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IBM concocts a deal with Dow Chemical

Electronic Data Systems gives way to Big Blue four years into a high-profile outsourcing job.

IBM has won a seven-year contract to manage and support Dow Chemical's global IT needs, displacing computer services rival Electronic Data Systems.

Under the multiyear outsourcing agreement, IBM Global IT Services will manage Dow's servers, storage, and voice, data and video networking, as well as security, e-mail and disaster recovery. It also will develop a custom portal to monitor Dow's operations and performance. Financial terms of the deal were not disclosed.

While the contract marks another win for IBM's services business, it signals a major defeat for EDS, which in 2000 touted the Dow contract as "the first large-scale application of a landmark new service offering" it called the Intelligent Network Foundation.

EDS, which also partnered with Cisco Systems, had signed a seven-year contract with Dow that was valued at $200 million per year, according to the company's press release at the time. That would have given the deal an overall value of $1.4 billion over seven years.

But last week, EDS and Dow said they reached a "mutual agreement" to cancel the contract, which initially was slated to last until 2007.

The termination of the EDS-Dow contract comes as no surprise to some in the services industry. As previously reported, some industry sources had suspected that Dow was the "unnamed commercial client" with which EDS was wrangling when it announced trouble with a major client.

In a March filing with the Securities and Exchange Commission, EDS said that a commercial client "has indicated it believes we are in default of our obligations and that the contract is subject to termination by the client."

Although EDS and the client were in negotiations at the time, the services giant warned it could suffer greater "impairment of some of the associated assets," even if an agreement were reached.

That would compound the $150 million in assets, such as equipment and software, it had already invested in that contract by the end of last year, EDS' filing with the SEC noted. The company also acknowledged an operating loss of $255 million under that agreement last year.

EDS and Dow declined to comment on the reasons for the early termination of the contract. Mary Jo Piper, a Dow spokeswoman, said the two parties were negotiating a settlement for several months prior to the agreement. EDS, IBM and Dow expect to work together for another four to six months on the transition, she added.

"We're pleased with the settlement," Piper said. "It was an amicable one."

When EDS struck its deal with Dow four years ago, the services giant was expected to revamp the chemical company's communications network, integrating voice, video and data.

IBM, as part of its deal with Dow, will also cover voice, data and video networking. Big Blue plans to transform Dow's voice communications by adding Internet telephony to Dow's global network.

The agreement also calls for IBM to provide e-mail to Dow's 50,000 employees and contractors worldwide, as well as support 2,800 servers and field services.