Pact's end is among several pointing to new era in outsourcing

11:18 PM CDT on Monday, September 20, 2004
By CRAYTON HARRISON / The Dallas Morning News

Perot Systems Corp. divulged details Monday of the final phase of its landmark outsourcing deal with UBS AG, the latest major company to reconsider its technology needs.

Plano-based Perot Systems disclosed in August that it expected to lose the majority of revenue and profit from its UBS contract when it expires at the beginning of 2007. The company said Monday that it would work with UBS to phase itself out but would still provide some technology work for the financial giant after the original contract ends. Companies have become savvier about outsourcing, choosing in some cases to directly manage their technology rather than completely hand big decisions over to a contractor, experts said. Perot Systems shares fell 39 cents Monday to $13.86.

UBS' new technology strategy is similar to one J.P. Morgan Chase & Co. decided to employ this year in dropping its large outsourcing contract with International Business Machines Corp. And General Motors Corp. has signaled that it will spread its technology work among several contractors when its deal with Plano-based Electronic Data Systems Corp. expires in 2006.

Those decisions aren't cause for immediate alarm in the outsourcing industry, since plenty of companies still choose to work with technology services contractors, experts said. But they do reflect the way companies are learning to more closely control their technology operations, even when they hire outsourcing firms.

"We may be reaching an inflection point in that there's probably going to be a host of smaller deals and less of the megadeals," said Ben Trowbridge, chief executive of the Trowbridge Group, an industry consulting firm. The technology services industry is still growing, but contractors such as Perot Systems, EDS and IBM will increasingly be handling smaller, more specific tasks, he said. The multibillion-dollar deals that once ruled the industry will still exist, but they could become rare and won't cede as much control to the contractor, he said.

The UBS contract generated $242 million in sales for Perot Systems in 2003, accounting for nearly 17 percent of its revenue. The negotiations to end the deal won't significantly alter Perot Systems' expected sales or profit from the deal, which earned $44 million to $50 million each year for the last three years.

The J.P. Morgan, GM and UBS contracts have turned heads in the outsourcing industry because they were so big, forcing contractors to discuss the renegotiations with their investors, said John Funk, a Dallas attorney with Jones Day who works with outsourcing clients.

Behind the scenes, outsourcing companies constantly have to renegotiate their contracts with clients, sometimes expanding their services and sometimes reducing them, said Mr. Funk, who declined to comment specifically on the Perot Systems deal because he has worked with the company. "These relationships really do change over time," he said. "Fully half the projects I have at any given time are renegotiations."