Will Westpac renew its IBM vows?

Summary:Westpac's US$2.3 billion 10-year contract with IBM for IT services is coming to an end. Will Westpac divorce or renew its vows with the big blue giant?

Westpac's US$2.3 billion 10-year contract with IBM for IT services is coming to an end. Will Westpac divorce or renew its vows with the big blue giant?

Westpac's CEO Gail Kelly and IBM's ANZ MD Glen Boreham

Westpac's CEO Gail Kelly and IBM's ANZ MD Glen Boreham (Credit: IBM and Westpac)

It's the US$2.3 billion dollar question, and a question neither company will take a position on.

Jane Counsel, senior media relations manager, corporate affairs and sustainability at Westpac told ZDNet.com.au that the bank's IT services contract with IBM expires March next year. "We have been having ongoing discussions with IBM for some time about the future of the contract," Counsel said. "No decision has been made about the future status of the IBM contract."

An announcement would be made before the current contract expired, she said. The bank couldn't make any further comment for "reasons of commercial confidentiality". As for IBM, in an official company statement to ZDNet.com.au it said it did "not comment on confidential client contracts".

Yet Westpac's chief executive officer (CEO) Gail Kelly has been on the record hinting at the possibility that IBM might have to fight to get the whole pie this time around.

"Ten years ago there were a number of large institutions that went for the all-in outsourcing arrangement, but I think that the models have changed," Computerworld quoted Kelly as saying. "I think one is much more likely to look at the different elements and make sure you have the right partner for all the elements — your desktop may be a different solution to your main frame for example.

If Westpac opted for another provider, both organisations would have to invest significant resources in the first 12 months to establish a sound performance base.

IBRS analyst Alan Hansell

"But, we have a good relationship with IBM and [CIO] Bob McKinnon and his team have been working extensively on that relationship with IBM and it's been very healthy over the course of this year so I feel comfortable with that," Kelly said.

According to Westpac's website, the last ten years have seen the company signing a number of deals with vendors including HCL Australia and HP Enterprise Services for various functions, ranging from back-office support services to print management services or cheque processing services.

The Westpac website also states that the value of the IBM contract commitment "is unable to be reliably measured as Westpac's obligations are dependent upon business volumes over the period of the contract". So has IBM's responsibility changed significantly? Would Westpac consider moving to another provider?

Intelligent Business Research Services (IBRS) analyst Alan Hansell said he saw IBM as the "low risk" option for Westpac going into the future.

"IBM has the people with the knowledge of Westpac's IT infrastructure and its integration with its business systems," Hansell said. "If Westpac opted for another provider, both organisations would have to invest significant resources in the first 12 months to establish a sound performance base."

Hansell said that in today's competitive banking and finance arena that was an expense and distraction Westpac could "do without". It was a point Cyrus Daruwala, Asia-Pacific managing director for IDC subsidiary Financial Insights, agreed with.

"I would say it would be a safer bet for them to continue with IBM given the fact that there is a certain level of KPIs [key performance indicators] and service level agreements that have been hit with this outsourcing deal," Daruwala said. "Looking at the assessments we've done both from the Westpac side of things as well as the IBM project management side of things, those service level agreements were adhered to and the KPIs were hit," he said.

Unless they've already been to market and been negotiating their requirements with various service providers they'll have no choice but to renew.

Gartner analyst Jim Longwood

He also pointed to the risk of going to market.

"Would Westpac, given its unbridled gusto of expansion and enthusiasm of ramping-up and what have you, and becoming customer-centric, would they have the time, the bandwidth, and even the people, to assess a brand new partner?," he said.

"Imagine ripping out that entire familiarity, putting in a brand new set of customers with absolutely no familiarity, no end-user knowledge: It will take the other outsourcee at least a couple of years to understand the dynamics of Westpac. That's a couple of years too many," Daruwala said.

Gartner analyst Jim Longwood said that whenever contracts expired, he recommended clients reassessed their sourcing strategy and went back to market. In the case of Westpac, things had changed "so much in ten years".

"To give you an example, when the deal was signed ten years ago it was for what I would describe as a first-generation outsourcing deal with some typical kinds of problems and challenges of first-generation deals," Longwood said. "And these days we're into what I call third-generation deals and, you know, best practices have changed significantly in that time."

