GM's Landmark in IT Outsourcing
A huge package of outsourcing contracts announced Feb. 2 by General Motors (GM) seems to signal shifting fortunes in the $600 billion-a-year information-technology services industry. EDS (EDS), GM's longtime primary supplier, lost ground, while Hewlett-Packard's (HPQ) sometimes-overlooked services unit got a big lift. The profile of India's tech industry rose when GM named one of the country's leading companies, Wipro (WIT), as a tier-one supplier.
All told, about $7.5 billion in five-year contracts were awarded. Another $7.5 billion in contracts are expected to be parceled out as new projects come up over the next couple of years. EDS, which formerly had about two-thirds of GM's outsourcing business, still has the biggest share. It got contracts worth $3.8 billion -- or about half of the business. HP's contracts totaled $700 million, and GM called it out as one of the major gainers. IBM got $500 million in contracts.
The package is significant beyond its sheer size because it's an indication of how GM Chief Information Officer Ralph Szygenda is reshaping the way the company handles tech outsourcing. He handed contracts in large chunks to companies that will handle them on a global basis rather than country by country.
Also, GM and the tech suppliers worked together to create new standards for managing technology, which means all suppliers will do things in a uniform way. Szygenda says the new strategy will allow GM to improve global collaboration while assuring reliability of its computing systems and cutting costs. "It lets GM focus on innovation rather than spending a lot of time on managing its suppliers," he said at a press conference.
GM's financial woes cast a shadow over the announcement, however. The carmaker reported a $4.8 billion quarterly loss on Jan. 26. While Szygenda said low prices were only a secondary impetus behind the way he structured the outsourcing contracts, some suppliers didn't even participate in the bidding, most notably, Accenture (ACN). Others said they didn't bid on all of the pieces because they were concerned they wouldn't make enough money on them.
"A BIG KICK."
Yet those who did win contracts were jubilant. "HP selectively bid on areas where we know we can do a great job and where focus was on core areas of importance to HP and GM," says Steve Smith, senior vice-president of HP Services. His business is often overshadowed by IBM and Accenture, but it has been gaining momentum lately. Its revenues grew 6% in HP's fourth quarter, to $3.9 billion. Last quarter, IBM's services revenues were in the doldrums, declining 5%, to $12 billion.
Wipro had already been doing some work for GM, but the new package gives it a credibility lift. Its contracts were worth $300 million over five years. Wipro Executive Vice-President Girish Paranjpe says the company is delighted to be picked. "It's a huge morale booster for us to be able to play with the big boys," he says. "Also, because we're the only tier-one player GM picked from India, it's a big kick for us."
If GM's new strategy for managing outsourcing works well, it could become a model for other large corporations. The package has five-year contracts instead of the more traditional 10-year pacts and splits the work up among several suppliers instead of relying predominantly on one. "This is a tipping point for IT," says Robert McNeill, principal analyst at Forrester Research. "Organizations will have to add skills to their vendor management function and make transition management a key for success when moving to a more flexible services model."
Another lesson from the contract: Even financially troubled companies are spending big on IT. That's great news for the tech titans that got a bigger piece of the GM pie. It should even provide solace to EDS, however diminished its share.