COMPANY SECRET
Minutes of a Meeting of the Fujitsu Services Management Committee
Present:
In attendance:
Apologies
05/20
FUJITSU SERVICES HOLDINGS PLC
FUJITSU SERVICES LIMITED
FUJITSU SERVICES (INVESTMENTS) LIMITED
(the “Companies”)
of the Boards of Directors of the Companies
Held at 1.30 pm on Thursday 18 August 2005
Mr. R. Christou (Chairman)
Mr. T. Adachi
Mr. D. Courtley
Mr. H. Madarame
Mr. H. Hirata
Mr. B. Harris
Mr. A. Nagai
Mr. T. Moriya
Mr. K. Nozoe
Mr ¥..N
(Secretary)
Mr. H. Kubo
Mr. T. Nagayama
Mr. S. Yamasaki
Mr T. Yurino
Introduction and Minutes of Meeting held on 18 May 2005
The Chairman welcomed those present at the Meeting. He explained
that Mr Nozoe would be resigning from the FSMC and that Mr Nagano,
who was present today, would be joining it. He thanked Mr Nozoe for his
support and welcomed Mr Nagano.
Mr Nozoe said he was grateful for the opportunity of being a member of
the FSMC for the past fifteen months. He was glad to have been
involved and to have had the opportunity to review FS transactions both
in the public and private sectors. He was not leaving Fujitsu and hoped
for a deeper and broader relationship with FS in his new marketing role.
The Chairman said he hoped Mr Nozoe would keep in touch.
Mr Nagano expressed pleasure at joining the FSMC and working with Mr
Hirata. He referred to the visit he had made to FS in April 2005 as
Marketing Director of Fujitsu Limited (“FJ”) when he had spoken of the
much closer marketing relationship he hoped to have with FS. He would
be working with Mr Hirata in support of the Service Product Business
{ FILENAME } -1-
2.
FUJITSU
FUJ00003674
FUJ00003674
COMPANY SECRET
05/21
05/22
Group and would be making infrastructure and outsourcing activities his
major activity. As a member of the FSMC, he hoped to make his own
personal contribution to the advancement of FS and looked forward to
learning a good deal from FS and its capabilities.
The Chairman asked if there were any comments on the draft minutes of
the 18 May 2005 Meeting. The Meeting had no points to raise and
approved the minutes. It was agreed that they should be signed on
behalf of the Meeting by the Chairman.
Chief Executive Officer’s Report FSMC/05/22
The Chairman invited the Chief Executive Officer to make his report.
Mr Courtley presented this paper, adding a few comments to what he
said there.
Trends — He had been pleased with the positive reaction of analysts to
the Group’s results. He felt they understood the Group’s strategy.
Business Continuity — He repeated his thanks for messages of goodwill
from around the Fujitsu Group following the July attacks on London.
Performance Q1 2005/6 — As Mr Harris would explain, for the present
FS would continue to report under UK GAAP, despite the intention to
switch to IFRS. Although some of the £46.5m increase in revenue was
due to the integration of FESA, some was organic growth.
Budget — The Q3 budget was unchanged for the 9 months to December
for the full year.
Service Delivery — He was pleased to report that there were no red
alerts at present and few amber alerts and noted the action taken to
prevent recurrence of alerts caused by supplier failings. Success in the
SLA achievement was still exceeding 93%.
Mid-Term Plan — He thought FS must continue to build its consultancy
business. FS now had an evolving model joining up its consultancy and
outsourcing activities, which was proving successful in the market place.
The Mid-term Plan would speak about this.
The Chairman asked if there were any questions. There were none.
CFO’s Report FSMC/05/23
The Chairman asked Mr Harris to present his report.
He explained that ratification by the FSMC of the adoption of
International Financial Reporting Standards (IFRS) by FS was on the
agenda for the meeting today. The Q3 budget had been prepared under
UK GAAP and under IFRS. The figures for previous budgets and for the
corresponding periods of 2004/05 had been restated to IFRS. In order to
retain the recognition with previously reported figures he would explain
the Q3 budget under UK GAAP and identify the main adjustments to
IFRS. The main pack included the Summary P&L and Balance Sheet
under IFRS as well as the usual schedules and analyses of their
movements from UK GAAP to IFRS for all periods. There was also for
reference a full pack of the Q3 budget under IFRS.
{ FILENAME } -2-
2.
FUJITSU
FUJ00003674
FUJ00003674
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
The schedules showed the Q1 results in the block on the left of the
pages. The Q3 budget for the periods of Q2, Q3 and the full year were in
the blocks moving across the pages to the right.
