UPDATE: P&G awards US$3B outsourcing contract to HP

Procter & Gamble Co. has agreed “in principle” to award a giant IT outsourcing contract to Hewlett-Packard Co. valued at US$3 billion over 10 years, the companies announced Friday. HP and P&G expect to sign a definitive agreement by mid-May.

The contract calls for HP to manage P&G’s IT infrastructure, including data centre operations, desktops, networks, help desk, product lifecycle and procurement, and some applications development and maintenance. The scope of the services is global, applying to P&G’s operations in 160 countries.

About 1,850 P&G employees from 50 countries will go to work for HP, most of them from P&G’s Global Business Services unit.

P&G chose HP for its cost, quality of service and technical expertise, according to the statement. P&G expects that outsourcing these IT tasks will let it lower costs and improve its IT operations.

If the contract is finalized, this would be a very significant win for HP as it continues to strive to improve its position within the IT services space, one of the stated goals of its Compaq acquisition. HP beat out IBM Corp. and Electronic Data Systems Corp. (EDS) for this contract, P&G spokesperson Damon Jones said Friday.

“This is a huge win for HP,” said Andrew Efstathiou, a Yankee Group analyst.

P&G’s nod to HP is consistent with recent Yankee Group research that shows chief information officers (CIOs) having a very high regard for HP’s outsourcing services in terms of quality and scope, Efstathiou said.

CIOs have high praise for HP’s outsourcing skills particularly in networking, desktop and end user support and data center management and operation.

HP will take on many P&G IT tasks, but P&G will also continue to manage in-house “a significant portion” of its IT work, Jones said. Details on what IT work P&G will continue to handle in-house weren’t immediately available.

A variety of major IT service providers went after a very sought-after P&G outsourcing contract last year that was more comprehensive, and Affiliated Computer Services Inc. (ACS) and EDS both at different points went into final negotiations that eventually fizzled out.

After those negotiations failed, P&G decided to break last year’s bigger contract into four smaller pieces: an IT services deal, which was the one announced Friday; a facilities management contract to manage and maintain P&G’s buildings and real estate; an employee services contract to manage human resources tasks, such as payroll, benefits and corporate travel; and an accounts payable contract, Jones said.

P&G expects to award the facilities management contract within the next three to four months, while the other two will not be awarded for at least another 12 months, Jones said. None of those three contracts are primarily about IT services, he said.

However, the employee services and accounts payable contracts could have a significant IT component, so there could be opportunities for IT services vendors to be included, if not as the primary provider, at least as secondary providers, Yankee Group’s Efstathiou said.

P&G decided to break up the larger contract into smaller pieces because it decided it would be able to hire companies that specialize in each area and at a lower cost than if it chose one provider to handle everything, Jones said.

P&G, based in Cincinnati, is a giant maker of household products, such as Pampers diapers and Crest toothpaste.

In related news, Telefonaktiebolaget LM Ericsson signed a memorandum of understanding to outsource its IT infrastructure worldwide to HP, Ericsson announced Friday.

The companies expect to sign a final agreement before the end of 2003’s second quarter. Financial terms weren’t disclosed.

The agreement will involve the transfer of a yet undisclosed number of Ericsson IT employees to HP. Ericsson has decided to outsource IT tasks to lower costs and to improve its IT operations by making them more flexible and easier to adapt to changes in its business. The development, implementation and management of applications will not be outsourced, Ericsson said.

HP’s Compaq acquisition has broadened HP’s services skills and increased its recognition among customers, said Juergen Rottler, vice-president of marketing, strategy and alliances at HP Services.

“The merger has clearly positioned us at a different level in the marketplace,” he said.

HP’s chances of winning these two contracts would have been significantly lower before the Compaq acquisition, Rottler said.

“Today’s announcements will do a lot to diminish any remaining doubts about there being one key player in the industry that can beat IBM and does beat IBM, and that’s HP Services,” he said. “Customers want to see an alternative.”

When the P&G contract becomes final, P&G will become HP’s largest services client, and the contract will become the largest in HP’s services history, Rottler said.

Both P&G and Ericsson have heterogeneous, multi-vendor IT infrastructures, which will call for HP to manage equipment from a wide variety of providers, further proof that clients see HP as a company whose services expertise extends well beyond its own products, Rottler said.