Let's Order Out For Technology
Just a few years ago, if a company turned over the operation of its information systems to an outsider, it was taken as a sign of trouble. Banks, in particular, sold off their computers and hired contractors to crunch their numbers as a way of raising cash and fixing balance sheets during the early-1990s recession.
No longer. Today, Corporate America can't outsource data centers, computer networks, PC support services, and software development fast enough. And outsourcing is a sign of corporate health and technological savvy. Indeed, banking and computer industry executives expect J.P. Morgan, one of Wall Street's most aggressive users of technology, to announce in mid-May a wide-ranging, $3 billion outsourcing deal.
Some 20% of the largest U.S. companies now use some form of technology outsourcing, says Howard Anderson, president of consultants Yankee Group Research Inc. In recent months, outfits such as AT&T's new Lucent Technologies unit, Ameritech, and Rubbermaid have signed big outsourcing deals. And large deals are under consideration at Aetna Life & Casualty and DuPont.
BUYING KNOWLEDGE. Computer Sciences Corp. of El Segundo, Calif., No.2 in outsourcing after Electronic Data Systems Corp., has identified between $10 billion and $15 billion in commercial business that it may compete for in the next nine months. "That exceeds all the [commercial] revenues we've closed to date in the past five years," says Tom R. Madison, president of CSC's Integrated Business Services Group, its outsourcing arm. "We now have the largest [order] pipeline ever." On Apr. 29, CSC announced that it will pay $1.5 billion in stock for Continuum Co., a specialist in supplying software and running computers for banks and insurers.
There's more than a desire to rein in data center costs driving the current trend. Now, companies are more interested in finding a partner that can keep them abreast of accelerating technology. "People want to buy knowledge, not develop it themselves," says John K. Halvey, a partner specializing in outsourcing deals at law firm Millbank, Tweed, Hadley, and McCloy in New York. Mutual Life Insurance Co. of New York is spending $205 million over seven years with CSC--only a little less than it would have spent itself converting from mainframes to PC-based networks. But "we'll end up with dramatically enhanced [systems] and significantly improved business capabilities," says Chief Information Officer E.P. Rogers.
J.P. Morgan & Co. has been exploring outsourcing, a spokesman says, "not to get out of technology but to broaden our capability." The CSC-led team bidding against EDS for the investment bank's business, for instance, includes AT&T to manage networking, Bell Atlantic Corp. to install and service Morgan's desktop computers, and Andersen Consulting to help Morgan design and build future systems.
The menu of outsourcing services is broadening, and corporations are carefully reviewing their options. Ameritech studied for 15 months before awarding a 10-year, multibillion-dollar deal to IBM's Integrated Systems Solutions Corp. subsidiary in late April. ISSC will consolidate Ameritech's current 26 data centers to maybe five and help it rebuild billing and other systems for future communications markets. Cliff Dodd, Ameritech's chief information officer, says buying and running mainframes is "like buying wattage from the power company."
The outsourcing game is getting more complicated. But with so many deals and so much money involved, the computer services companies are happy to do whatever it takes.