Q1 results
Mr Harris explained the Q1 results by reference to the Summary P&L on
Page 1 and to the Balance Sheet on Page 14.
Page 1 was the Summary P&L under UK GAAP. Q1 revenues of
£484m were £12m below the Q2 budget of £496m. Most of the shortfall
related to the continued delay in signing the Walsall contract in Public
Sector, which was down by £8m. EMEA was £4m lower from the delay
in securing the Tiscali order in Holland. The margin was at the Q2
budget level of 19.3%. Opex of £82.4m was £5m lower than the Q2
budget of £87.7m with all businesses contributing to the savings.
Rationalisation costs of £1.1m were £1.4m lower from deferrals in
Core, EMEA and Nordic. In Core, FS continued successfully to redeploy
people and the Committee would remember that the budget included an
allowance for rationalisation in Nordic, and in Spain (not yet applied).
These costs would be incurred later in the year. Operating profit from
associates of £3m was £0.7m more than the Q2 budget from improved
profitability in Camelot, mainly from its European activities. This
improvement would continue. Operating profit was, therefore, £12.8m,
which was £5m more than the Q2 budget. The improved cash position at
June had resulted in interest income of £1.1m being generated in the
quarter. PBT of £14m was £6m more than the Q2 budget of £7.8m.
Orders received of £646m were lower than the Q2 budget of £670m.
The shortfalls were O2 and Telewest in Commercial amounting to £25m,
the loss of Harrow at £24m in Public Sector, slippages in EMEA on the
FSC helpdesk for £30m, Tiscali for £11m and from Nomura for £10m in
EMEA. The main orders secured were LloydsTSB for £170m, the PwC
datacentre for £65m and the CHOTS one year extension for £96m.The
O2 order was signed in July. Compared with 2004/05, revenues were
£47m more than the £435m achieved last year. Aspire contributed £32m
and Spain £24m. The margin was almost 1 percentage point more than
18.6% last year, which was accounted for by the reduction of 1 point in
2004/05 for the effect of the Sirius benchmarking effect on prior years.
Opex was £4m more than last year from the inclusion of FESA.
Operating profit and PBT were both over £7m more than last year.
Page 14 was the Balance Sheet. The cash balance at June was £29m.
It was £14m more than the Q2 budget, due to lower capital expenditure
on the Aspire and NHS contracts. There were movements in the various
lines of working capital, but the total of £136m was consistent with the
Q2 budget.
Q3 Budget
Page 1 was the Summary P&L under UK GAAP.
The next block to the right of the Q1 results was the Q3 budget for Q2.
Revenues of £503m were £25m less than the Q2 budget. The shortfall
related equally to delays on Walsall, the slippage of VME product for
DWP in Central Government and delays in EMEA. The reduction in the
{ FILENAME } -3-
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
margin of 1.5 points to 19% was mainly accounted for by the VME delay
to DWP. Closing contracts for which FS had been selected was a major
issue which Mr Courtley and Mr Harris were currently addressing, as
revenue slippage was the inevitable consequence of delay. Opex of
£82m was £6m less than the Q2 budget of £88m, primarily from
continued deferrals of expenditure in Group HQ. Currently, restraints on
HQ spending to secure the profit position were being held to secure the
profit position. Operating profit of £13m was £7m lower than the Q2
budget. This reduction could be related to the delay to Q4 of the VME
sale to DWP. It was compensated at the PBT level by the gain of £6.7m
on the disposal of the shareholding in Infocare, which has been
concluded and should be in the August results. In the Q2 budget,
because of the uncertainty of the timing at that stage, it had been
included in Q4. PBT of £18.4m was, therefore, unchanged from the Q2
budget. Orders received of £539m were £531m below the Q2 budget
because of the continuing delay on closing the Walsall order.
The next block was Q3. Revenues in the Q3 budget of £594.5m were
unchanged from the Q2 budget. The margin improvements that were
included in the Q2 budget would materialise later than previously
expected. Gross margin was, therefore, £3m lower at £116.9m. Opex
deferred from the first half in Group HQ would start to be spent in the
second half. It was £90.6m compared with £87.9m in the Q2 budget.
Operating profit of £26.1m was £5.8m lower than the Q2 budget of
£32m. Although PBT was £6.2m lower at £23.8m, cumulatively for the
first three quarters, it was unchanged from the Q2 budget at £56.2m.
