Multibillion-pound outsourcing deals can deliver hefty savings and adapt to meet the changing needs of the business, according to the IT director of Rolls Royce.
Speaking at a National Outsourcing Association conference last week, Rolls-Royce IT director Luc Schmitz said his company had made substantial savings on IT costs since signing a £1.3bn outsourcing contract with EDS in 2000.
"We have roughly halved the cost of the PC managed service unit under the outsourcing deal, saving us tens of millions of pounds," he said.
Under the 12-year contract, EDS runs 90% of Rolls-Royce's IT in four areas of the business: global aerospace, defence, marine and energy.
Although "mega" outsourcing deals have become common, some analysts believe they pose significant risks. For example, a user could be vulnerable if its supplier folds, and long-term contracts may lack the flexibility to change with business needs.
Other large companies, such as Barclays Bank, have chosen to sign a series of smaller outsourcing deals with different suppliers.
Schmitz admitted that long-term outsourcing contracts were difficult to plan and manage but added that they reduced the amount of time his business had to spend on negotiating contracts with suppliers.
"We do not have to renegotiate contracts with other suppliers on a frequent basis, he said. "[Having to renegotiate frequently] can be a nightmare, especially when you have to decouple part of your estate and hand it over to another outsourcing supplier."
However, since the deal with Rolls Royce, EDS has been hit by problems with other mega deals. EDS customers WorldCom and US Airways filed for bankruptcy last year, and problems with the US Navy and the Department for Work and Pensions in the UK resulted in delayed payments to the supplier worth hundreds of millions of pounds.
The resulting profit warning by EDS and an investigation by US financial regulators contributed to the loss of a multibillion-dollar outsourcing contract that was due to be signed with Procter & Gamble late last year.
Schmitz said Rolls-Royce had renegotiated part of the outsourcing contract since 2000 but had decided not to capitalise on EDS' troubles by pressing for big discounts on the deal.
"Changing a deal like this is like a turning an oil tanker, but we have refreshed our approach and changed some of the terms of the contract, mainly how we plan and align the objectives in the deal," he said.
Mega deals 2003
April Procter and Gamble signs £2bn, 10-year deal with Hewlett-Packard.
June Royal Mail signs £1.4bn deal with consortium led by CSC.
October Nordea Bank embarks on 10-year, £1.5bn "joint venture" with IBM.