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Weekly Column

Changing of the Guard: This Time, Microsoft's the Good Guy

Status: [CLOSED]
By Robert X. Cringely

Microsoft has just signed a nine-year contract with the UK's National Health Service -- up to 900,000 software licenses for the healthcare giant at a cost of around half a billion dollars. The deal is being seen as a counter-attack on Open Source, which the NHS is also known to be evaluating, but that's not really it. While Microsoft still views Open Source as a long-term threat, this deal is all about Microsoft taking on the IT systems integrators like EDS and Computer Sciences Corp. It's a huge potential expansion of Microsoft's business, and this time, it probably bodes well for everyone.

Earlier this year I did a series of columns on the nightmare of EDS' Navy Marine Corps Internet network integration project -- the largest IT outsourcing project in U.S. military history. Well, Britain's National Health Service has been shopping around the same kind of deal, hoping to outsource a revolution in medical IT integration very similar to the one already taking place in the U.S. at Kaiser Permanente, which the NHS has been studying. Their laudable goal is to eliminate paper medical forms and records, and in doing so, streamline operations, save money, eliminate mistakes, and save lives. Of course, these projects typically do none of the above, at least not for their first few years, if ever. It will all cost somewhere between nine and 40 billion dollars, a range of numbers that is not only breathtaking in size, but is so loosey-goosey that it fairly cries out that nobody involved really has much of an idea what they are actually doing.

The project is so filled with peril that many of the usual suspects have avoided it completely, and Lockheed-Martin last year took a look and walked away from the deal altogether, saying it might well have taken down the company.

Enter Microsoft, stage left.

Microsoft desktop software was always part of the NHS IT structure, but Microsoft, itself, was not central to the development of new systems. Nor, it could be argued, are they central even now. But my guess is this new contract puts Redmond right in the hot seat, giving them a chance to expand their business in whole new ways. Microsoft has long had a consulting division that supposedly competes with the Accentures and EDSes, but its customers are mainly smaller enterprises, and its successes haven't been that much to talk about. But that could change as Microsoft now worms its way into the heart of the NHS IT.

There are three key components to this contract. First, the NHS gets a lot more for its money, paying about $500 million less to Microsoft than the previous contract and getting more than 50 percent more licenses at that. Second, Microsoft has committed to spend $75 million of its own money to build for the NHS a custom healthcare interface that will bring uniformity and greater usability to all desktop and handheld applications. Third, the contract is subject to review three times over its nine-year term, and the work may be expanded or contracted as part of those reviews.

So Microsoft really has about a $575 million bet that they can make themselves indispensable to the NHS, eventually push out whatever big integrator wins and screws-up the overall contract (if one is ever awarded), and then can replicate this success through healthcare industries around the globe. It's a $575 million investment in what they hope will become a $50 to 100 billion business.

And I think Microsoft will succeed.

I'm far from a Microsoft booster, but in this case the alternatives are even worse, and Redmond is in a position to bring a whole new business model to bear. And it's about time.

Here is what's key. The IBMs, EDSes, Lockheed-Martins, Computer Science Corps, and Boeings of the IT world make their money based on head count, while Microsoft makes its money primarily from software licenses. If any of those other big companies were to win the NHS IT contract, they'd budget 30 to 40 percent of the total amount for management, which is to say for doing very little, if any, real work on the project. They would throw a couple thousand bodies at the project whether those bodies were really needed or not. Microsoft, on the other hand, will put a dozen key developers on the project with probably two managers above them. They'll get the work done in less time and for less money because they don't have to carry the baggage of that old business model.

This doesn't mean that Microsoft won't be sorely challenged by the project. For one thing, the nature of this deal forces them to work from the outside in. Their key deliverable is that $75 million medical desktop which will be designed with APIs that make it the indispensable link in the overall NHS IT architecture. Most other vendors would start with the database and END with the GUI, but so far, the GUI is all Microsoft has been assigned to make.

And in one sense that's just as well since I don't think Microsoft yet has a database that can handle what the NHS has in mind -- completely replacing all medical records and medical images for 60 million patients then making that data available in real time to any desktop or handheld. This is beyond SQL Server and may well become the first use of WINFS, Microsoft's next-generation information storage system that was supposed to ship in 2006 with Longhorn but now probably won't (except to the NHS). The NHS will be a good test for WINFS.

It has to be Microsoft's hope that three years from now when the first contract review comes due the NHS will be inspired to expand the project and hand more of it over to Microsoft. They'll certainly have incentives to do so because that $75 million medical GUI not only won't have cost them anything -- if Microsoft is successful in reselling it over and over around the world to other medical services, it will actually generate royalties for the NHS.

The losers here are likely to be the old-line integrators and their business model based on headcount. But what's wrong with that if the work is done sooner and better and cheaper, which Microsoft knows it will have to do if it wants to be successful? For all its own frailties, Microsoft is always willing to spend money and work hard if it has to for new business. Their drive to succeed is the strongest imaginable and the structure of this deal requires that they deliver big-time or lose that $575 million bet. Bill Gates HATES to lose.

Now what about Open Source, which the UK's Office of Government Commerce just declared to be a viable desktop alternative for government use? Microsoft is again leaning on its financial strength since neither Red Hat nor Novell has so far promised to spend $75 million to develop anything, nor are they likely to. This is a model Microsoft can use over and over again in many markets, and will help them continue to succeed in a Open Source world. Not that they wouldn't consider using some Open Source components if they absolutely had to...say, if WINFS yet again missed its deadline and an Open Source alternative was available to save the day for Microsoft.

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