CGNU has scrapped a seven-year £124m outsourcing contract with IBM
after only two years.
Nick HuberThe recently merged insurance giant said its decision to abandon
its Perth datacentre was part of a drive to consolidate its IT
systems.
An existing Norwich Union datacentre, run in-house, will replace
the Scottish datacentre in a shared service model.
The early termination of the deal illustrates the dangers of
long-term outsourcing agreements that are not flexible enough to
accommodate company mergers and restructuring.
Both CGNU and IBM refused to comment on whether any penalty
clauses were paid to compensate IBM. But Computer Weekly
understands that payments of at least £6m were agreed under the
Perth outsourcing deal prior to the merger last year.
Some 120 IT staff at the Perth datacentre, who transferred to
IBM in 1999, are waiting to hear about their future. However,
compulsory job losses are not expected.
A CGNU statement said IBM provided an "excellent" service for
the Perth datacentre.
In 1999 CGU signed the seven-year outsourcing contract with IBM
for its Perth office. This extended an existing deal - signed by
the then General Accident - and covered software, hardware and
technical support.
Last summer CGU merged with Norwich Union to form CGNU. Shortly
after the merger, a senior CGNU IT professional raised concerns
over outsourcing arrangements to Computer Weekly.
An IBM spokesman said, "If there is a change in corporate
direction there is always a chance that there will be a change in
attitude to certain services."
Now the insurance giant has decided bring the Perth datacentre
back in-house to Norwich Union in a phased transition from the end
of August. The migration is due to be complete by early 2002.
CGNU refused to comment on the amount or existence of any
penalty clauses paid to IBM for terminating the agreement five
years earlier than agreed.
A source close to CGNU, however, said a penalty clause of
between £6m and £12m had been agreed for the Perth deal, before the
contract re-negotiation last year.
Computer Weekly also understands that predicted cost savings
through scrapping the IBM outsourcing deal was a factor during last
year's CGNU merger discussions.
Outsourcing experts said the collapse of the Perth deal
underlined the importance of users agreeing "exit" clauses when
negotiating outsourcing agreements in a bid to cover unforeseen
business circumstances.
"There is a huge move to outsourcing and this points to the need
to having a clear exist strategy," said David Grey, business
development director at Winchester White, an insurance industry
consultancy. "But in the enthusiasm for the deal it's almost
impolite for companies to think about the exit."
In recent months there has been a spate of outsourcing in the
commercial sector. Last year Bank of Scotland signed a 10-year
"mega outsourcing" deal with IBM covering the whole of the group's
IT infrastructure. Bank of Scotland is currently locked in merger
talks with Abbey National to create a "fifth force" in banking.
But when the 10-year deal with IBM was signed last year Bank of
Scotland's managing director for IT insisted that it was still
master of its IT strategy.
A bank spokesman said it was too early to say whether the
proposed merger would have any impact on its outsourcing
arrangements. "Detail on IT support will be worked out further down
the line," he said.
nick.huber@rbi.co.uk
Other mega deals that have to cope with business
change
February 2001 AstraZeneca and IBM: the pharmaceuticals
giant outsources the lion's share of its IT to IBM Global Services
for £1.2bn
July 2000 Rolls-Royce and EDS: 12-year outsourcing deal
extends existing relationship for $2.1bn
July 2000 Bank of Scotland and IBM: bank claims it will
save £150m in IT costs over the life of the 10-year contract worth
£700m.