Insurance giant drops £124m IBM contract

CGNU has scrapped a seven-year £124m outsourcing contract with IBM after only two years.

CGNU has scrapped a seven-year £124m outsourcing contract with IBM after only two years.

Nick Huber

The 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.

[email protected]

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.

Read more on IT outsourcing