The full year was to the right of the page. Revenues of £2280.5m and
PBT of £102.2m were unchanged from the Q2 budget. A minor
reduction in the margin was compensated by improved profitability in the
Group’s Camelot associate.
The Q2 budget for Orders received of £3,211m and headcount of
19,979 were also retained in the Q3 budget. Compared with 2004/05,
revenues were £294m more than £1,986m last year, an increase of
almost 15%. The increase was accounted by the integration of FESA of
£132m, LloydsTSB at £58m, NHS £60m more, Aspire £29m more and
Walsall at £30m. Excluding FESA, the increase was 8%. The margin
was slightly lower at 20.4%.
Opex was £29m more due to FESA. Rationalisation of £12m included
an allowance of £7m for Nordic and FESA. Interest costs were offset by
the higher gain on disposals. PBT of £102m was £17m more than in
2004/05.
Page 2 was the Major Movements in Q3 budget revenues and PBT
from the Q3 budget for Q2, Q3 and the full year. The effects of the
delays on the Walsall contract, the VME for DWP and in EMEA were
shown on the first three movement lines. Expenditure on the Triole
project was slower without detrimental effect on its progress. The next
line showed that improvements in margins would materialise later than
previously expected. On the next line, Opex deferred from the first half
being spent from later in the year.
Page 3 was the Analysis of the Adjustments in revenues and
{ FILENAME } -4-
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
operating profit from UK GAAP to IFRS. It showed the changes
relating to revenue recognition for the long-term contracts applying the
percentage completion method and to pension accounting. Applying
IFRS, it showed that revenue would increase this year by £116.3m to
£2,397m under IFRS (and under the IFRS standard all costs incurred
had to be charged to P&L and the appropriate level of revenue taken
against them irrespective of any delivery or acceptance by the customer)
and PBT would be £33.8m more at £136m. £8.8m related to the margin
on the additional revenue. £25m related to the pension cost, where the
pension deficit being written off to reserves meant that only the normal
charge was charged to P&L, and the amortization deficit was not
required. This gave FS a £25m increase in its profit to £136m. The
analysis showed that the change in accounting mainly affects the PFI-
type contracts, with revenue on contracts with a development stage
being booked earlier, as the cost was incurred.
Page 4 was the Summary P&L under IFRS. Mr Harris noted one
correction here for a mis-posting: the gain in the margin on the additional
revenue had been posted to Opex when it should have been in the
Margin line. The PBT numbers were, however, correct. Each period had
been adjusted, including the previous budgets and last year.
Page 5 was the Revenues by business unit. In Q2, all businesses are
below the Q2 budget with the exception of Commercial. At £125.7m, it
is £7m higher from service revenues from Centrica brought forward from
Q3. The slippage of the VME sale to DWP reduced Central
Government to £187m in Q2 from £195m in the Q2 budget. Public
Sector is £11m lower at £32m, reflecting mainly the delay on Walsall.
The reduction in EMEA to £93m was due to the delays on the Tiscali
and Aer Lingus contracts (the latter had been won, but Aer Lingus
needed to negotiate the conditions with the unions). In Q3, additional
Defence revenues in Central Government offset reductions in
Commercial and in the two European regions. The full year was
unchanged from the Q2 budget.
Page 6 was the Margin by business unit, which was broadly in
accordance with the movements in revenues.
Page 7 was Opex by business unit. At £82m in Q2, it was £6m less
than the Q2 budget. Most of the savings were HR, Marketing, CIS and
Properties in Group HQ, which was £3.3m lower at £9.2m. EMEA was
£1.5m below Q2 budget at £18.5m and Nordic was £1.2m less at
£8.3m. Spending in the second half by Group HQ was, consequently,
higher than in the Q2 budget. In Q3, it was £2.6m more at £13.7m,
which accounted for all of the increase in the total from £87.9m in the Q2
budget to £90.6m. Opex in the full year was unchanged at £365.6m.
Page 8 was Rationalisation costs, which were £0.5m more than the Q2
budget in the full year, as a result of a reassessment of the sales force in
Commercial. Page 9 was Operating Profit, Page 10 was Orders
received, Page 11 was the Orders backlog and Page 12 was the
Headcount, all by business unit. The movements from the Q2 budget
were explained by the previous schedules.
Page 13 was the Headcount bridge. The main movements occurred in
{ FILENAME } -5-
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
Q1. The increases relating to FESA (where 1,539 people joined) and the
LloydsTSB contract (where 533 people joined) were highlighted. In Q3,
the additional 320 people were for new business relate to the FSC
helpdesk, Aer Lingus and Walsall contracts.
