Energy services firm drops outsourcing deal with AT&T

McDermott International Inc., a New Orleans-based energy services and engineering company, today confirmed that it plans to drop what was supposed to be a 10-year-old global IT outsourcing deal with AT&T Corp.'s professional services unit and take back control of the technology operations just two years after signing the contract.

According to an internal memo obtained by Computerworld, the US$600 million outsourcing agreement between McDermott and Basking Ridge, New Jersey-based AT&T Solutions will be terminated effective Sept. 30. After that date, the memo said, responsibility for IT design, implementation and management services provided by AT&T will revert to McDermott.

"We are bringing our IT operations in-house," said McDermott spokesman Don Washington, who confirmed the information detailed in the memo. The document said the company also plans to evaluate other agreements with contractors and vendors providing IT services "to determine if those relationships will be extended or amended." Washington declined to identify any of the vendors beyond AT&T.

The outsourcing deal with AT&T was announced in early 1999 and was supposed to run for 10 years. But Washington said McDermott, which did $1.9 billion worth of business last year and today reported revenue of $928.5 million for the first half of this year, decided it could more effectively and efficiently manage the IT operations on its own.

The change of heart followed a series of top-level management changes at McDermott during the past 12 months, including the hiring of a new chief executive officer (CEO), a new chief financial officer (CFO) and a new head of IT. "Things change, leadership changes," Washington said.

AT&T spokesman Mike Cuno said the two companies had been in the process of renegotiating the outsourcing deal with an eye toward continuing the arrangement. "But ... corporate leadership changes, and McDermott decided that what was appropriate three years ago is not appropriate today," he said.

Cuno said it's common for users to periodically renegotiate contracts but unusual to have deals terminated altogether. However, AT&T Solutions is "in the business of serving our clients," he added. "If a client doesn't think [something] is right for them, we want to find a way to productively work with them."

Both Washington and Cuno said AT&T will continue to manage wide-area voice and data networking for McDermott under a separate agreement signed in 1995. But the outsourcing contract went much further, giving AT&T responsibility for 10,000 PCs and 350 servers at McDermott, as well as its LANs, end-to-end network management and some business applications. About 280 IT workers switched from McDermott to AT&T as part of the deal.

The internal memo said McDermott "will immediately begin to evaluate staffing requirements" in connection with the ending of the outsourcing agreement. The company expects to offer jobs to nearly all the AT&T employees who currently support its IT operations, Washington said, although he added that final hiring decisions will be based on the needs of individual facilities.

Washington declined to comment on the financial implications of the contract termination, but he said the computers and other IT assets now being managed by AT&T will be included in the transfer of those duties back to McDermott. "We will not be going out and buying new systems," he said.

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