Electronic Data Systems Corp made a major stride in its effort to restore its battered reputation this week by announcing a ten-year $4.5bn outsourcing deal with US financial giant Bank of America.
EDS believes the contract ranks amongst the top ten services transactions ever, and is the biggest deal to date in the financial services industry. The deal covers the Charlotte, North Carolina-based bank’s voice and data network infrastructure, and will see 1,000 Bank of America workers moving across to EDS.
The deal was finally signed this week, a day after market speculation that Plano, Texas-based EDS was about to clinch the contract helped push up its share price.
EDS has endured a tough few months. It was forced to lower its third quarter and fourth quarter forecasts, partly because of the financial difficulties of key customers. EDS’s penchant for mega deals has also become a liability in the eyes of some, because of the high start-up costs they often incur. It issued a further profit warning earlier this week, because of investments associated with leveraged aircraft leases with United Airlines, which is in Chapter 11 bankruptcy protection.
However, EDS said this week that it would not be exposed to large start-up costs with the Bank of America deal. Larry Ivins, enterprise client executive at EDS, said that the bank had grown by acquisition, resulting in a complex network. EDS expected it could reduce the network elements by 30% he said. He said the strategy in the deal was to align benefits with costs. In effect, EDS will be taking a piece by piece approach to refreshing the network.
It doesn’t have the same upfront bubble as other megadeals, said Ivins. While this approach was suitable for Bank of America, it does not necessarily apply to other financial institutions or other potential clients, he added. What we’re doing for each of them is unique, said Ivins.
Ivins said the contract also covered across the board tier one help desk support for the bank. However, this represents less than 10% of the deal.
A spokeswoman for the Bank of America said it had spoken to a number of IT services and telecommunications companies before settling on EDS. IBM Global Services had been among those considered for the contract, she said.
While the issue of start-up costs and their effect on EDS’ finances has been hotly debated in the industry recently, the Bank of America spokeswoman said while this may have a consideration, the bank evidently felt confident.
EDS this week has been flinging as much good news as possible into the market. On Wednesday it announced it was in final negotiations with Bank of Bermuda for a $375m, 12 year deal. It also announced contract extensions worth $240m with other existing clients.