Deutsche Post Kills Huge HP Outsourcing Deal

Deutsche Post World Net has backed out of a planned IT outsourcing megadeal with Hewlett-Packard worth billions of dollars, InformationWeek has learned.

Deutsche Post, the German logistics company and parent to DHL, chose not to finalize the contract after a six-month review found the "benefits, particularly in the early years, do not outweigh the risks," according to an internal memo.

It's a considerable blow to HP, which has had limited success winning IT services megadeals. HP plans to propel itself into the IT services big leagues via the pending acquisition of EDS for $13.9 billion.

The dropped outsourcing deal called for HP to hire 2,500 Deutsche Post employees, including those working for DHL. It included taking over the operations and management of data, infrastructure, networks, and software running in data centers in Scottsdale, Ariz.; Prague, the Czech Republic; Malaysia; and other regions.

Although the companies didn't make the contract size public in January, when they announced the signing of a letter of intent, they said Deutsche Post would save at least 1 billion euros over seven years by outsourcing IT and expected to reach a "definitive agreement" with HP by the middle of 2008.

Analysts had lauded the significance of the deal. In a January research note titled, "HP-Deutsche Post Agreement May Herald Fresh Outsourcing Wave," Gartner analyst Claudio Da Rold wrote that the planned deal signified that the "threat of a recession means outsourcing providers may see a period of intense activity as companies race to sign similar deals."

But the cost savings apparently weren't there. In a July 21 e-mail to employees, Stephen McGuckin, IT services managing director at Deutsche Post, wrote that the deal had fallen through partly because it wasn't going to bring Deutsche Post the expected savings.

During the past six months, "both companies have learnt much about the challenges, risks and benefits of the proposed outsourcing. More significantly ... [Deutsche Post] IT Services continued to improve its cost position, increased the number of services delivered while also maintaining service levels. Simply put, during the six months of the evaluation, our improving cost position made HP's job that much harder and their cost reduction target that much more difficult to achieve."

McGuckin added that the decision is "not a reflection of HP's merits as a service provider; it is a vote of confidence in [Deutsche Post] IT Services and our track record of service delivery." McGuckin and other Deutsche Post officials could not be reached Friday morning.

However, there were other issues at play, according to sources within Deutsche Post that requested anonymity. HP was having some difficulty negotiating with IBM -- a staunch IT services competitor -- for acceptable prices on existing IBM server and mainframe software and support in the data centers, they claim. Also, some employees raised concerns about HP's compensation packages.

InformationWeek was unable to get a response from HP or Deutsche Post about these claims Friday.

HP did confirm Friday that the deal was off, but said it's still working with the company. "The [Deutsche Post] and HP teams working on the project identified a number of areas where optimization can be achieved without outsourcing at this time," an HP spokesperson said in an e-mail. "As a result, [Deutsche Post] IT services will continue to retain responsibility for all day-to-day services while working with HP's support to deliver the savings through a series of transformation projects." The companies have a "strong relationship" and "jointly agreed to revisit the situation if and when appropriate at a future time," the spokesperson added.

HP, meanwhile, should get into big IT outsourcing deals via the planned EDS acquisition. If the deal goes through, EDS will give HP blue-chip customers like American Airlines, Bank of America, and Royal Dutch Shell. The combined services revenue for EDS and HP last year was $38 billion, compared with $54 billion for IBM.

Earlier this week, EDS said that Europe's antitrust watchdog agency had OK'd the deal. On Thursday, EDS said a majority of its shareholders voted in favor of the acquisition.