Outsourcers eye chance to win Kodak IT contract

Eastman Kodak Co. is soliciting bids from information technology companies to run its internal IT systems.
It’s the second time since the photo company’s landmark contract with IBM Corp. in 1989 that IBM is facing competition to renew the deal, which expires in 2005.
Neither Kodak nor IBM officials responded to requests for comments regarding this story. But several local IT industry observers said Kodak plans to begin accepting bids on the contract early next year.
Kodak stunned the business world in 1989 by inking a 10-year, $250-million deal with IBM and two other companies, outsourcing responsibility for running its computer work stations and data centers. It was the first major corporation in the United States, not in significant financial distress, to outsource its information systems, according to researchers at Computer Sciences Corp., which provides similar services.
“Despite much controversy and skepticism, Kodak’s actions soon legitimized IT outsourcing, and its approach quickly became the role model for how to structure and manage an outsourcing relationship,” CSC researchers wrote.
IBM last year held a quarter of the U.S. IT outsourcing market, up from 19 percent the previous year, generating $7.6 billion in revenue, an IDC Corp. reports states. Electronic Data Systems Corp. placed second and CSC ranked third.
IBM and EDS competed on the first Kodak deal in 1989 and are expected to duel again for Kodak’s business. John Cubbin, EDS enterprise client executive on the Xerox account, said he expects other prominent companies to vie for it as well.
The bidding process for a company Kodak’s size typically takes a year to complete, sources said, and displacing an established vendor is difficult.
“The outsourcing industry has shifted,” said George Hynes, a partner with Unisys Corp.’s global partners division in Connecticut, which is not planning to bid on the Kodak deal. “Most companies’ outsourcing deals get renewed with existing clients. When you do look at a client that is looking to shift and move, you typically find they are looking for a lot more control in working with the vendor.”
In May, Gartner Group Dataquest researchers said the average value of an IT outsourcing contract is $47 million.
EDS lost out to IBM on the 1989 Kodak deal, but subsequently won two major contracts in Rochester that it still holds: Xerox Corp. and Delphi Automotive Systems.
EDS employs 1,300 people in Rochester, roughly 1 percent of its worldwide work force.
Xerox’s contract for outsourced IT services with EDS was set to expire next year, but in 2001 the companies extended the deal through 2009, at a value of $1.5 billion. The renewed contract illustrated how such deals have evolved: Xerox won preferred-supplier status for printers and copiers that EDS supplies other corporate clients.
While the sales process is arduous, landing such accounts is a remarkable feat for account teams.
“Basically, you are a hero,” EDS’ Cubbin said.
IBM and EDS have competed aggressively in the past decade for deals the size of Xerox and Kodak as well as for mega-deals for organizations running 100,000 workstations or more. Kodak and Xerox have not made public how many seats their outsourcing deals involve, but Hynes said they do not qualify as mega-deals.
Bruce Caldwell, an analyst with Gartner Group Dataquest, said IBM won half of the 14 mega-deals awarded last year.
EDS won two but has the highest profile deal in the industry, a $6 billion-dollar deal to run IT infrastructure for the Navy and Marine Corps. Xerox is providing equipment as part of that deal.
Hewlett-Packard Co. won its first mega-deal in 2002, with Procter & Gamble Inc. Local sources said HP plans to bid on the Kodak contract as it looks to bolster a 5-year-old IT services business by locking in other name-brand customers.
HP’s media relations department did not respond to a request for comment.
EDS’ Cubbin said IBM and HP have proven to be formidable competitors because they can write discounts on computer hardware directly into service contracts.
Unisys’ Hynes echoed Cubbin’s point but said more often at renewal time customers are most interested in adjusting the deal to better align business processes with IT systems.
“More often than not the customer wants to change the relationship but not so much to go from one (outsourcer) to the next as changing what is in-house and what is outsourced,” Hynes said.
In a Gartner Group Dataquest survey this year of 70 organizations that had canceled a large outsourcing contract, 46 percent said they did so because their vendor failed to meet agreements on specific levels of service stipulated in their contract. Another quarter of the companies said they did so because of relationship problems with their outsourcers. Sixteen percent cited cost overruns as the reason they shifted, and 10 percent complained that their vendor was not innovative enough.
In their efforts to wring costs out of their operations, more companies are pitting IT outsourcers in a price-bidding war deep into the proposal process, which Hynes said can cause delays.
“It makes it tougher for us, because you want to get off the contract language and get to the ‘we’ stage of the relationship,” Hynes said. “If you have not been dealing with the client, and (a bid solicitation) shows up on your doorstep, you are probably not going to get anywhere. Usually the company is using (the bid) to get someone else in line with their expectations.”
While companies such as Kodak rely on big companies like IBM to run “big iron” infrastructure like telecommunications data switching centers, they often rely on local subcontractors for niche software projects.
For instance, last month Kodak announced that Rochester-based Leveraging Technology Inc. created a way for field engineers to access information to service health imaging equipment Kodak sells. It was a mammoth project for the 10-person firm, involving scanning 100,000 paper documents into a database and setting up an Internet infrastructure to make that information accessible anywhere through wireless links.
In the past several years, a major goal of Kodak has been to finish installation of a resource planning software system from the German firm SAP, said Tray Layton, a former Kodak employee who now is vice president of advanced technologies at Ronco Communications and Electronics Inc.
David Kennard managed IT projects at Xerox, EDS and Kodak before co-founding his own company, based in Portland, Ore., in 2001. Kodak has been attempting to consolidate network operations.
Hynes said it is difficult for outsiders to predict the shape of new outsourced IT deals, especially for companies such as Kodak that are in transition, but that it is an exciting process to help guide.
“You capture the imagination of the CIO or CFO or CXO,” he said. “You help them resolve a business issue-you help them move to a new state of mind.”
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10/17/03 (C) Rochester Business Journal