IBM lands $1.6B services contract with energy supplier

Energy supplier NiSource signed a 10-year, $1.6 billion deal with IBM to outsource a number of IT support functions.

US energy supplier NiSource said Tuesday it has signed a 10-year agreement with IBM to outsource a number of IT support functions, a deal IBM estimated will be worth US$1.6 billion in service fees over the life of the contract.

IBM will begin service delivery on July 1. NiSource plans to transfer 572 employees to IBM or IBM's subcontractors and to eliminate another 445 positions over the next 18 months. The company estimated the arrangement with IBM will save itUS $530 million in operating and capital costs over the next decade.

NiSource operates more than a dozen subsidiary companies that collectively deliver natural gas and electricity to 3.7 million customers in the Midwest and Northeastern U.S. The arrangement with IBM will free NiSource to devote additional capital to its core energy operations, the company said. It will spend US$35 million on severance costs related to the outsourcing deal, and another US$35 million on transition costs. Over the life of the contract, it anticipates spending US$50 million on governing the deal.

IBM will handle some daily support functions for NiSource including human resources, accounting, supply chain, customer contact, billing and IT processes. The deal also includes strategic consulting services.

IBM Global Services, IBM's largest revenue generator, focuses on arranging such long-term outsourcing deals with enterprise customers. Other recent customer wins include a 10-year human resources administrative services outsourcing deal with auto parts manufacturer Dana Corp. and a 10-year engineering services arrangement with military contractor Honeywell International Inc.

Such deals carry risks for both parties, though: JPMorgan Chase & Co. cancelled a US$5 billion deal with IBM last year, less than two years into what was intended as a seven-year contract. Sears, Roebuck and Co. recently killed a US$1.6 billion deal with Computer Sciences, swapping acrimonious allegations with its former vendor about poor performance.

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