GM axes $2.5Bn HP outsourcing contract – inspired or suicide?
A week ago General Motors’ CIO Randy Mott signalled the end of 28 years of pioneering outsourcing deals by announcing that he was returning 90% of outsourced services back in-house. HP’s approximately $700m per annum (including hardware provisioning) outsourcing contract is now in full run down mode.
Returning IT in-house is an alarming and growing trend in both the private and government sector, for example, Islington Borough Council is currently bringing various services back in-house after 15 years of being outsourced.
The General Motors decision must frighten the executives and shareholders of HP and competitor giants such as IBM and CSC all the way through to the minnows such as Capita and Logica. Remember GM pioneered outsourcing when they originally bought EDS from Ross Perot in 1984, and twelve years later they spun EDS out as an independent company but not before giving it a significant and lengthy back to back contract for global services which basically guaranteed EDS credibility and financial stability to acquire business anywhere in the world. HP of course parted with $13.9Bn to buy EDS in 2008.
Two companies effectively pioneered outsourcing in the 1980’s, General Electric and General Motors. General Electric has spent the last five years exiting its large scale outsourcing interests and investments and now General Motors is doing the same by stating that they will transition services over the few years and will be recruiting thousands of IT staff worldwide.
Mott says the goal is to make GM more efficient and more productive. If anyone knows what he talking about then it is Mott – few people remember that Mott was CIO of HP and oversaw that company’s global restructuring of IT operations but left to avoid the short lived “Leo era”.
Ask yourself this question –how did Mott get this past the GM board? On the one side, the promise of cheaper and more efficient IT which is currently bought in as a service and so is nice and clean on the balance sheet. On the other side, the hiring “thousands of staff” with all the associated heavy pension and social costs; a hugely increased CAPEX budget to acquire the IT assets; the business risk and huge transition costs which will flow straight to the liabilities side of an already shaky corporate balance sheet. AND all this against a background of a global recession; loss of market share; and GM’s key product having to compete against the most intense competition this beleaguered industry has ever seen. How did he do it?
Either Mr Mott is a genius snake-oil salesman to have sold the idea to the CFO and board, or HP must be making obscene profits – enough to make this decision viable and worth the risk.
Answers on a post card …