*P&G names HP as outsourcing contract winner
Nearly a year after revealing its desire to outsource much of its IT function, Procter & Gamble this month finally is poised to make a contract award.
P&G announced an agreement in principle to a $3 billion, 10-year managed services contract with HP’s HP Services unit and the two companies are expected to finalize the deal next month. HP Services will manage P&G’s IT infrastructure, data center operations, desktop and end user support, network management and some applications development and maintenance support for P&G’s global operations in 160 countries. Approximately 1,850 P&G employees from 50 countries will move over to the HP unit.
The HP deal is a compromise for P&G, which had originally planned to outsource nearly all of its IT organization – P&G Global Business Services – to a third party in a $7 billion megadeal. After nearly six months of on-again-off-again negotiations with bidders, the consumer products giant terminated its efforts to award such a contract in November.
The story goes something like this. In June, P&G 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: https://www.nwfusion.com/newsletters/asp/2002/01407536.html). Among the initial rivals for the contract were EDS and a much smaller competitor, Affiliated Computer Services. Both companies had prior relationships with P&G and were expected to be leading candidates to win the deal.
In July, EDS pulled out of the bidding, leaving ACS as the only bidder – and apparent winner – of the huge deal. Although ACS did appear to have some advantages in its workflow software, many observers applauded EDS for passing up the deal, which required a heavy up-front investment (see: https://www.nwfusion.com/newsletters/asp/2002/01467089.html).
Then, in September, ACS ended negotiations with P&G because executives felt the terms of the contract were “not in ACS’s best interest.” EDS, in desperate need of a financial boost, jumped back into the bidding and appeared to have the contract sewn up (see: https://www.nwfusion.com/newsletters/asp/2002/01573891.html).
At the end of September, however, EDS’s stock price took a nosedive following a severe cut in its earnings expectations for the quarter. “Certainly [EDS’s] earnings warning in September did cause us to pause and reevaluate,” said P&G spokesperson Linda Ulrey. “Given those changes, we decided it would be more prudent to take a step-by-step approach.”
Rather than awarding the entire outsourcing contract to a single vendor, P&G decided to break up the outsourcing deal into pieces. The HP deal will take care of most of the IT infrastructure management piece, but P&G still has not awarded a contract for facilities management, human resources, employee services and accounts payable, all of which were part of the original outsourcing plan. Observers estimate that there are more than $3 billion in services that are not covered by the HP contract.
P&G made shrewd choices in dividing up the outsourcing work. The HP deal covers the key elements of ongoing IT operations, particularly management and maintenance, and ensures that those functions will be handled by a company with a strong track record in IT service. However, the other functions fall more naturally into a business process outsourcing category, and the competition for that sort of contract will likely be a different set of outsourcing vendors. Separating infrastructure management from BPO enables P&G to find the best outsourcer for both.
It has been a very long road, but it appears that P&G is now going in the right direction toward a workable outsourcing structure. In this case, the long contract award process likely has been worth the wait.
