Connecticut nixes EDS outsourcing deal

The state of Connecticut ends negotiations with services giant EDS, dumping plans for a contract worth up to $1.5 billion to privatize the state's computer systems.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
3 min read
The state of Connecticut today nixed negotiations with services giant EDS, dumping plans for a contract worth up to $1.5 billion to privatize the state's computer systems.

Connecticut Gov. John Rowland, pressured by state union workers and faced with intense taxpayer and legislative scrutiny, scuttled the controversial deal, announcing his decision at a press conference today. Instead of trying to negotiate with another company, Rowland said the job would be completed through smaller contracts with EDS and other firms, using state workers as needed.

An EDS spokesman said the Plano, Texas-based firm remains committed to working on future state outsourcing deals, and will continue to try to work with Connecticut.

"We made every effort to forge a contract that would help the state achieve its vision of transformed government," EDS's Stephen Person said. Ultimately, the deal, negotiated over the past six months, broke down because it would have been "difficult to achieve the sort of savings the State of Connecticut expected" by outsourcing, Person said. The two sides also disagreed over state employees' roles under the contract, he added.

The contract, under negotiation until as late as last night, fell apart because there were too many risks involved for both sides, said Rock Regan, Connecticut's chief information officer.

Regan said EDS wasn't willing to provide the state enough protection--specifically the assurance of technology upgrades during the contract's seven-year duration, as well as an acceptable "out clause" if the state became dissatisfied with contract performance. Regan added that a return on the state's investment was not promised until the last two years of the contract.

"It was a leap of faith," to enter a contract under those terms, he said.

When EDS inks an outsourcing deal, it typically takes the clients' employees and makes them employees of EDS--a detail that raised the Connecticut IT workers union's ire.

"They want to keep some of their employees state employees," Person said.

Analysts say the botched deal, while a blow for the $16.9 billion firm, was not EDS's fault.

"This is clearly a political issue," said Merrill Lynch financial analyst Steve McClellan. He added that the margins on the deal were much lower than a typical corporate deal and the loss isn't expected to impact EDS earnings.

Julie Giera, services and consulting analyst at Giga Information Group said the loss, in the big picture, is not huge for EDS--though the timing is bad.

"[New EDS chief executive] Dick Brown is trying to get everyone energized, so it's pretty poor from a morale perspective," she said. "The timing of this is likely to be very unfortunate for them."

But Giera said Connecticut's decision underscores a larger issue of how state governments need to get labor unions to cooperate on IT outsourcing deals, which typically offer 15 to 20 percent overall savings for the state. Giera noted that her recent informal survey of four or five states showed that state IT workers are paid 25 percent less than private-sector employees, making it very difficult for states to lure talent.

Meta Group analyst Dean Davison said he doesn't expect today's news to impact future government deals, including a pending deal that several services firms are bidding for in San Diego County.

"It would appear [in this case] that the governor has caved in to political pressure, which has nothing to do with technology or best practices," he said. In the future, states will focus more on the practicality of outsourcing, with the business leaders who understand the practicality of outsourcing bucking the political tide, he said.

"Clearly, going forward we'll see many more contracts."