Services Market In Slump, Despite Big DealsServices Market In Slump, Despite Big Deals

While most hardware and software vendors are struggling to land new customers in a dismal economy, two major outsourcers said last week they're signing or negotiating billion-dollar deals. Canadian Imperial Bank of Commerce inked a $1.3 billion IT outsourcing pact with Hewlett-Packard that includes selling its share back to HP in a 4-year-old partnership designed to deliver IT services to other companies. An even bigger deal is in the final stages of negotiations: Procter & Gamble Co. is again haggling over the details of an outsourcing deal with No. 2 outsourcer EDS Corp. valued at $7 billion to $8 billion over 10 years--two months after EDS walked away from the table.

The outsourcing market took in $120 billion in revenue last year and is growing at 15% to 20% annually, Meta Group estimates. However, despite the growth projection and these large deals, outsourcing executives say their market is turning sour. EDS last week said third-quarter earnings would be far short of projections, which led to a precipitous drop in its stock price. EDS chairman and CEO Richard Brown told analysts that customer spending has come to a "screeching halt."

Ann Livermore, executive VP of HP Services, also says that business-technology managers, for the most part, aren't spending much on IT services these days. The agreement with CIBC represents HP's largest services deal, and Livermore is optimistic it will help HP lure new customers, calling it "a significant proof point."

For CIBC, signing a conventional IT infrastructure outsourcing deal marks a shift away from trying to make IT services a revenue center. Says CIO Mike Woeller, "It will free up capital and management time from noncore business."