HP banks on outsourcing deal

CIBC, which has about 8 million customers, will outsource the management of its information technology infrastructure to HP's services group in a seven-year agreement worth about $1.5 billion, the companies said in a conference call Tuesday morning.

HP also announced Tuesday that it is expanding its outsourcing staff.

Under the agreement with CIBC, the computing giant will manage a wide range of technology for the bank, including desktop PCs, computer networks and a mix of servers based on the Unix, Windows NT and OS/400 operating systems. HP will also handle purchasing for CIBC and provide application support services.

"This is one of the largest outsourcing deals in terms of revenue that's been signed this year by any services company," said Ann Livermore, executive vice president for HP Services. It's also by far the biggest services agreement signed by HP since its merger with Compaq Computer last May, HP executives said.

Gartner Dataquest analyst Bruce Caldwell said that the deal adds credibility to HP's services unit, particularly as HP looks to compete against IBM and Electronic Data Systems in large deals that include management of older, large computer systems.

In particular, Caldwell noted that HP will be managing IBM midrange AS/400 and mainframe systems.

"This puts them into the megadeal world," Caldwell said.

Other industry analysts were less impressed. "While it's a larger deal, it doesn't indicate they've stepped into the IT services market in a large way," said IDC analyst David Tapper.

Tapper also noted that CIBC is not parsing out the care and feeding of its business applications, such as accounting and customer service systems, as part of the contract. HP doesn't typically offer services for maintaining business applications, preferring instead to partner with other IT service companies.

However, one of HP's closest partners, PricewaterhouseCoopers, is soon to become part of rival IBM. That could highlight the differences between offerings from HP and those from competitors IBM, Electronic Data Systems and Computer Sciences, Tapper said.

The agreement arose from an existing relationship between HP and CIBC, said Mike Woeller, the bank's chief technology officer. The bank, which has been working with the technology company for about four years, considered options such as managing the infrastructure in-house, but stopped short of putting the contract up for bid.

With the deal, HP is getting a larger slice of CIBC's business. Today HP is managing about 60 percent of CIBC's technology, but under the new deal, HP should eventually be handling nearly all of it, a bank executive said.

"Our strategy is to increasingly consolidate our technology platforms into this environment," said CIBC Senior Vice President Grant Westcott.

Under a separate agreement, HP will buy out Intria-HP, a joint technology services venture between the two companies. It was established in 1998 to provide outsourcing services to the bank as well as other Fortune 500 customers in North America.

The deal will let HP expand its outsourcing capabilities, acquiring about 1,280 new services employees as well as two data centers, HP's Livermore said.

"This move is a natural evolution for both of our companies and gives HP a tremendous opportunity," she said.

Gartner Dataquest's Caldwell said that the unwinding of the joint venture probably won't mean a big change for HP's capabilities.

"The joint venture has had its ups and downs," said Caldwell, who noted however that it is doing a significant amount of business--5 billion transactions a year. "Joint ventures tend to have a fairly short shelf life before something happens to change their status."

By acquiring the joint venture, HP will be able to tout a wider array of services to potential customers. The move also frees HP to go after more business knowing it will have sufficient resources, said Juergen Rottler, a vice president in HP's services unit.

The acquisition marks a potential milestone for HP Services. The division, which represents about 20 percent of the computing company's overall revenue, is looking to offer more to customers, Livermore said.

"What you'll see us continue to do is aggressively focus on growing our services business. You'll see us do a whole variety of things associated with that," Livermore said. "You'll see us hire particular skills we might need. You'll see us consider other acquisition or joint ventures as well."

Terms of the deal were not disclosed.

News.com's Ian Fried and Alorie Gilbert contributed to this report.