IBM Corp and US power company NiSource Inc are reviewing the status of the enormous 10-year, $1.6bn outsourcing deal they signed in 2004, and NiSource has already decided to take certain finance functions back in house.
The contract includes finance and accounting, HR services, supply chain, billing and collections, call center, and IT function. It’s one of the landmark multitower North American outsourcing deals signed several years back that turned over a large chunk of operations to some of the top players in the space.
Capgemini SA, for example, signed a CAD 1bn ($640m) deal with Canada’s Hydro One Inc in 2001, followed by its whopping $3.5bn contract with Texas utility TXU Corp in 2004. Accenture Ltd made its own splash with a CAD 1.45bn ($1bn) contract with BC Hydro in 2003.
Like the NiSource deal, these contracts typically cover several BPO areas and some IT functions as well. They also involve a large number of employees transfer and some very rosy cost savings projections–in the case of NiSource, some $530m over the 10-year contract term.
NiSource, which clocked in an operating profit of nearly $900m last year on $7.5bn in revenue, now believes that this $530m figure may be too high.
NiSource’s recent outsourcing initiative and service agreement with IBM may not achieve the level of savings that was originally anticipated, the company said in its 10-K filing with the Securities and Exchange Commission earlier this month. Additionally, many associated changes in systems and personnel are being made, increasing operational and control risk during transition, which may have an impact on the business and its financial condition.
Following some challenges with the first wave of systems implementation under the contract, NiSource and IBM have agreed to push back the second implementation phase, NiSource spokesperson Kris Falzone told Computer Business Review. She said they are now engaged in an assessment of the deal, and that such a review was customary for such a long-term, sweeping contract.
So far NiSource has decided to take back certain F&A functions from IBM, including general ledger, fixed assets, and budgeting, Falzone said. But there’s no definite timeline to transfer these processes back to the utility, according to IBM spokesperson Tim Blair. He also said the ongoing review was nothing out of the ordinary, and that IBM and NiSource were firmly committed to keeping their relationship in place.
We’re just at the initial stage of the assessment, Falzone said. She declined to say what specific issues were causing concerns with the IBM deal.
It’s not clear whether the risks NiSource mentions in the 10-K were known when the contract was inked. Many functions have recently been transitioned to IBM and many new personnel have assumed responsibilities across these functions, increasing the risk of operational delays, potential errors and control failures, the filing states.
The filing also provides some information on the employee impact of the deal. The transitioning of services over to IBM ended on December 31, 2006, and by that point NiSource had shed 872 employees as a result of the deal, 554 of whom transferred over to IBM.
Falzone said NiSource hasn’t projected the financial impact of the contract assessment process but said that such costs could appear in their first-quarter statement due out in early May.