GM axes $2.5Bn HP outsourcing contract – inspired or suicide?

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 …

Posted in Uncategorized Comments: 15 comments


15 Responses to GM axes $2.5Bn HP outsourcing contract – inspired or suicide?

  1. Neel Gupta says:

    I would beg to disagree with you. I believe it conveys a sense of confidence on General Motors ‘They taking control of their destiny. Also as technology evolves the line between what is technology and what one manufactures becomes blurred. It may not work in vendors best interest however if GM can pull this off, it would be remarkable turn around in an industry that is plaqued by ‘Herd’ Mentality’. It also demands that vendors are able to truly understand the clients business problems and are able to better position their products and services that are aligned to how their products and services would enable them to compete effectively in an already competitive marketplace :)

  2. Richard Kravchuk says:

    I agree with Neel, many forget the prophetic thoughts of Paul Strassmann who, 20 years ago, postulated that business management and information management are one and the same. Human nature, however, learns less from logical induction (insight) than from empiricism (trial and error). Real thinking is not easy.

  3. Sharon Spencer says:

    Some Board Members confuse Outsourcing with abdication of accountability and responsibility. Too few companies build the capability to properly manage service contracts

  4. chris lawn says:

    I think the days of the outsourcing mega-deals are numbered. In my experience, as outsourcing has become more of a BAU activity customers require more finely tuned and service focused sourcing. This must also include elements of multi-sourcing to maintain competitive tension and avoid too much power being given to one supplier in a single large deal. If governance of these large deals and relationships is not properly implemented the customer and supplier can both become lazy and take their eye off the ball – leading to outdated, inappropriate and high cost deals

  5. Doug Schulek-Miller says:

    I think we need to remember the parlous state of US employment in the general context of whom owns GM stock these days. The government, a political entity of considerable influence wants nothing more than to point to increased employment in an election year for its titular head. Whether or not this is an economically or financially feasible solution for the corporation might well take second place to the overriding political considerations of a major, if not THE major shareholder of GM stock. Such are the strange, though questionable, actions when corporate interests and fiduciary responsibility are potentially considered as secondary to political objectives.

    It may not be as I have noted, but the corporate landscape in a governmentally held company is so fraught with financial land mines that careful treading is required and that consideration may well answer a lot of other questions regarding actions that may seem strange to many viewing this corporation as a mere production and economic entity.

  6. Anonymous says:

    I work for a multi-billion pound company where IT Applications are developed in-house through capital projects, following which ongoing maintenance and support of them is outsourced. The result? Ask any User who’s had to wait for months to see the smallest of changes made to their application. Then ask them about the quality of deliverable. The answers would frequently be unprintable. We have used two different (very well known) outsourcing Suppliers over the last 5 years or so (fairly recently signing a new contract) but the results have been depressingly familiar.

    Outsourcing providers will always struggle to acquire the level of knowledge necessary to effectively support companies like ours. They have too many Customers to service, too few properly trained and experienced staff and, once a contract is won, an operational ethos based on a single premise – maximise profit whilst continually reducing costs. Add to these factors the regularly occurring language barriers and time differences and you have a recipe for disaster – and that is the opinion of a typical business User, not a self-interested IT professional fearing for his job.

    My main area of interest is Business Intelligence, and in this area in particular, a constantly changing team of outsourced support staff can never hope to acquire the same level of business understanding and strategy knowledge, can never keep up with a Customer’s rapidly and regularly changing focus, drivers, KPIs etc. and can never establish the same working relationship with those at the operational end of the business – as can an in-house team of dedicated support staff (the same team that developed the Applications originally).

    Outsourcing? For a short time (until the inevitable happens) it looks good on the company balance sheet. But what price quality, responsiveness and responsibility?

  7. Roger Barber says:

    I tend to agree with some of the comments already submitted.

    The GM move is, most probably, more to do with the restoration of GM as a profitable concern and with demonstrating confidence in that goal by increasing the internal capability.

    On the working assumption that the services are being delivered and managed properly, the rationale behind retaining the erstwhile externalised profit within GM is a compelling argument at this stage of GM evolution.

    Another possible influence is the role of US Government in sustaining GM in its leaner years and the government’s views on the value and morality of outsourcing -especially when it takes jobs outside of the US economy.

    Given the current hiatus with the Olympic security – which, I know, is more of a short term contract than “outsourcing” in its general meaning – outsourcing will undergo yet another investigation into its value and benefit.

    The root cause of such problems frequently rests with the customer side not understanding how to negotiate, manage and probe a contract successfully.

    With my many years in the sourcing profession I always believed everything the supplier said they would do and rest easy when they told me all was well with the service delivery. (It says here in my manual of what not to do!!!).

  8. Robert Morgan says:

    I wrote the GM story from a market maker, shareholder or CFO viewpoint. In the ultra competitive car market it is brave board that add thousands of staff to its balance sheet, buys in large CAPEX assets, and takes on thousands of new pensions and benefits in a deep and widening recession.
    It is facinating to see the difference viewpoints developing. BUT WHO SUPPORTS MY ARGUMENT? ANYBODY?!!!!

  9. Doug Schulek-Miller says:

    “Do you think it has anything to do with the fact that GM now stands for “government motors” and as such management is responsive to concerns that are not identical to the investment criteria of ordinary shareholders? Given the institutional control of most of the Dow and many international markets, what are the implications for traditional for-profit decisions when the majority of stock ownership is controlled by groups who have a social or political agenda as opposed to the expected financial focus? Just a thought.”

  10. Ted says:

    GM is going to END the service agreement with HP in September.

    The HP workers at GM were told that between now and February all HP workers both in the US and world wide would be converted to GM.

    GM will be paying fines for getting out of the contract early.

    GM will assume all liabilities,for the current HP workers.

  11. Bob Surroco says:

    Ted, where are you getting the information that supports your statement that GM is is going to convert the HP staff to GM staff, probably starting in September/October?

  12. HPWorker says:

    Ted, I’m working at HP and we didn’t received any information like the one you are mentioning.
    Can you tell us from where you are getting it?

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  14. Jim says:

    I worked for EDS for many years in management positions. In this position, I worked at transitioning many clients into EDS. Frankly, I always felt that companies could do much better in house. EDS is not in the business to help other companies, or to be white knights, they are out to make money for shareholders and bonuses for management. How do you do this, you provide as little service as legally possible for as much money as you can get. We regularly outsourced our work to third world companies (usually India) to save money, and we took the slings and arrows from clients for poor quality and overruns as the money was so good, it was worth it. Morale is awful and most managers are busy working on the resumes and doing just enough to keep their jobs. The company has slid a long way since Ross Perot. This is why the Board sold the company to HP, it could see that the good days were well past and HP was sucker enough to pay top dollar. They deserve each other.

  15. Kushal Kislay says:

    I am not sure how GM will going to manage the Complex mainframe systems in the Supply chain Division.
    They have hired many managers from the HP but i have first hand experience that they are not being utilized properly every one seems to be in such a hurry resulting in lot of confusion and rework.
    This chaos will have detrimental effect on business too.

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