GM offers EDS rare Y2K bonus
The nation's largest auto maker says in an SEC filing that it will pay the consulting firm $75 million if its Y2K transition goes smoothly.
In its 10-Q filing with the Securities and Exchange Commission earlier this week, GM, the nation's largest auto maker, said it will pay EDS $75 million if its computer systems and microprocessors embedded in a wide variety of products are "capable of continued operation before, on, and after January 1, 2000 without causing significant business disruption" that results in financial losses.
Most industry analysts agree that the GM-EDS agreement is unusual.
"I don't know how common or uncommon this kind of agreement is," said Andy Diamondstein, an analyst at the IT research firm Giga Information Group. "But I know it's the first publicized instance of this type of incentive that I have seen."
Diamondstein added, however, that several IT vendors have told him that clients have proposed such deals but incentive stipulations are not something that the vendors are offering.
Most IT firms continue to work on straight time and materials billing bases with a few exceptions, including Cambridge Technology Partners, which distinguishes itself with a fixed price arrangement.
Fixed pricing, guarantees, and bonuses are something IT firms seem to be happy to do without.
"As far as I am aware, all firms have significantly hedged away from making any Y2K guarantees concerning their work," said one industry analyst at an influential New York investment bank. "The federal government has been aggressive about trying to put guarantees into software contracts but the IT industry has pushed back."
He noted that if there were guarantees, there would be major audit problems in determining whether something failed because of Y2K bugs.
"When you get into after-the-fact finger-pointing, everyone has already lost," he added.
Even in the case of GM and EDS, some things will be open to interpretation since GM notes that it would be not pay the bonus if there are "significant business disruptions" that result in financial loses.
"I am not a lawyer, but I wonder what the legal implications are for an agreement like this," asked Diamondstein. "It sounds almost like a concession from GM that there might be a few bugs, and does it exonerate EDS if there are a few bugs?"
Although smaller IT firms may use this bonus strategy as a way to wrestle contracts from larger players, analysts agree that the "dangling carrot" agreement is probably not the norm.
GM's Year 2000 program will earn EDS $300 million before the bonus. The auto maker added its No. 1 priority was the analysis of microprocessors used in GM passenger cars and trucks. GM said that a review included all current and planned models as well as the electronics in older vehicles produced during approximately the last 15 years when vehicles began having microchips capable of processing date information.
Most of the processors reviewed have no date-related functionality, and therefore have no Year 2000 issues, GM said. Of the vehicles with processors that perform date-related functions, none had any Year 2000 issues except for one model where an indicator light prematurely indicates the need for an oil change at the end of every decade.