March 05, 2009, 9:38 AM — EDS has announced a ten-year, £700 million ($1 billion) deal with UK-headquartered insurer Aviva. Under the terms of the data center services contract, EDS will modernize and manage two of Aviva's UK data centers. The deal, one of the biggest in recent UK IT outsourcing history, is classic infrastructure-transformation territory, in which EDS intends to take cost out by standardizing and rationalizing Aviva's data-center systems and processes. Around 300 Aviva staff will transfer to EDS.
There's value in fixing IT's underpinnings
Aviva's back-office systems probably aren't in that bad a shape, but they're equally unlikely to be operating at optimum efficiency – otherwise there'd be little logic in outsourcing them to EDS. We'd expect the usual array of problems: duplication of resources, underutilization of assets and operational inefficiencies. Fixing problems such as these are the 'bread and butter' of infrastructure outsourcing, and EDS will use its skills to transform Aviva's data centers with a classic program of infrastructure standardization, rationalization and automation. Programmes like this are where the $1 billion deals are to be found, not in the 'sexier' areas of IT.
Sounds simple, doesn't it? Cut out the duplication and underutilization, chuck out the legacy (though maybe not the mainframe), 'ITIL-ize' your operations staff and no doubt add a big dash of virtualization and HP technology. The skill will come in architecting the transformed systems and managing the change, of course.
These are things that CIOs could undertake in-house, but maybe not at the same cost: £700 million sounds like a lot, but £70 million a year to sort out and manage two big data centers and 300 people looks like a bargain for a company with annual revenues of £50 billion. For EDS it should be easy – this is what it does and mostly does well, bar the occasional slip in the UK public sector. Its margin will depend on getting the transformation done quickly and reducing staff numbers in the long term.
The longer the term, the harder the bargain you can drive
It may sound obvious, but one of the reasons Aviva was able to drive a fair price was that it went for a ten-year deal, bucking the trend for smaller, shorter deals. There's evidence here and abroad that the recession will encourage vendors to return to pitching longer terms in return for more competitive pricing. Enterprises can counteract the lock-in by unbundling their service requirements and ensuring that the bid and renewal cycles are evenly spaced. There maybe good deals to be had, but rushing through multiple sourcing deals in a recession will only come back to bite the next CIO.
HP profits too
Meanwhile, EDS gets to keep its HP management happy. This is just the kind of long-term, annuity revenue for which HP bought EDS. It also gets to shift some kit, and in the current economic climate every little bit helps for a hardware OEM like HP (though it's another chink in EDS's claims to vendor independence). HP gets to own a bit more of its customer's IT estate, and winning a share of wallet is what motivates it – especially when it beats IBM, as in this case.
Now EDS just has to deliver on its margins. Pre-acquisition, they were in the 4–5% range. HP likes double-digit margins: even though product revenues were hammered in its 1Q09 results, for the most part it clung onto its margins.
Ian Brown is a senior analyst at Ovum
