Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 28, 1995 TAG: 9505270001
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: LOUISE LEE THE WALL STREET JOURNAL
DATELINE: LENGTH: Long
In practice, it is another matter.
Consider Southern Pacific Rail Corp., which last year hired an International Business Machines Corp. unit to handle its computing for the next decade. Computer breakdowns delayed accounting reports, and when connections failed at a major California rail-car switching yard, a technician was left to direct 1,200 cars a day by hand. On other occasions, Southern Pacific's maintenance director has had to wait for weeks for help from IBM's distant workers.
``IBM has not very successfully met any expectations,'' said Roy Carlson, a Southern Pacific manager who used to oversee computer systems. ``It's not seen as a successful relationship.'' An IBM official blamed the problems on his company's inexperience in dealing with railroads, and said performance has improved in the past few months.
Some Southern Pacific workers believe that the railroad's problems may have resulted from IBM's stinginess, such as allotting too few managers during the early stages. Others say IBM has been slow to beef up the software-development staff. While a few new software programs, such as a power-distribution system for locomotives, have been installed successfully, others are running months behind schedule.
Most firms expect things to be different when they pay hundreds of millions - or even billions - of dollars to turn over their computer systems to the experts. Such established companies as IBM's Integrated Systems Solutions Corp. unit or Electronic Data Systems Corp., a unit of General Motors Corp., promise more efficient systems, tailored software and lower costs.
The allure is so powerful that 40 percent of the Fortune 25 corporations have farmed out at least part of their computer systems, according to the Yankee Group, a Boston-based market-research firm. The frenzy has been especially pronounced in the past two years, producing such high-profile deals as Xerox Corp.'s $3 billion, 10-year pact calling for Electronic Data Systems Corp. to run its worldwide computer systems. And the $16 billion annual market for such services is expected to more than double in five years.
Why? For companies that have grown weary of running their own internal computer system, outside firms can routinely handle such tasks as installing systems for payroll or billing, or managing data-processing centers. Besides taking on the company's computer department, some computer-service companies run other areas, such as the customer service center.
Some companies, however, find that rent-a-techs often know little about how their industries work or about their individual corporate cultures. Furthermore, hiring an outsider may not even save the companies money in the long run.
Rudy Hirschheim, a University of Houston professor who studied 14 Fortune 500 companies that hired outsiders from 1984 to 1993, said that, ``seven or eight years out, companies are paying for services through the nose.''
Some of the assumptions about computer-services companies' cost-cutting abilities, such as buying computers at a discount, also are questionable. Large companies, Hirschheim said, should be able to get similar price breaks.
Once the contracts are in force, companies learn that breaking up is hard to do. After 25 years with EDS, Blue Shield of California concluded last year that EDS' performance was so poor that it needed a change. But it couldn't just dump EDS because EDS knows more about its computer systems than Blue Shield itself. ``We were sticking together for the sake of the children,'' said Cora Tellez, a senior vice president at the San Francisco health maintenance organization.
Such concerns ultimately could make it harder for computer-services companies to get customers. Great Western Financial Corp., for instance, last year considered bids from four companies before deciding to stick with its own 400-employee computer-systems department. The thrift didn't think an outsider would save enough to make the effort worthwhile, and there was ``fear over the control we'd supposedly give up,'' said Jesse L. King, controller.
Still, many customers are pleased with the results they have gotten from computer-services companies. Bethlehem Steel Corp. hired EDS in 1993 under a 10-year, $500 million contract when it was spending about $100 million a year on its computer operations. It credits EDS with bringing it up to speed technologically and helping it boost revenue.
Among the major accomplishments: EDS has combined Bethlehem's two data-processing centers and strung miles of fiber-optic cables for a high-speed data and video network linking field offices to headquarters in Bethlehem, Pa. ``We absolutely made the right decision,'' said Curtis H. Barnette, Bethlehem's chairman. ``We have no second thoughts.''
Among EDS customers who aren't so happy is the Dallas Market Center, a group of wholesale merchandise centers. It broke off a 10-year contract with EDS at the halfway point in 1993, concluding that it could cut costs if it brought computer operations back in-house. ``EDS was expensive for us,'' said Michael Harrison, a Market Center manager, who estimated the company is saving $500,000 a year.
Splitting with EDS wasn't simple: The Market Center had to hire another consulting firm to help it convert, a job that took 10 months. EDS declined to comment.
Intimidated by the difficulty of replacing EDS, Blue Shield of California decided instead to renegotiate its pact, better defining EDS' responsibilities and Blue Shield's expectations. ``That was lacking in the past,'' said Pat McCaffrey, the EDS manager who oversees the Blue Shield account.
Before the contract was reworked, the relationship had deteriorated. Computers at the claims-processing centers were down frequently, requiring Blue Shield workers to put in costly overtime. Blue Shield had brought the desktop computer operations back in-house, forcing the company to hire more people. Though it was ``outsourcing,'' Blue Shield last year had 200 people on its in-house computer staff, including employees hired to monitor the 100 EDS workers, said Tellez, the senior vice president.
``By last June, it was finger-pointing galore'' on both sides, she said.
EDS concedes that Blue Shield was duplicating some work, but ``it's not unusual for the customer to add resources when issues come up,'' McCaffrey said. And excessive computer downtime may have been due to a ``major system implementation'' between 1991 and 1993, he says.
Under the revised contract, EDS got the desktop-computer operations back. But it also faces more detailed performance requirements, and far stricter financial penalties when it doesn't meet specific standards.
In negotiating computing contracts, companies have ``to differentiate between the marketing hype and delivery capabilities,'' said Harry Glasspiegel, a partner at the Washington-based law firm Shaw, Pittman, Potts & Trowbridge, which represents companies seeking computer services.
In retrospect, Southern Pacific may have failed to do that. A newcomer to computer services, the rail company signed a $415 million contract in 1993 for IBM to manage its data center. IBM also took over the railroad's software-development department and the ``help desk,'' where railroad employees call when their computers break down. The 300 railroad workers in these operations became IBM employees.
Before the railroad hired IBM, help for a computer problem was literally one floor away. Today, it's 1,300 miles away at IBM offices in Boulder, Colo. ``You can't run downstairs and slap someone on the head,'' as in the past, said Carl Brasher, the railroad's assistant controller. IBM is reachable via a toll-free telephone line.
But when Southern Pacific workers call, they say, they don't get much assistance. Charles Arana, a maintenance director, said that when a software glitch was sending electronic-mail messages to the wrong destination, he tried calling IBM technicians directly. He would be routed back to the help desk, however, where workers simply log calls and ask someone else to return them.
Bob Zapfel, a vice president at IBM's computer-services unit, said the help desk is primarily supposed to serve IBM employees working on the Southern Pacific account, not railroad employees. But the railroad workers said it is the only place to go for aid for fussy computers.
Southern Pacific has other complaints about IBM. Railroad officials said that IBM has brought in bureaucracy, such as requiring written requests for a software upgrade, which used to get done with an informal query. Others complain that IBM doesn't respond quickly to problems.
by CNB