Outsourcing /

Procter & Gamble's soap opera cliffhanger

By Tim Wilson
Network World Outsourcing Newsletter, 09/30/02

The Procter & Gamble outsourcing soap opera continues, but it is now looking more like " The Secret Storm " than " The Guiding Light. "

Our story so far: In June, Procter & Gamble revealed that it was preparing to turn over much of its IT operations - including most of its Global Business Services Unit - to an as-yet-unnamed outsourcing provider (see: " Procter & Gamble poised to make outsourcing leap " www.nwfusion.com/newsletters/asp/2002/01407536.html).

Although P&G wasn't talking, many observers speculated that ACS gained an edge in the bidding because of workflow software that would help P&G fulfill its goal of " business process outsourcing. " That would involve outsourcing of the management of P&G's IT function and the management of the entire processes within the P&G business.

But in this week's episode: " Turnabout! " On Sept. 18, ACS revealed that it had pulled out of the bidding for the P&G contract. On Sept. 19, P&G reported that it was back in negotiations with EDS, now the sole bidder on the contract, and a spokesperson said the two companies are close to finalizing a deal.

ACS executives said the company ended negotiations with P&G because they felt the terms of the contract were " not in ACS' best interest. " EDS executives used much the same language when they dropped out in July, but those executives now will not say why they've changed their minds.

In fact, none of the three companies are sharing details on the P&G contract negotiations, though the general facts have been among the outsourcing industry's worst kept secrets. As a result, observers have begun to speculate on the reasons behind the unlikely turnabout, and arrived at several different scenarios that might have led to the switch from ACS to EDS. Let's take a look at some of them.

*P&G's initial list of requirements may have turned out to be unworkable. In its first phases, the P&G contract called for an outsourcer to buy much of the P&G IT organization, then lease it back to the consumer product giant. And as a business process outsourcing deal, the contract not only required the outsourcer to take on IT services, but back-end office processes such as payroll and billing.

It is possible, even likely, that neither ACS nor EDS could find a profitable way to acquire so many assets from P&G and then execute the contract without taking a huge financial hit at the outset. Although the contract clearly will mean tremendous revenue for the winning outsourcer over the course of the life of the deal, it is possible that neither ACS nor EDS could find a way to make the initial acquisitions without a financially damaging drain on their resources.

*ACS may not have had the resources to handle the P&G contract. This seems the least likely scenario, because ACS has been a P&G outsourcing partner for many years, and because P&G actually would have provided most of the staff and equipment required in the contract. Still, it is possible that a company of ACS's relatively small size ($3 billion in annual revenue) might have had second thoughts about the prospect of tying such a huge part of its business to the P&G contract.

*EDS, facing extreme financial difficulties, may have knuckled under to P&G's demands. On the day that ACS announced its pullout, EDS slashed its earnings estimates for the third and fourth quarters, and EDS stock lost over half its value in dropping to $17.20 per share. Is it coincidental that EDS jumped back into the P&G contract just before announcing its poor financial results? Perhaps EDS executives, seeing the red ink, decided they needed a big-name contract to help stem the tide.

Chances are that we will never know the real story behind the P&G outsourcing contract, even after the contract is awarded. But it is likely that P&G will not be the last financially-troubled corporation to go through such machinations as it tries to cut costs by bringing in help from similarly financially-troubled outsourcing companies.