ACS pulls out of P&G outsourcing deal

Affiliated Computer Services (ACS) has pulled out of negotiations for a Procter & Gamble outsourcing contract that could be one...

Affiliated Computer Services (ACS) has pulled out of negotiations for a Procter & Gamble outsourcing contract that could be one of the largest in the history of IT services.

ACS says it has withdrawn because "the financial, operational and cultural risks were too high". The company had emerged as the finalist for the outsourcing contract, whose value analysts have estimated at anywhere between $4bn (£2.6bn) and $10bn (£6.4bn) over eight to 10 years, after rival Electronic Data Systems (EDS) announced in July it was ending its negotiations with Procter & Gamble.

But EDS may now be back in the running, according to a Wall Street Journal story published yesterday (18 September). EDS spokesman Jeff Baum declined to comment when asked if EDS was again a candidate for the outsourcing contract but if EDS were in fact again seeking this contract, EDS' top executives would have a lot of explaining to do on why they changed their minds. EDS chief executive Dick Brown said in July that giving up on the Procter & Gamble deal "was not an easy decision to make" but that "the financial model, especially relating to the acquisition cost, simply didn't make financial sense as structured for EDS".

In a note published on 2 July, J P Morgan Securities analysts praised EDS for its decision and said they estimated the winner of the contract would have to invest $1bn or more to acquire the Procter & Gamble assets. "We believe EDS is doing the right thing by walking away," the note read.

Procter & Gamble spokesman Doug Shelton also declined to comment on the negotiations and on whether the company is talking to EDS again, but he said the company remains committed to choosing an outsourcing provider before the end of the year.

ACS spokeswoman Lesley Pool explained that Procter & Gamble is looking for an IT services provider willing to do two things. First, the services provider would buy Procter & Gamble's Global Business Services unit, which provides back-office operations, a deal that would involve acquiring the unit's assets and staff. Second, the services provider would enter into an outsourcing agreement to provide back-office services to Procter & Gamble. This type of outsourcing deal is of the business process outsourcing (BPO) type, in which the services provider not only handles IT tasks but also business operations, such as payroll and billing.

Procter & Gamble would also be interested in buying an equity stake in the outsourcing company, Pool said.

Dallas-based ACS planned to turn the Procter & Gamble Global Business Services unit into a "shared services centre" which would provide back office operations not only to Procter & Gamble but also to other clients, Pool explained. But after taking a closer look at the deal, ACS determined that the services centre potential for growth was lower than ACS had originally estimated, she said.

"We went through the due diligence process and determined the Procter & Gamble unit didn't meet our criteria for acquisition," Pool said.

Pool declined to comment on the value of the outsourcing deal, referring only to estimates made by analysts, nor would she comment on how much the chosen services provider would have to pay Procter & Gamble for the back office unit, saying that ACS is under a confidentiality agreement with Procter & Gamble. She said she did not know if EDS had once again emerged as a candidate for the contract.

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