One of the changes had been views on how long a contract should be.

"It locks them in for too long, too rigid, they don't have access to the new services coming through," Longwood said of ten-year contracts. "So in hindsight, we know that that's bad practice."

Deals could become "stuck" in a form of stagnant matrimony, according to Longwood. "I see a lot of deals where its a bit like a marriage," he said. "They're stuck in a marriage: They're not working on improving or keeping the marriage on good terms so to speak.

"It's hard to swap out of marriages, divorce costs are high. Switching costs in outsourcing are high as well. So you hit a trough of disillusionment in these and you get stuck in it for a while," he said.

It's hard to swap out of marriages, divorce costs are high. Switching costs in outsourcing are high as well.

Gartner analyst Alan Longwood

This is why Longwood said going back to market — or at least threatening to go to market — was a good idea for Westpac.

"By going to market it actually forces them [IBM] — or the threat of going to market — forces them to come in with the latest best practices, most cost-effective infrastructure and the best offerings. And that's what we saw happening in the South Australian Government when they came back to market after their single source with EDS," he said.

Longwood also said clients could save anywhere between five and ten per cent when they renegotiated their contract.

"If a client has a good deal with a service provider that they've benchmarked and shown that they're getting value for money, good service levels and they have a good relationship then typically we recommend they renegotiate," he said.

Going back to market would cost Westpac three to five per cent of its annual deal costs, according to Longwood, which meant it would consider renegotiation carefully.

Other factors than cost could also enter into a decision according to Financial Insight's Daruwala, such as IBM's alleged plans to move up to 800 of its Australian jobs to low-cost centres in China and India.

"If IBM made it amply clear that they are going to go offshore and move most of their datacentres and applications support say to Shanghai or to Bangalore, I think that may be a big deterrent for Westpac," he said, although he admitted that the bank could say it wasn't its problem what another business did.

"I think maybe if there's a rumour flying about that, [Westpac] would nip it in the bud by saying, 'Sure IBM does what it does, but that has no consequences or effects on the Westpac-specific outsourcing deal, because that is all well and alive, be it in some other offshore location or Australia'," Daruwala said.

And if Westpac doesn't go with IBM?

Companies suggested for multi-sourcing by the analysts included CSC, Unisys, HP Enterprise Services, Fujitsu, Dimension Data and Lockheed Martin.

"There are others, such as Datacom, who might bid for specialised services such as call centre and desktop support in which they have a track record," said IBRS' Hansell.

Gartner's Longwood said if Westpac were to go "best of breed" Fujitsu or Unisys "might be a contender for the desktop".

Financial Insight's Daruwala suggested HP Enterprise Services as being the only option, but he didn't believe it was a "real" option for Westpac.

"EDS is a services company. HP has deliberately and sensibly bought a services company to augment their entire set of offering. HP is famous with the desktop management, infrastructure management and outsourcing deals. But if you look at business acumen with growing with a certain bank, IBM ends up scoring a little more than HP would right now," he said.

But if you look at business acumen with growing with a certain bank, IBM ends up scoring a little more than HP would right now.

Financial Insight analyst Cyrus Daruwala

Corporate affairs executive at IT services company CSC, Jacqueline Fisher, told ZDNet.com.au that it would not comment on whether it was in discussions with Westpac over its IT services contract, other than to say it was involved in the implementation of Westpac's Hogan core banking system.

Unisys was even more cautious with its response. "We can neither confirm nor deny," Unisys head of communications, Asia Pacific, Claire Hosegood said on whether it had approached Westpac on the IT services contract. "It would be up to Westpac to make any comment about who has bid for their business."

Fujitsu media and PR specialist Angela Coombes was unable to comment, whilst HP Enterprise Services PR manager, South Pacific, Paula Driscoll said ZDNet.com.au should refer its inquiries to Westpac. Dimension Data had not responded in time for publication, and neither had Datacom or Lockheed Martin.

Whether Westpac is in negotiations with any company remains a mystery. But in order to sign a new contract they would have to be in such negotiations right now, according to Gartner's Longwood.

"You typically need around the 12 to 18 months to go to market to evaluate, select and then there's quite a long lead time for switching service providers," he said. "Unless they've already been to market and been negotiating their requirements with various service providers they'll have no choice but to renew."

Topics: IBM, Banking, Outsourcing

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