InformationWeek

DuPont Goes Outside

Lured by outsourcing's new agenda--cut costs, add revenue, expand business--DuPont signs a $4B 'creative sourcing alternative'

By Bruce Caldwell and Marianne Kolbasuk McGee
Issue date: Dec. 16, 1996

One year after DuPont Co. decided not to outsource its computer operations, the chemical giant did an about-face when it announced last week that it will award outsourcing contracts worth more than $4 billion over 10 years to Computer Sciences Corp. and Andersen Consulting.

Why the reversal? This time, DuPont concluded that outsourcing will be good for business. CIO Cinda Hallman projects the contracts with CSC and Andersen eventually will cut DuPont's IT costs by 5% to 10%, bring in revenue by selling software developed for DuPont to other chemical companies, and help DuPont grow by supporting new international ventures. The cost savings alone could add 25 cents per share to DuPont's annual earnings, says Thom Brown, managing director at Philadelphia investment firm Rutherford, Brown & Catherwood Inc. DuPont, which earned $5.61 a share last year, is counting on the IT alliances to help the company meet its goal of doubling shareholder value by 2002.

DuPont's move reflects several trends in IT outsourcing. Not only has outsourcing's popularity taken off, it's also becoming more sophisticated--and more complicated. No longer is it a simple customer-outsourcer relationship. No longer is cutting costs the main motivation. Instead, compani es want to create new business through IS partnerships in which risks and profits are shared and all parties count on big financial gains. This model has appeared already indeals by Eastman Kodak, J.P. Morgan, Swiss Bank, and Xerox.

"We've reached the second level of maturity," says John Hammit, a former CIO at United Technologies and Pillsbury and now a senior VP at Giga Information Group, a Cambridge, Mass., research firm. "These creative deals have IS organizations taking the unique strengths of different firms to bring maximized benefit from an IT perspective."

DuPont's deals with CSC and Andersen, which will take effect in the second quarter of 1997, are so complex that Hallman won't even use the word "outsourcing" to describe them. She prefers to call them "creative sourcing alternatives." She envisions an "innovative alliance of the best of the best," where DuPont will "retain the roles of leader and integrator." Despite the projected cost savings, she adds, "costs have never been a driver. The driver is access to the skills and talent we need."

Multiple Vendors Preferred
Hallman's goals are what most IS managers say they want. More than 60% of 250 IS executives surveyed last summer by Dataquest Inc., a San Jose, Calif., research firm, said they prefer to have multiple vendors managed by in-house IS. Only 10% said they prefer to have a primary vendor managing subcontractors. The executives said the biggest benefit of outsourcing is greater access to technology skills, industry expertise, and application expertise; cutting IT costs was in last place.

Along with benefits, the new deals bring big risks. Because they are so complex and create such great expectations, the deals can be difficult to manage, Giga's Hammit says. "There aren't too many dead bodies around yet," he says--but he notes that it's still early.

In fact, megadeals have crumbled because of factors such as high costs, poor performance, or an acquisition of one of the parties. Last year, Kodak replaced Digital E quipment and Entex, two of the three vendors in the photo-products company's long-term outsourcing deal. Also, a joint IT venture between Delta Air Lines and AT&T Global Information Solutions was dissolved this year, when AT&T spun off its computer unit.

CSC is having trouble with one of its big customers--Mutual Life Insurance Co. of New York, which signed on with CSC in 1994. In response to an inquiry, the companies issued a statement last week saying they are "pursuing the resolution of contract differences... through internal discussions and, if necessary, private arbitration." An industry source says the insurer has complained that a plan to develop and sell IT products to the insurance industry hasn't worked out. DuPont says Hallman was briefed about the Mutual of New York situation and other CSC contracts.

The degree of control that DuPont will retain is significant. The company will keep 1,100 of its 4,200 IS staffers to manage the contracts and proprietary or critical areas, such as r esearch and development and process control. The internal IS operation will retain $290 million of DuPont's $690 million annual IS budget.

CSC is to be paid $3.5 billion over the 10-year contract. The El Segundo, Calif., services firm will acquire all of DuPont's IT infrastructure--13 data centers, 65,000 desk- top computers, and all of DuPont's networks--for about $52 million; it will use that infrastructure to offer global outsourcing services to other clients. CSC also is creating Horizon Initiative, a unit dedicated to the chemical and oil industries, by enlisting more than 100 industry experts from its consulting and systems-integration units.

DuPont will pay about $550 million to Andersen, which has extensive expertise and contracts in the chemical and oil industries. The Chicago consulting firm will focus on industry-specific application development and will have responsibility for applications at DuPont's $17 billion Conoco oil unit.

Andersen's work with DuPont and Dow Chemical, where Ande rsen has a contract for application management, is expected to result in application and processing services for environmental, health, and safety functions, says Kevin Campbell, a managing director at Andersen and leader of its DuPont team. Andersen also has a new offering Campbell calls a "joint venture in a box." It's a package of methodologies and financial systems for rapidly putting together the infrastructure needed for joint ventures DuPont plans to form in Asia.

DuPont's commitment to outsourcing marks a complete turnabout from a year ago, when Hallman's then-boss, Michael Emery, senior VP of integrated operations, declared that Hallman's consolidation and standardization efforts had made DuPont vastly more efficient than outsourcing experts could. Indeed, Hallman was named InformationWeek's Chief of the Year last year in large part because she had cut DuPont's IS budget by almost half from its 1992 level of $1.2 billion. Hallman declines to comment on the statements made by Emery, who retired la st month.

More recent opposition to outsourcing appeared when Archibald Dunham, Conoco's CEO, reportedly sent an E-mail message to top Conoco and DuPont managers, asserting that "outsourcing cannot become a substitute for real leadership." He urged the executives to "concentrate our energy and attention on making the valuable skills and capabilities we have in this company better, not on outsourcing them," according to the News Journal in Wilmington, Del., where DuPont is based.

Sources at DuPont say Dunham was persuaded to "go along." When the CSC and Andersen deals were announced, Dunham reportedly told Conoco staff in an E-mail that he had received assurances no IS jobs would be cut at the unit.

Shock And Dismay
Some of DuPont's IS employees still may be looking for reassurance. Some with special IT skills have received job offers from other companies with 50% pay increases, a DuPont source says, and are waiting for word on what DuPont's contractors will offer.

Van Honeycutt, CS C's CEO, says he's used to seeing his customers' employees go through "stages of surprise, shock, and dismay." Recruiters, he adds, "prey on the situation, but as it becomes real over the next 60 to 90 days, it is highly unlikely for people to fall out."

Already, a possible initial sign of their acceptance is that Hallman's awkward term for the new arrangement, "creative sourcing alternative," is already ingrained in DuPont's culture as "CSA."

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