EDS/MCI WorldCom alliance a big deal in Canada

EDS and MCI WorldCom have entered into a strategic alignment internationally, which is going to have a somewhat special meaning to the Canadian IT and network services market place.

“The play in Canada is probably the most interesting in the whole deal,” said George Logemann, analyst with the Yankee Group in Boston.

Last year, MCI WorldCom bought outsourcing provider SHL Systemhouse and changed its name to MCI Systemhouse everywhere except in Canada. This was for a couple of reasons, according to Ian McLaren, the Ottawa-based president of Canadian, U.K. and international operations for SHL. At first there was a legal condition that made the possibility of the use of the name MCI difficult in Canada.

That didn’t cause much distress, however, because SHL was such a well-known and successful brand name in Canada that a change might have hindered its success anyway, according to Logemann. So, the company decided to keep the name.

For EDS in Canada, it hasn’t quite been the same success story.

“Canada has not exactly been an EDS showcase,” Logemann said. He said EDS has had a few interesting contracts with the government and the insurance and banking industry, but in general it hasn’t been as successful as SHL in this country.

“So if EDS doesn’t mess too much with the SHL infrastructure, EDS gains instant brand and market recognition in Canada,” he said.

Sheelagh Whittaker, CEO of EDS Canada in Toronto, agreed that Canada has an interesting story when it comes to this deal.

“It’s very different here because Systemhouse started out in Canada and it’s particularly strong here,” she said. “So while Systemhouse has roughly 9,000 employees worldwide, about half of them are in Canada, so it has much more impact in our market than any other market.”

Four key elements make up the complete agreement.

The first is that in a 10-year agreement, MCI WorldCom will outsource major portions of its IT services to EDS, and EDS will assume responsibility for significant application development and maintenance services for almost all of MCI WorldCom’s infrastructure services. EDS expects its revenues to range from $5 billion to $7 billion over the life of the contract.

The second is that EDS will outsource the bulk of its global network to MCI WorldCom, with MCI WorldCom handling end-to-end management of voice and data communications services on a preferred basis for EDS and its customers. MCI WorldCom expects this to bring its company approximately $6 billion to $8.5 billion in revenue over the next 10 years. The Yankee Group said it believes MCI will be guaranteed at least $6 billion.

The next part of the agreement is that EDS will acquire MCI Systemhouse (SHL Systemhouse in Canada), the IT service provider branch of MCI, for $1.65 billion.

Lastly, MCI WorldCom and EDS agreed to develop various networking solutions and services, especially in electronic business applications, and to explore global market opportunities together on a non-exclusive preferred provider basis.

EDS’s Whittaker called this is a “win-win situation,” and the Yankee Group’s Logemann agreed. Both companies win because of guaranteed increases in revenue streams, he said.

Whittaker and SHL’s McLaren said they’re excited about the synergies between the two companies in Canada. Where one falls short, the other is strong, both geographically as well as in terms of service offerings.

“We have outsourcing centres in Calgary, Ottawa and Halifax and EDS has one in Toronto,” McLaren said, explaining the geographic synergies. “Now that we will be able to sell with data centres across the country, I think we’ll have more leverage.”

Whittaker agreed. “Before EDS was sort of a central Canadian (company) with some significant outposts, but now we’ll be truly national.”

As for the services side, Whittaker explained that EDS gains from some of SHL’s important systems integration contracts such as the integrated justice system in Ontario and the work it has done with Canada Post. And EDS, on the other hand, has done high-profile jobs such as the redesign of the Canada Pension Plan and the development of a health information network in Manitoba.

“So our work is very complementary,” she said.

The alignment in general is going to be quite significant for the overall IT and network services industry, according to Logemann, especially in light of the recent similar AT&T/IBM deal.

“There’s a change in the overall industry, because now what we have is the two global leaders in outsourcing and systems integration, and the two global leaders in communications — the former being EDS and IBM, the latter being AT&T and MCI WorldCom — saying to the world, ‘We’re going to stick to our knitting,'” he said.

“What I think that suggests to world-class companies that are looking to do outsourcing is that the two musts on the list are IBM/AT&T and EDS/MCI WorldCom.”

In view of this change, his advice to other large global players such as Cap Gemini and Computer Sciences Corp. (CSC) is that they should now begin to rethink their strategies with respect to network outsourcing and managed network services. A focus on core competencies is now even more important, he said.