Page 14 was the same presentation of the Balance Sheet under UK
GAAP as for the Q2 budget at the last FSMC. Net borrowings would be
higher throughout the year than in the Q2 budget. They would be £83m
in September, compared with £60m in the Q2 budget. Borrowings would
increase to £100m in December and would be £65m in March, both
£35m more than in the Q2 budget. The increase was mainly due to the
reinstatement of the capital expenditure programme on Aspire, in
particular the e-services portal refresh for internet tax returns, the Stride
project for the NT replacement by Windows XP, and the data replication
project. (The Meeting would recollect Mr Harris’s previous explanation
that, up to now, with the integration of the Inland Revenue and HMCE by
the UK Government, the capital expenditure on these had been held
until they had worked out the structure. That exercise was now more
advanced, and they had therefore reinstated the programme). The effect
appeared in Fixed Assets of £323m. Net borrowings of £65m at March
2006 represented a cash outflow of £135m during the year. £27m
related to the acquisition of FESA, Aspire would absorb £40m, Dll £20m
and NHS £100m. HMCE would generate £57m. Those contracts
accounted for the main movements on FS’s cash position.
The main effect on the Balance Sheet from the implementation of IFRS
was the accounting for the Pension Fund deficit, which was written off
against Reserves. The Adjustments to Share Capital and Reserves at
March 2005 and March 2006 were shown on Page 15. It demonstrated
that, from a healthy position of in excess of £400m of shareholders’
funds under the previous UK GAAP FS Would at March 2006 have
shareholders’ funds under IFRS of £119m. Moving down the schedule,
the first item was the writing off as at 1 April 2006 of the IAS 19 Pension
Fund deficit of £524m with the related deferred tax effect; the previous
accounting prepayment was no longer relevant and was written off to
reserves, too - £52m, with the deferred tax upon it. There was, however,
an improvement to FS’s shareholders funds through the lower charge to
the P&L for pension costs and at March 2006 FS would have two years’
worth - £51m, again with a related tax effect - The annual charge to the
P&L for Pension costs ceased to include the amortisation of the deficit,
having been written off to Reserves. It reduced by £26m in 2004/05 and
was estimated to reduce by £25m thereafter. This benefit was included
in the PBT under IFRS on Page 4. The other adjustments related
primarily to the effect on profits of revenue recognition and leases. Share
capital and reserves at March 2006 reduced from £485m under previous
UK GAAP to £119m under IFRS. The figure was similar to current UK
GAAP with the introduction of FRS 17.
Page 16 was the Balance Sheet under IFRS. Each period had been
adjusted, including the previous budgets and last year.
Pages 17 to 19 were the Inventories, Debtors and Payables by
business unit, respectively. They showed that working capital in Central
Government at March 2006 would be lower than the Q2 budget from
{ FILENAME } -6-
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
payables for year end capital expenditure
Page 20 was the Cash Flow. The free cash outflow in the year of
£129m would be £36m more than the Q2 budget from the additional
capital expenditure, mainly on Aspire, offset by lower working capital in
Central Government, as previously explained.
Page 21 is the Capital Expenditure and Depreciation schedule by
quarter. The increase in capital expenditure from £188m to £249m is
contract related. Much of it will be incurred in Q2, being carried over from
Q1, and in Q4.
The next packs were the Attachments and the Q3 budget under IFRS for
reference.
The Chairman asked if there were any questions for Mr Harris.
Mr Adachi referred to the Summary P&L on page 1 and noted the
progressive increases in Net Opex — Q2: (£82m); Q3: (£90m); Q4:
perhaps (£110m). If control of expenditure continued as in Q1 and Q2,
would it be possible to improve Net Opex by £20m, to make it £90m
rather than £110m in Q4? Mr Harris said that, numerically, Mr Adachi
was correct, but in Q4 FS accrued for most of the incentive and bonus
payments (assuming that FS made its numbers). The other item that
occurred towards the end of the year was an e-procurement project
called Lightfoot which would incur some £4m of costs on the
development stage, which was in the forecast for the second half of the
year. So Mr Adachi was right that, if the constraints continued, FS would
improve on Opex, but he thought the improvement here would not be as
much as £20m. He nevertheless admitted that there was an opportunity.
