Services giants shed global networks
Large IT services companies are shedding the global networks once considered their crown jewels.
During the 1980s, services companies such as IBM Global and Electronic Data Systems built up their own networks as showpieces to sell to big corporate customers. These networks, which helped outsourcers to land big deals with companies going multinational, were sold as a more secure and reliable alternative to anything offered by commercial telecommunications companies.
Now, the service giants are busy shedding responsibility for their voice and data network services so they can focus solely on systems integration and outsourcing deals. In December, AT&T agreed to buy IBM's global communications network and the two companies contracted services to each other worth about $9 billion. At the time, analysts lauded the deal, noting IBM had rid itself of an aging, expensive albatross.
Yesterday, in an even larger deal, Plano, Texas-based EDS turned to MCI WorldCom to help manage its network which handles 9.4 million long distance calls per month. Through the deal, EDS will farm out the bulk of its global network to MCI WorldCom, with MCI WorldCom managing voice and data communications services on a preferred basis for EDS and its customers. MCI WorldCom is expected to reap up to $8.5 billion over the next 10 years through the deal.
"This is a defensive maneuver [MCI WorldCom] is making in response to AT&T," said Julie Giera, analyst at Giga Information Group.
But unlike IBM, EDS is holding on to its network that supports its core businesses. EDS's network consists of a complex string of outsourcing agreements the company has forged with carriers across the world. Through the deal with MCI WorldCom, EDS will fold all of its network traffic onto MCI's Asynchronous Transfer Mode (ATM) backbone.
"We still retain the revenue stream," said John Harris, EDS's corporate vice president, marketing and strategy. "MCI will be our communications provider going forward, though we'll work with others when required."
Harris said networking has become a much more critical part of EDS's business as the company moves toward offering Web-based services that include electronic billing and Internet-based banking.
"The very short lifecycles of technology is driving this," trend of partnerships between telecommunications carriers and systems integrators, said Lewis Clark, analyst at research firm Dataquest.
Telecommunications carriers can no longer afford to run outsourcing arms by themselves and services companies can't run a far flung global network without a giant partner, particularly when new applications and services are so network-intensive.
In the first year of its new deal with MCI WorldCom, EDS is expected to save 10 percent, or $50 million, on its internal voice and data costs, according to analyst estimates. The company can also now jointly market service contracts to customers with the nation's No. 2 telecommunications carrier. And that market is expected to do nothing but grow over the next several years.
Research firm International Data Corporation estimates that the market for IT outsourcing will continue to grow at a 10-percent compound annual rate to approximately $75 billion in the United States and $142 billion worldwide by the year 2002.
Outsourcing services most in demand are data centers, network operations, desktop, application services, help desk, and disaster recovery, according to IDC.