Business
How a Japanese firm became part of the scandal
Japanese firm Fujitsu is at the heart of the Post Office’s IT scandal. More than 700 Post Office branch managers were convicted when faulty accounting software made it look as though money had gone missing from their sites. That software, named Horizon, had been developed by Fujitsu.
As the public inquiry into the scandal continues, Fujitsu’s legal representatives will make their opening statements on Friday. So how did a Japanese company, generally known to Brits as a maker of laptops, become embroiled in one of the most widespread miscarriages of justice in UK legal history?
It may be difficult to believe, but in Fujitsu’s home market, hardly anyone has heard of the Horizon scandal.
“Horizon? What’s Horizon?” was the reaction of a former company president in Tokyo when the BBC asked him about it.
This is a person who worked at the firm for nearly four decades.
The current president, Takahito Tokita, has turned down our multiple interview requests, even when I asked for a written comment he may wish to make to the victims whose lives were turned upside down.
The Horizon scandal saw some sub-postmasters attempt to plug huge shortfalls with their own money, after IT errors made it appear like thousands of pounds were missing. Some even remortgaged their homes.
Hundreds ended up with criminal convictions for false accounting and theft, and some went to prison. Many were financially ruined and have described being shunned by their communities. Some have since died.
The assertion in Japan has repeatedly been that this is a matter that its UK subsidiary is handling.
To understand Fujitsu’s role, let’s go back to its takeover of the British firm International Computers Limited (ICL) – which developed the Horizon software – in the 1990s.
The relationship between ICL and Fujitsu goes back decades, and the ways in which both operate are quite similar.
In the 1970s, the Japanese government was trying to counter the dominance of America’s IBM, and provided 57bn yen of financial support to three giant technology alliances, one of which was Fujitsu.
In the UK, the Wilson government was doing just that by forming ICL.
With the might of the government behind them, Japanese firms went on a shopping spree in the 1980s, encouraged by the favourable exchange rate.
That is when ICL was having financial issues at home. It held several UK government contracts as the government had a policy that every computer over a certain size was bought from the company. But the firm was struggling to keep up with its international competitors, and by 1981 it had lost £18.7m,
Fujitsu and ICL were a perfect match. The takeover allowed Fujitsu to have an outsized presence in the UK as ICL’s strong ties to the government often meant that it was the only bidder for government contracts.
Previous problems
Even after the Horizon scandal, its products are deeply entrenched in the government’s IT infrastructure. To some MPs’ fury, the company was still winning new government contracts as recently as this September and it is the third biggest IT supplier to the UK government, according to the procurement analysts Tussell.
Since 2013, the UK government has awarded Fujitsu contracts worth more than £3.7bn, including:
- £1bn with HMRC
- £572m with the Ministry of Defence
- £487m with the Home Office
And that is despite Horizon not being the first Fujitsu-developed software that has created problems for the UK government.
In 1999, the firm won a £184m contract to develop Libra – a software meant to standardise case management transactions across more than 300 magistrates’ courts.
In the end, it cost nearly three times more than expected, and the National Audit Office (NAO) concluded that it was not able to produce even basic financial information.
Horizon was installed at the Post Office around the same time. But its flaws were already known by then because it couldn’t fulfil the requirements of its original project, an automated system for benefits payments announced in 1994.
“Horizon was offloaded to the Post Office to try to salvage something from the failed scheme,” says IT journalist Tony Collins who has covered the industry for decades.
Then, there was an NHS lawsuit. Fujitsu was one of four companies tasked with digitising the NHS in 2004.
But after repeated delays and failure to deliver the promised product, the NHS terminated its contract with Fujitsu in 2008. The Japanese company sued and won the case in 2014, which cost the UK government £700m.
Some believe the government may be reluctant to engage in another long and potentially expensive legal battle.
In addition, Mr Collins says the government isn’t in a rush to get rid of Fujitsu because “it is an indispensable IT supplier”.
“Its mainframes have been used for decades at HM Revenue and Customs and the largest department of all, the Department for Work and Pensions, have been pretty reliant on Fujitsu equipment,” he says.
The government has confirmed that Fujitsu is no longer on some approved vendor lists, but remains a strategic supplier and can still compete for and win government contracts.
Troubles at home
Fujitsu’s software is not without controversy at home.
In 2002, Fujitsu and two other tech firms came under fire for glitches at the ATMs of one of the country’s major banks, Mizuho, with problems still being reported as recently as last year.
Fujitsu was also blamed in 2005 for a $300m trading loss when its software, installed at the Tokyo Stock Exchange (TSE), was unable to cancel an incorrect order. The TSE and the securities firm involved fought a decade-long legal battle, with the court eventually ruling in 2015 that Fujitsu as a software developer wasn’t legally liable, and that the TSE must pay the securities firm.
Fujitsu’s critics blame the industry’s business model.
“They don’t like to have a software engineer as a full-time employee,” says Satoshi Nakajima, who worked at Japan’s telecoms giant NTT before becoming one of the foundational members of Microsoft.
In a country where companies have traditionally practised the lifelong employment system, they prefer not to hire engineers for individual projects and let them go as they do in the US.
That means hiring full-time software engineers – who develop code – becomes costly when they are between projects. Instead, they outsource to multiple layers of external vendors.
But those vendors often cannot afford to hire top engineers – like Fujitsu can – and this practice has been blamed for the quality of their products. Vendors also tend to focus only on single aspects of a project, and often cannot be held accountable for project failures.
As a graduate of the prestigious Tokyo University, 31-year-old Junpei Ikegami joined Fujitsu in 2015 as a system engineer – who is responsible for building and maintaining computer networks – because he thought “it was at the forefront of the latest technology”.
“But once I joined, I realised that the systems they use are ancient and they’re still trying to conserve the old systems,” he says.
Mr Ikegami felt he couldn’t grow so left Fujitsu to join a start-up.
But despite some bugs and scandals, Fujitsu continues to play a major role in the public and private sectors.
“Their unique advantage is the relationship with the government,” says Mr Nakajima, referring to the company’s ties since the 1970s but also how it still wins big government contacts.
“That’s why they still exist. Without that, they’re not competitive at all. If this is a really open free market, then they should have been eliminated 10 to 20 years ago.”
But amid growing calls for governments to include smaller, more agile companies over established giants, government attitudes may be changing.
When I asked the country’s former digital minister, Karen Makishima, who will win contracts in Japan’s push to digitalise its economy, she repeatedly emphasised the growing role start-ups will play.
As Fujitsu comes under the spotlight in the UK, it remains to be seen if their British subsidiary too will lose the preference of the government it once enjoyed.
Reports /TrainViral/
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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