Beverage giant toasts IBM with deal for IT services

Alcoholic-beverage giant Diageo has hired IBM to transform and manage its IT infrastructure, which, after several mergers, acquisitions and divestitures, needs to be made more uniform and homogeneous, the companies announced Friday.

The seven-year deal calls for IBM to redesign, standardize, consolidate and simplify Diageo’s heterogeneous IT infrastructure worldwide, including its help desk, desktop platform, global network and data center operations. Diageo is also outsourcing the management of its IT infrastructure to IBM. Diageo’s goals in hiring IBM are to reduce costs and improve its operations.

“As a result of our (merger and acquisition) activities, our IT infrastructure has evolved and we felt it was very important to operate a single, integrated business throughout the world in a way that maximizes our efficiency and speed to market,” said Isabelle Thomas, a Diageo spokeswoman. “IBM will provide us worldwide with a single operating environment.”

So far, Diageo had managed its IT infrastructure internally, so this is its first major foray into outsourcing, an IBM spokesman said. The company will maintain in-house some strategic IT tasks such as application development and management, said Meta Group analyst Stratos Sarissamlis, who was briefed on the deal.

Diageo was formed in 1997 from the mega-merger of Guinness with Grand Metropolitan, and originally had four divisions, including the Pillsbury processed foods unit and the Burger King fast-food restaurant unit, Thomas said. However, in 2000 Diageo decided to focus only on alcoholic beverages, which led to its eventual divestment of Pillsbury and Burger King, and its acquisition of Seagram’s drink business from Vivendi Universal, she said.

This year, Diageo decided it needed to hire an IT specialist to help it transform and manage its IT infrastructure. “We felt IBM was the only company that could bring us the capabilities we required,” she said. The companies declined to disclose financial terms, but Meta’s Sarissamlis estimates the total value of the deal at between $400 million and $500 million.

The deal also gives Diageo options to pay for services it uses, as opposed to locking the company into a fixed-price arrangement, IBM said. This pay-per-usage model, which IBM calls “on demand,” is becoming very popular in the IT industry because it gives companies more control over their IT spending and more flexibility.

“They’re going to be using IBM services to have consistent service quality across different operations in various countries,” Sarissamlis said. The company’s key markets include North America, U.K., Ireland and Spain.

“It’s important for them to revamp their infrastructure to have a consistent architecture that will trigger the provision of consistent services priced in accordance with the on-demand model, so that fixed costs become more variable,” Sarissamlis added.

Competition in the alcoholic-beverage market is fierce, with five or six strong global companies, so Diageo does well to hire outside help in order to improve its IT infrastructure, which will in turn enhance its business operations, Sarissamlis said. “Diageo is exploiting outsourcing services to move faster, consolidate faster, have consistent service quality, so it can reap the benefits in the near term,” he said.

Diageo declined to name the other vendors it considered, but Sarissamlis said the final decision came down to IBM and CSC, and that HP also made a run for the contract. Diageo’s server infrastructure is primarily made up of HP products, said Sarissamlis. Neither HP nor CSC immediately returned calls seeking comment.

With this deal, Diageo is among the first consumer packaged goods (CPG) companies to outsource its IT infrastructure, said Frank Britt, vice president of strategic outsourcing for the CPG industry at IBM Global Services. “The CPG industry only relatively recently has begun to look at strategic outsourcing,” he said.

CPG companies have traditionally preferred to do their IT work internally themselves, but they are finding that this approach isn’t serving them well anymore, he said. While corporate IT spending has fallen in general in the past three or four years, CPG companies haven’t seen a demonstrable change in IT spending, he said. During this period, CPG companies’ costs for maintaining and managing their IT infrastructure have been rising, and they have been forced to slash funds for more strategic work like application development, he said.

“CPG companies are having to consume larger and larger quantities of their IT spending just to support the infrastructure, which is in effect eroding the dollars available for new application development, which are the dollars that support the IT enablement of the business, which is what drives substantial value,” he said.

Thus, many are coming to the realization that they need outside help in order to keep their IT infrastructure updated and agile, he said. “CPG companies are starting to realize their business strategies can only go so far without a responsive, flexible IT infrastructure, particularly as they continue to grow through acquisitions, of which Diageo is a great example,” Britt said.

Diageo, based in London, has about 24,000 employees and does business around the world, Thomas said. Its revenues for fiscal year 2002, ended June 30, 2002, were £11.2 billion ($17.2 billion, based on the June 30, 2002 exchange rate), she said.