Outsourcing Deals: Better the Second Time

 
 
By Stan Gibson  |  Posted 2004-08-16
 
 
 

Outsourcing Deals: Better the Second Time


Everyones always looking for a better deal, arent they? Hey, better deals are closely related to the pursuit of happiness, which is, after all, one of our nations founding principles.

So why is it that outsourcers and their customers are always so proud to announce really long deals—deals of seven, eight, even 10 years—that are probably longer than most marriages last? The only reason I can think of is that it makes a more impressive press release. Otherwise, it makes little sense to be tied to one outsourcer for so long.

Indeed, it appears that once customers sign these deals, they want them to be shorter. A recent Meta Group study found that although 80 percent of organizations will outsource at least one function by next year and 70 percent of that group will renew their contracts, many will cut back the scope and duration of the deal when they renew. The main reason is that customers find they need to regain control of their IT strategy and architecture, according to Dane Anderson, a Meta Group analyst.

"When contracts come up, customers re-evaluate. Often, user companies have rushed into contracts. When architecture and strategy have been outsourced in megadeals, people have discovered that they should keep these things in-house," said Anderson.

Not only are companies wont to change the scope of the deal, but they are also likely to swap outsourcers the first chance they get. Anderson noted that JPMorgan Chase once had a deal with Computer Sciences Corp. but jilted CSC last year and switched to IBM Global Services. Now, Anderson said, JPMorgan Chase is bringing some aspects of the IBM deal back in-house.

In another example of customer fickleness, Dow Chemical dumped EDS and flew into the arms of IBM Global Services, signing a seven-year agreement (will they never learn?) with Big Blue earlier this month.

The deal, worth an estimated $1 billion and encompassing 63 countries, covers LANs, WANs, voice and video communications. IBM will also provide e-mail for more than 50,000 Dow employees and contractors and support for 2,800 servers.

Next Page: The Navys venture into outsourcing waters.

Page 2


When talk turns to large, long-term deals, the Navy Marine Corps intranet contract with EDS inevitably comes up. After the first seven years, the contract calls for an optional extension of three years. But to continue as the outsourcing provider, a contract provision calls for EDS to cut its charges to the Navy by 15 percent.

Capt. Chris Christopher, deputy director of the NMCI office, told me that figure was estimated based on anticipated technology improvements that would lead to greater efficiency and therefore lower costs, a sort of Moores Law factor, if you will. But based on reports of how much money EDS is losing on the deal, its difficult to imagine the giant integrator will be able to match that figure.

Click here to read why all eyes are on Navy Marine Corps intranet project.

Christopher said hes looking forward to a time when the Navy will be able to compare the known performance of EDS with bids from other providers. As it is, he cannot compare EDS performance with that of the Navy before the contract—IT governance was that chaotic.

As far as EDS is concerned, the company is trying to make the best of a bad situation. Earlier this month, the company announced it will consolidate and host several legacy Navy applications from an EDS-run facility. This will lower EDS costs considerably because the contract requirement that it take over and run those legacy applications had apparently been a huge cash drain for EDS.

So far, the NMCI-EDS contract is showing that if your hands are tied, a little flexibility can go a long way.

Out and about

The U.S. National Archives and Records Administration is building an electronic archive and has selected two companies, Lockheed Martin and Harris, to compete for the final design. A year from now, the National Archives will select the winner to build the Electronic Records Archives, which will capture electronic information regardless of its format and save it permanently. Lockheed Martin will be paid $9.5 million for its work in the competition, and Harris will be paid $10.6 million.

Stan Gibson can be reached at stan_gibson@ziffdavis.com.

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