IT outsourcing deals are rarely as fascinating as they are big. But the decision by Procter &Gamble, the US consumer goods supplier, to award a $3 billion outsourcing contract to IT giant Hewlett-Packard completes a story that has taken as many turns as a corny soap opera.
Hewlett Packard (HP) announced in April that it had won the deal to manage most of P&G’s data centres, desktops, network management and applications for the next ten years – concluding a year’s worth of contractual to-ing and fro-ing that saw one supplier – EDS – near to winning P&G’s business three times, but each time walking away with nothing.
P&G’s decision to finally go with HP may turn out to be something of a landmark in the development of the outsourcing market. In winning this contract, along with similar but smaller deals at the Bank of Ireland and telecommunications switch maker Ericsson, HP has become the world’s third largest IT services company, overtaking Accenture and CSC.
P&G’s stop-go managers may even have helped to secure the reputations of two of the IT industry’s top women – Ann Livermore, head of HP services, and Carly Fiorina, HP’s highly scrutinised CEO.
Livermore, critically, said HP’s investment in its utility computing and data centre management software was crucial to winning the deal – vindicating some of HP’s heavy investment in that area. “We’re popping a few bottles of champagne around here,” she said. One executive involved said HP had camped a village of executives at P&G in order to beat off rivals EDS and IBM.
EDS, meanwhile, was devastated by the loss, especially as it came days before another big deal, at Alstom, was also lost. Wall Street analysts say the two contract failures helped to seal the fate of Dick Brown, who was replaced as the CEO of services giant EDS in April.
But there may also be wider implications for all those involved in outsourcing, both as suppliers and customers. Big as the $3 billion deal is, P&G had originally intended to outsource huge tranches of its business in an ambitious business process outsourcing deal worth between $7 billion and $10 billion.
That deal would have required the outsourcing company to buy almost all of P&G’s back office systems – including its Global Business Services Unit – for several billion dollars. The winning bidder would then have been able to earn the money back, with a generous premium, over the next decade by providing services such as payroll and data processing. Analysts in the US believed the deal, if it had gone ahead successfully, could have paved the way for dozens of similar, huge deals.
But the plan fell down on two counts. First, neither of the two initial bidders – EDS and Affiliated Computer Services (a US services company with a long-term trading relationship with P&G) could agree with P&G on how to value the IT assets or the business. And second, both companies concluded – as several other potential bidders already had – that the deal was too big and too risky. In mid 2002, first EDS and then ACS pulled out.
Later, when EDS changed its mind and decided to re-enter, P&G itself decided that an outsourcing deal on this scale was too risky. “EDS’s earning warning in September  did cause us to pause and re-evaluate,” said an official. Instead, P&G has broken the deal up into a number of smaller parts, and will keep some of the services in-house.
The long-term legacy of this deal may be that big business shies away from finding one big partner, preferring to spread the risks, the financial burdens, and the rewards.