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January 15, 2006

Fujitsu hit with $1.1bn contract cancellation

Fujitsu Services has been rocked by the news that a UK local government authority is scrapping a proposed $1.1bn outsourcing contract, 13 months after naming Fujitsu as the preferred bidder for the project.

By CBR Staff Writer

Walsall Council announced in December 2004 that it had agreed terms Fujitsu for one of the largest ever outsourcing deals in the local government sector. The 12-year deal was to see the two parties create a joint venture vehicle to improve Walsall citizens’ access to information on issues such as council tax and library services by revamping the underpinning technology infrastructure.

But after 12 months of negotiation, the council has decided to pull the plug on the project, saying that it is now better placed to meet the needs of local people without the joint venture.

Council leader Tom Ansell said: When we began looking at this project, the council was in a weak position and uncertain about how the service improvement could be made without a partner, but any proposal for a partnership had to be affordable both in the short term and in the long term for the council.

Peter Hutchinson, managing director of Fujitsu Services’ public sector business, told ComputerWire that the company was surprised and disappointed by the news. He said the council had been struggling to fund the project, and despite a lot of negotiation between the two sides over the size and scope of the contract, they had failed to agree a deal. The problems began when the council found that their budgets were being cut, he said. They didn’t get as much money from [UK Chancellor] Gordon Brown as they had previously done.

Although Fujitsu had not started any work on the project, Hutchinson said it has cost the vendor a good deal of money – most of it wasted to bid for and negotiate the contract. He refused to comment on whether Fujitsu would receive any compensation from the council for the resources it had invested in the project.

There are other examples of local authorities getting cold feet over outsourcing engagements after initially reaching an agreement with a supplier. In December 2002, Northamptonshire County Council announced plans for a $1.5bn, 10-year deal with Hyder Business Services to support IT, procurement, property, and finance functions. However, in 2003, the two sides agreed to end negotiations due to an unbridgeable financial gap between the expectations of both organizations.

Hutchison said it is generally more difficult to strike deals with local government organizations than central government agencies or private sector firms because of the greater level of bureaucracy. One of the big issues in dealing with local government is that the governance process is run by an executive and a cabinet, and the two sides don’t always agree, he said. It is much more difficult to get everyone to go through a hoop than it is in the private sector.

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