Mega deals struggle with change

The deal being forged by ABN Amro and EDS will fuel the ongoing debate over the wisdom of so-called "mega" IToutsourcing deals -...

The deal being forged by ABN Amro and EDS will fuel the ongoing debate over the wisdom of so-called "mega" IToutsourcing deals - such as 10-year contracts worth hundreds of millions of pounds.

The decision by Halifax Bank of Scotland to terminate a £700m, 10-year outsourcing contract with IBM after less thantwo years has already re-ignited the argument over whether these deals allow for sufficient contract flexibility.

A spokesman for HBos, formed by the merger last year between Bank of Scotland and Halifax bank, claimed the decision to scrap the contract was "all about cost savings" and was part of a wider review of IT cost savings.

Despite this rosy picture, the suspicion remains that the failed contract was not flexible enough to accommodate the changing needs of its original customer, Bank of Scotland.

When Bank of Scotland signed the 10-year outsourcing contract with IBM in the summer of 2000 it was hailed as a groundbreaking deal for IT outsourcing by analysts, and the bank boasted that it would save £150m in IT costs over the lifetime of the contract.

Fast-forward about a year, and the Bank of Scotland announces that it is in merger talks with Halifax. One year later and the supposed watertight rationale for the deal has evaporated.

Now the bank faces the likelihood of having to pay millions of pounds in penalty clauses to compensate IBM for the abrupt end of the deal.

A similar thing happened at insurance giant CGNU, now called Aviva, which last year scrapped a £124m outsourcing contract with IBM after only two years, following a recent merger.

Yet, driven by the promise of cost savings, large-scale IT outsourcing is still very much in vogue - witness the five-year £1bn deal between ABN Amro and IT services giant EDS.

So how can IT managers avoid such deals becoming a burden?

A "get-out" clause allowing for the relatively easy termination of an outsourcing contract is one option, but legal experts warn that companies will have to pay their supplier more money to get this.

Mega outsourcing deals have yet to deliver, and have so far proved as unreliable as an English summer.

Read more on IT outsourcing

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.