Mr Adachi also referred to the Balance Sheet on page 14. At the end of
September, FS had borrowings of £83m. Had those borrowings already
been incurred at the present date? What was the current number? And
as regards the figure of £65m at the end of March, how much could FS
improve that number if it tried really hard? Mr Harris replied that at the
end of July FS had had £25m of borrowings. So the £29m cash at the
end of June was now £25m of borrowings. FS would try very hard to
improve that position and have borrowed less than £65m at year end. To
that end, FS would try hard to collect cash. The Government tended at
the year end to be helpful — advanced invoicing showed £150m which
had been received from the MoD, and by the end of the year it was
forecast to fall back to a normal level of £114m. In previous years, FS
had gained by £20-30m, though he could not guarantee that this would
continue. He was also looking at other things — for example, if the NHS
progressed well, it might be possible to advance the advance payment
from the NHS, but that was merely a hope. To sum up, he would try to
improve the cash position and he hoped the MoD would continue to be
helpful with advanced payments, but he could not predict how far the
£65m would reduce — there were too many unknowns. But if revenues
increased, it would have an effect on FS’s collections. Mr Courtley
added that the forecasts this time were not as good as he would have
liked. He believed FS could improve but, as a precaution, some
spending had been restrained to ensure the profit target was achieved.
He was also seeking measures to improve the business. An example
{ FILENAME } -7-
COMPANY SECRET
05/23
05/24
was Project Lightfoot — if the improvements were not attained, that
project could be stopped before the money was spent. On balance
sheet, he hoped for a better cashflow solution through the NHS which
would reflect in the balance sheet. He also stressed that FS could not
rely on advanced payments from the Government, but in fact there often
were such payments around the year end.
Mr Hirata asked about the impact of Walsall on revenues and the current
position. Mr Courtley replied that large projects were attractive, but there
was a substantial impact when delays occurred. Those delays were
partly due to the need to complete contract schedules, and partly to a
mistake by Walsall in calculating its budgets. FS was addressing this by
taking away scope and assuming a little more responsibility than
previously planned through sub-contracts. It was important not to
increase risk unacceptably and it was taking time to make the
assessment. If all went well, he expected to sign the contract in
October.
The Chairman summed up by saying that questions were raised by the
Q3 Budget. Corrective measures were being taken and they were
believed to counter the risks. There was, nevertheless, the possibility of
upside if the risks did not materialise, though how much was a matter of
conjecture. The difficulty of closing deals like Walsall was not to be
under-estimated.
Implementation of IFRS Oral report
Mr Harris said that he had not produced a Paper on this item, since he
felt that a paper on such a technical subject would not be helpful in this
particular Meeting. The purpose of this item was to seek the
Committee’s approval, on behalf of the Board of FSH, of the proposal to
adopt IFRS. In European countries, quoted companies were now having
to adopt IFRS and FJ had signalled its intention to do the same, perhaps
next year. This year, FJ intended to go part of the way by implementing
the percentage completion basis. In the UK, a company could not adopt
an accounting standard in part — it was a case of all or nothing. IFRS
was beneficial to FS for the pension fund accounting aspect and FS
wished to comply with the corporate policy on recognising revenue. It
accordingly wished to implement IFRS — hence the request for Board
approval.
The Chairman asked for questions. He commented that, on the surface,
it looked as though it improved the P&L and damaged the balance sheet
but, whatever it did, it made no change to the cash or debt position — the
underlying position was exactly the same and it was simply a different
way of presenting the results.
It was RESOLVED by all those present to approve the implementation of
IFRS, as proposed. Mr Harris was directed to continue his collaboration
with Mr Moriya.
Mr Harris confirmed that he and Mr Moriya and their respective teams
were working closely and well together on this difficult task.
Major Bids Report FSMC/05/24
{ FILENAME } -8-
2.
FUJITSU
FUJ00003674
FUJ00003674
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
Mr Courtley presented this paper.
Item 1, Walsall — He ad already referred to this. This bid was not yet
closed. He hoped it would sign as soon as possible, but the remaining
issues were not easy. It was notorious that contracts with local
government customers were difficult to bring to completion.
Item 2, Northern Ireland Civil Service — This was worth about £250m
over fifteen years and was in its final stages of down select, with
Accenture as the competing bidder. FS was bidding with PwC and
Capita. David hoped for a successful outcome. It was a BPO deal and
he thought it offered FS the opportunity to learn a lot through the
partnerships so that, in future, it could take more responsibility itself
directly and earn more margin from such transactions. The FJ EMC had
recently approved FS’s request for a parent company guarantee in
respect of this project and he was grateful.
i — This involved desktop managed services in the
telecoms sector. Part of it would involve consideration of an operation in
Poland and as part of the bid FS was looking at whether it would be a
good idea to consider a Polish operation on a modest scale. David
thought that FS’s bid was competitive with EDS, the other main
contender.
