Big Blue bags billion dollar outsourcing deals

IBM has announced pair of substantial outsourcing agreements - a $1.21bn contract with French tyre maker Michelin and a "pay per use" deal with a Swiss financial company to manage front-end systems and software support.

Under the terms of the eight-year Michelin contract, IBM will take control of Michelin's information technology operations in North America and Europe. The tyre maker said it sought the outsourcing agreement to lower costs and improve the performance of its IT processes. The companies reported that roughly 600 Michelin employees would join IBM beginning in the first quarter of 2004.

IBM will oversee Michelin's IT production operations as well as systems management, user support, and technical support. It will also manage the company's ongoing vertical industry technology efforts and its physical IT assets, including its servers, workstations, PCs and software.

Under the Swiss deal, Big Blue will consolidate and manage personal technology for all 64,000 employees of Zurich Financial Services. The employees work in five European countries, the United States and Canada. The companies said that approximately 470 of the employees will be transferred to IBM.

IBM reported that payment from Zurich Financial will be made using a "pay per use" system for desktops, laptops, help desk support, printers and software support, which should let Zurich Financial lower hardware-related overhead and avoid upfront capital investment.

IBM currently leads in the global IT outsourcing market, ahead of rivals such as Hewlett-Packard. The technology-industry behemoth has reported numerous outsourcing agreements over the last year and continues to push its "on-demand" computing model in deals such as Zurich Financial's, which gives businesses the ability to buy IT services on an as-needed basis.

However, some industry watchers warn that the impressive dollar values often attached to these deals, and those of other outsourcing vendors, should be looked at with some caution. Many times there are substantial costs hiding behind the big numbers that make the original figures less impressive than they may first seem, experts say.

For instance, in July IBM reported a $1.1bn, 10-year IT services contract with ABB, a Swiss power and automation technologies company. At the time, IBM said that, along with roughly $600m generated by two other contracts signed in late 2001, its revenue from ABB will approach $1.7bn over 10 years. But Big Blue didn't say that it could incur personnel expenses that total as much as $90m.

Analysts say IBM's method of reporting deal values is typical of large IT services contracts. They point out that outsourcing services providers are often required to make sizeable upfront investments in IT equipment and personnel. What's more, experts say, these companies' clients usually renegotiate contracts along the way, which can trim profits even further.

Matt Hines and Dinesh C Sharma write for CNET News.com, CNET News.com's Ed Frauenheim contributed to this report.