
ratified, approved and confirmed.
Any other business
There was no other business.
Date and location of next meeting
The next Meeting of the Committee would be held on 15 February
2006 in Tokyo.
The Chairman thanked everyone for their attendance. There being
no further business, the Meeting ended.
Chairman
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