Item 4, NOMS — This was another competitive bid, with Steria as the
other bidder. Again, Mr Courtley was grateful for the recently approved
parent company guarantee. It was a good deal in the centre of FS’s
standard offerings and he believed that FS was well positioned. The
customer was now evaluating the bids and FS would have to wait and
see the outcome.
Item 5, Post Office — This involved moving to the next generation of
Horizon. At present it was difficult making a business case with the Post
Office, which did not have much spare money. The negotiations were
accordingly challenging, but were continuing.
Item 6, BAE Systems — It was expected that this bid would take off in
November when the customer launched an RFP. This would be a big
project, worth up to £2bn.
Item 7, DCA — This was the opportunity to bid for a single infrastructure
contract to replace services provided by FS (Libra) and others. FS had
had managed to transform the customer's view of FS, achieving high
level of customer satisfaction on its existing services — over 9. This was
accordingly a good prospect, despite the presence of three other
competitors, including EDS, and he thought FS might be seen as a
favourite to win it. FS was also conscious of the need to avoid
complacency.
Item 8, United Utilities - This was a managed services opportunity for a
big utilities company.
Item 9,; IRRELEVANT The customer was at last looking for a POS
update and he" leased to say that the customer was looking to buy
a managed service rather than just technology. This would be
competitive but, as an incumbent supplier, FS was well-positioned.
{ FILENAME } -9-
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
Mr Courtley then turned to new bids.
Item 10, HMRC — This involved the merger of HMCE and the Inland
Revenue. As a result FS had the opportunity to increase the value of its
order book through the extension of the contract length as a result of
that transition. That should be a positive development for FS. It would
take some time to negotiate.
Item 11, NHS — The existing PACS service was going well. FS had
shown itself to be the best performing LSP and it was being given
opportunities to bid in other areas — East Midlands and North-east of the
UK.
Item 12, Ditech — This related to an Italian company which wished to
divest itself of its internal IT services with a view to having a contract
instead. FS was looking to take over those services for little or no
consideration. It was, Mr Courtley thought, a good way of improving its
business in Italy.
Looking at bids reported last time, the following was worthy of mention -
Item 13, PwC — Mr Courtley was pleased to report that this contract, for
datacentre services over four years and worth £62m, had been signed.
Under lost and withdrawn bids -
Item 14, HMCE — This had concerned the Automated Lorry Road User
Charging System. The Government had re-evaluated its strategy in this
area and had withdrawn this opportunity. As a result, FS would probably
be able to recover some of the money it had spent on this project.
Item 15, Inland Revenue — FS had decided not to bid for this big
hardware supply project because it did not presently have the right
capability or positioning.
Mr Courtley asked if there were any questions.
Mr Hirata commented that there were good deals in the pipeline, but was
wondering whether there would be sufficient human resources to deal
with them. Mr Courtley replied that substantial resources were needed to
bid these deals. It was important to qualify strongly so that resources did
not become too thinly stretched. As regards delivery, the same applied.
With outsourcing deals, there was the benefit of staff being acquired and
some of them (for example, on the Aspire project) were very good. That
said, there were often too many contractors (as on Lloyds TSB). Another
challenge was to build up the strength of the account management
teams — FS could not run the risk of having unqualified people in
management positions. He felt that, so far, this was being managed
reasonably well. Mr Hirata wondered whether there were any resourcing
issues specifically referable to the NHS prospects in other regions. Mr
Courtley explained that the PACS deals mostly involved equipment, so
did not impose too heavy a headcount burden. The PACS team was
only ten people, but the quality of those people had been instrumental in
FS’s success. The challenge was to keep the quality high.
Referring to his perception of a shift in focus of FS business from the
Government side towards the private sector, Mr Madarame asked what
{ FILENAME } -10-
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
skills and resources FS thought it was currently lacking. Mr Courtley
replied that there were still commercial deals coming into the pipeline, as
well as Government deals, so there was a balance. The main difference
between the two sectors was that sometimes the commercial sector
wanted to move very quickly. The question was whether FS could adapt
to that style. Opportunities like Orange required this. On the resources
side, he was able to put the right people before the customer in order to
win. There was some stretch, but he felt that he resources were being
managed well enough. It was helpful that it had been possible to bring
some good people in to supplement existing resources and, so far,
capable senior people had not been lost to competitors. The skills most
in demand were senior technical architects and programme managers
and this was where the greatest difficulty was experienced when
recruiting and where it was most important to focus FS’s internal training
programmes.
