AT&T has signed a $1 billion, seven-year outsourcing agreement to turn certain information technology operations over to Computer Sciences Corp (CSC) as a cost-cutting move.
CSC will provide application development and maintenance for 150 applications - such as billing, credit and customer care - within AT&T's consumer services division.
The agreement reached this month calls for more than 600 AT&T employees in New Jersey and Texas will work for El Segundo, California-based CSC.
AT&T's contract replaces a 10-year, $300 million outsourcing deal that the communications company signed with CSC in March 1999.
Ironically, IT vendors, which tout their technical expertise, are increasingly using outside parties for support services while their internal IT staff works on higher-priority projects, said Albert Nekimken, an analyst at Input, a market research firm in Vienna, Virginia.
For instance, Electronic Data Systems, and MCI WorldCom signed a two-way outsourcing deal worth $12.4 billion last October.
"All of the IT companies in recent years have discovered that the benefits of outsourcing apply to them as well," Nekimken said. "AT&T decided that it had other things that were [of] higher value to do."
According to Input, the market for IT support services is projected to grow from $35 billion this year to $121 billion five years from now.
Details are guarded
For competitive reasons, AT&T is closely guarding the details of its arrangement with CSC. But AT&T spokeswoman Lee Ann Kuster said the deal is part of CEO Michael Armstrong's plan to reduce costs by $2 billion this year.
Kuster couldn't say how much money AT&T would save from this deal, but she did say the company would save labor, systems support and management costs. In addition, outsourcing would allow AT&T to tap CSC's expertise in application management while its own staff concentrates on core projects.
So how exactly does spending $100 million per year save a company money? "The assumption is that [AT&T] will earn more money by taking other work for other companies, presumably at a higher margin," Nekimken said. He added that vendors guard information about their own outsourcing so it doesn't appear that they lack enough people to handle their own IT needs.
Howard Rubin, research fellow at Meta Group, said that companies in the telecommunications and financial services industries are under pressure to outsource to compete with startups.