EDS strikes deal with MCI

Electronic Data Systems' (EDS) mutual outsourcing deal with MCI Worldcom will yield in excess of $15 billion for the companies over the next 10 years, but analysts warned they may lose out in other areas.

MCI Worldcom and EDS last week announced they have aligned on a preferred partner basis to provide joint networking systems to business and government entities worldwide. MCI WorldCom will outsource all significant applications development and maintenance services, plus virtually all infrastructure services to EDS.

The outsourcing deal, which the companies claim is the largest in the telecommunications industry, will generate $7 billion in revenue for EDS.

In return, the Texas company will outsource the bulk of its global network to MCI WorldCom, which is also set to handle end-to-end management of voice and data communications services on a preferred basis for EDS and its customers.

The agreement will garner up to $8.5 billion in revenues for MCI WorldCom over the 10-year period.

But Tim Sheedy, IDC research analyst for European telecommunications, said: 'Although for EDS it is a key strategic deal that will allow it to refocus on its core competencies, I wouldn't expect other telcos to take it seriously as a services provider, due to the fact that its ties with MCI Worldcom go beyond a simple outsourcing agreement.'

MCI Worldcom and EDS have promised each other efficiency savings of at least 10 per cent from the outsourcing arrangement.

'But this is not about cost savings,' said John Sidgmore, vice chairman of MCI WorldCom. 'The real consideration is how we we move our top lines faster and make ourselves more efficient in the provision of services.'

MCI Worldcom will sell its IT services company, MCI Systemhouse - formerly SHL Systemhouse - to EDS for $1.6 billion in cash. Brown refused to rule out the possibility that some of the estimated 9,400 employees of MCI Systemhouse worldwide would be made redundant.

Sidgmore insisted that MCI Worldcom's decision to sell MCI Systemhouse was a strategic move, not a reactionary one.

'Nothing went wrong with Systemhouse: it did well under the MCI umbrella,' he said. 'But we realised it was too small on its own to be able to bid on enough big deals so we wanted to find a way to combine it with a bigger partner.'

Sidgmore and Brown denied the joint deal was in response to AT&T's recent agreement to buy and manage IBM's Global Network in exchange for outsourcing some of its applications processing and data centre management functions to IBM.

'As part of our deal, all the traffic we're getting will be put on MCI Worldcom's network on an ongoing basis,' Brown said. 'We're not just selling in the one-off way IBM did with AT&T.'

Sheedy indicated that there will be further outsourcing activity among the key players in the telecommunications industry, but said the trend of alliances being formed with large services organisations was unlikely to continue.

'EDS wanted to make itself an important player in the internet sector, as did IBM Global Services, so it had the motivation to sell its network to a telecommunications provider that had the skills to manage them better,' Sheedy said. 'But other service companies are not so interested in the internet market, so it's not in their interests to have this type of mutual relationship.'