Millions of dollars are at stake as Searsfreshly merged with Kmartand CSC battle over the language of an outsourcing contract.
Sears Holdings Corp. and Computer Sciences Corp. are at war over two words: "cause" vs. "convenience."
This is no mere dictionary debate. Millions of dollars in termination fees are at stake as Sears ends a $1.6 billion, 10-year agreement to use computer, server, voice and data services from CSCone year after inking the deal.
"Cause" means CSC didnt meet its obligations and Sears Holdings, formed by an $11 billion merger between Kmart and Sears announced in November 2004, can exit for a smaller fee.
"Convenience" means Sears exits the outsourcing deal due to a business change such as a merger or acquisition, according to CSC, but for a much higher termination fee. In a filing with the Securities and Exchange Commission, CSC says the Sears termination is "contrived to avoid or reduce termination fees of tens of millions of dollars."
In a May 13 regulatory filing, Sears Holdings cited Computer Sciences "failure to perform certain of its obligations" as justification for ending the deal. It did not say what the failure was.
Both companies declined any comment, beyond their filings with the SEC.
But on Computer Sciences fourth-quarter earnings conference call May 25, its CEO, Van Honeycutt, said the squabble is headed to binding arbitration in a federal court in the fall.
That sets a precedent in the outsourcing industry, says Peter Allen, a managing director of Woodlands, Texas-based TPI, which counsels companies on outsourcing contracts.
"We dont expect anything to change through the fall, but we have differences and we need to resolve those differences," Honeycutt said.
While resolution is months away, one thing is clear about the skirmish: There isnt a graceful exit. "This looks extremely acrimonious," Allen says.
Mathematics could be motivating Sears Holdings if it doesnt rehire the roughly 200 employees given to CSC when the deal was initiated, Allen says.
In theory, Sears Holdings remaining technology team could take over CSCs chores. Sears had a tech staff of about 1,100 at the time of the deal. Computer Sciences would have to decide whether to retain or let go the former Sears team.
"Its speculation, but someone did the math to justify this decision," Allen says.
The pact, signed in June 2004, calls for CSC to provide information-technology support services for desktops, servers, Web sites, voice and data networks, and decision support technology. Sears Holdings noted that the agreement was terminated May 11, but Computer Sciences "is obligated to continue providing these services for an extended period."
How the deal gets sorted out could impact how Sears Holdings manages its technology infrastructure. Kmart chief information officer Karen Austin now oversees the technology of the merged companies; Sears CIO Gerald Kelly Jr., the architect of the CSC deal, has left.
Yet to be resolved is whether Sears Holdings will rehire employees absorbed by CSC. In any case, analysts say day-to-day management between Sears and Computer Sciences could become strained, just as the retailer works on integrating the operations of 1,400 Kmart stores and 2,400 Sears stores.
"Anytime there is legal activity, its a distraction," says Greg Buzek, president of IHL Consulting. "Most folks are trying to figure out if they are going to have a job. Its uncomfortable."
Next page: Keeping an outsourcing deal viable.
Business Editor firstname.lastname@example.org Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.