Mr Nagano asked about BPO prospects, such as the Northern Ireland e-
HR deal. BPO involved human links and a partnering model. He
wondered whether FS itself could obtain the skills it needed for such
work. And what was the gross margin for BPO, and the criterion for
taking BPO business? These were topical questions in Japan, too. Mr
Courtley replied that FS should not enter the highly commoditised part of
the BPO market. In that part of the BPO market, the typical gross margin
there of 5% was far too low for FS. Instead, FS needed to focus on
areas very close to IT, which were not commoditised. If it did so, he felt it
could aim to achieve similar margins as those which FS achieved
elsewhere in its business. It might be that slightly lower margins could be
accepted, but he would look hard at a proposal where the margin was
less than 20% gross; he would look very hard where it was less than
15%. In the early stages of FS’s experience of partnering, of course, it
was important to understand that FS would be in a leaming curve and
could not simply put margin on top of margin carelessly and expect to
win. A learning curve was unavoidable, as FS had found with Walsall.
When FS offered these services itself, it had to see them as added value
services, not commoditised services, and price them accordingly. He
added that BPO was not an area FS could avoid: it was an opportunity
and, if FS did not grasp it, it would be naive to assume that the world
was going to buy IT outsourcing on its own to suit FS. FS must face up
to this gradual change in the market and adapt.
Mr Nagano added that, when doing BPO work, he found that upstream
business process needed to be revised and improved. The role of
business consultancy was important in this context. Was he right to
assume that Mr Courtley intended to ensure there was sufficient internal
resource for this activity? Mr Courtley agreed that, to succeed of selling
BPO, FS needed consulting capability to be credible and to be able to do
the required process redesign. So a particular business consulting group
had been established in Core, headed by Robert Devien. He hoped this
would enhance FS’s ability to sell and deliver with increasing credibility.
There had recently been a collaborative discussion with FJ on the
consultancy aspect and one of the senior FJ consultants had presented
here on this subject. Some details of the FS model had recently been
shared with FJ. Mr Courtley would be happy to go into more detail on
{ FILENAME } -ll-
COMPANY SECRET
05/25
this at the next FSMC.
The Chairman commented that the subject would form part of the Mid-
term Plan which would be under discussion at the next FSMC anyway,
so it would be addressed then. It was agreed that it would form a
separate component of that Plan.
Major Accounts Report FSMC/05/25
Mr Courtley began by saying that he had not included Lloyds TSB in this
present report but would do so at future Meetings of the FSMC in view of
the size of the account.
NHS — Mr Courtley reminded the Meeting that FS had failed to work
successfully with BT and IDX and had, with the customer's agreement,
terminated their agreements. There had been risks in taking that course,
but he hoped that would be accomplished safely. Looking forward, the
plan now was to use Cerner as the sub-contractor instead. Having
looked carefully at Cerner, he strongly believed that this was much more
likely to succeed. Cerner had better plans than IDX and managing them
direct, rather than via BT, gave FS more control. FS had insisted on
placing a large team on the site working with them so there would be a
joint effort. This would be a much healthier plan than the position up until
now. The customer had been pragmatic and had agreed somewhat
easier terms for delivery — they wanted FS to succeed. Indeed, the
customer had acknowledged that there had been problems on its side
and were willing to be more generous in their contract terms and in
terms of scope going forwards. So, the first deliveries would be of
existing software, which would reduce the delivery risk. Revised figures
were therefore now being put forward for approval . There had initially
been some concerns over cashflow which had been discussed, but that
had now been significantly improved as a result of further concessions
from the customer, including some advance payments. Cerner had also
helped. Being late did not, of course, help on cashflow overall. But there
was now more clarity in the project, risks had been dealt with and there
was a better chance of delivery. The aim now was to sign as soon as
possible and get on with the project in case the internal politics at the
customer changed. Returning to the subject of Cerner, Mr Courtley was
happy with a meeting with its CEO and the sub-contract moved risk to
Cerner (an improvement).
He added that, so far as PACS was concerned, the present contract was
going very well and new opportunities were arising from it.
The Chairman observed that this opportunity to reset the NHS deal
needed to be grasped quickly — the present situation was not that
different to Pathway or Libra. There was political sensitivity and the
customer could not risk embarrassment. A risky moment had been the
change in the Minister of Health but, in fact, that change had not caused
a problem. A further risk would be if the person in charge of the project
moved elsewhere, so he was urging Mr Courtley (who needed no
urging) to bring the matter to a conclusion as soon as possible. As for
the figures, experience of these projects showed that it was impossible,
over the ten years of the project life, to predict correctly the outcome, but
the position usually improved once there was a good baseline. The
{ FILENAME } -12-
2.
FUJITSU
DC
DC
FUJ00003674
FUJ00003674
FUJ00003674
FUJ00003674
COMPANY SECRET FUJITSU
project as it stood was acceptable, but he expected extra business to
come, as with PACS. He was satisfied with the progress made and
would be happy when the CCN was signed. He commended the project
team for its hard work. Mr Courtley agreed and also thanked Mr Hirata
and Mr Nagai for their strong support.
Mr Hirata commented that, as a result of his involvement since the
negotiation stage, the NHS had been his “pet project”. He believed BT
and IDX had been the largest risks. It was good that FS had addressed
that problem and that top management had grasped it and implemented
solutions, moving away from BT and IDX. He appreciated the work
involved. He hoped that the CCN would be signed soon. But risks — work
packages, quality, performance, other issues — could arise with Cerner
and FS must be ready for them. FJ would give help and support, if they
did.
Mr Nagai added that the first milestone for the revised project would be
16 December 2005. Cerner had asked FSH to guarantee FSL’s
performance of its sub-contract (as, indeed, had BT under its
agreement) and a request would later today be made to FSH’s board,
through the circulation of a written directors’ resolution, for approval of
that guarantee.
Mr Madarame asked about the risks involved in changing from BT/IDX to
Cerner and how they would be managed. Mr Courtley said that there
were risks, but the agreement by the customer to take delivery of
existing software for the first few months was helpful and Cerner’s well-
qualified team made a lot of difference. The scale of the delivery was a
big issue and the scaling up of Cerner’s solution was near the top of the
list of risks. But he believed FS would be able to manage the risks and
that FS and Cerner had the engineers to get the job done. The
Chairman added that the hospitals liked Cerner, preferring them to IDX.
MoD — Dil — This job was going fairly well. EDS had agreed to occupy
under-used property leased by FS at Reading, which helped in the
management of the Group’s property portfolio.
Post Office — Horizon Next Generation — It was necessary to wait and
see the result of the present negotiation.
HMRC Integration project - The customer had decided to use the Aspire
framework for the integration project for Revenue and Customs. So FS,
which was sub-contractor to Capgemini on Aspire, would lose the
primacy it had enjoyed on the HMCE project. Nevertheless, Mr Courtley
thought that FS would not lose out either technically or financially. He
thought that the strong line taken in negotiations with the customer and
Capgemini would result in a net benefit for FS. The eventual integration
agreement would be brought to the FSMC in due course.
Libra — This project was going well. It was now in its late stages, and
performance was good, as was customer satisfaction.
Home Office — The customer had been difficult, but had been very
pleased by FS’s response to the terrorist incidents.
DTI — FS's financial performance needed to improve, but there was a
{ FILENAME } -13-
COMPANY SECRET
05/26
05/27
05/28
plan to do that.
The Chairman asked if there were any further questions. There were
none.
Items for noting and questions
Major disputes — progress report FSMC/05/26
There were no new developments at a level causing concern. There
were no questions.
HR Manpower Report FSMC/05/27
The Chairman commented that Mr Courtley had already covered much
of this subject in his replies to earlier questions. Mr Courtley said that he
would just add that the recently acquired Spanish business had many —
over 500 - contractors. He would be looking at whether FS could
improve profitability there by examining manpower.
Signed and sealed documents FSMC/05/28
The list was noted and the documents signed or executed as deeds
ratified, approved and confirmed.
Any other business
Mr Nagai and Mr Allnutt explained the nature of the guarantee that FSH
was proposing to grant to Cerner, after which the relevant directors’
resolutions were circulated for signature.
There was no other business.
Date and location of next meeting
The next Meeting of the Committee would be held in November in Tokyo
and would address, amongst other things, the Mid-term Plan.
The Chairman thanked everyone for their attendance. He felt that the
Meeting had been productive.
There being no further business, the Meeting ended.
Chairman
{ FILENAME } -14-
2.
FUJITSU
FUJ00003674
FUJ00003674