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Technology Stocks : IBM
IBM 306.44-1.9%Nov 7 9:30 AM EST
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To: Don Hurst who wrote (8009)9/21/2004 4:33:12 PM
From: Arrow Hd.   of 8218
 
Don, sorry for the delay, just saw the note.
This is a complicated subject. Anytime you lose a big contract or it gets modified that is a problem for revenues and margins. That said, I don't think it is the demise of these kind of deals. A much bigger problem was when IBM, EDS, and others fought each other to the point that each one of these deals was unprofitable for at least many years. Now they are profitable to IBM, or IBM doesn't do them, but that also means that a well managed company could continue to do the work in-house and beat an outsourcing deal. Some of these large customers are starting to think that they can do it cheaper now and may want to go back to in-house operations. But it is not that easy. The infrastructure, including people, were transferred to the service provider and unless the company was skilled at writing contracts that provide for a seamless repair of the deal there is a lot of breakage involved in going back in-house. For instance, IBM would keep the most skilled employees and move them into a consulting role at some other customer.
I believe there will continue to be a need for outsourcing and it will be the low cost solution for a lot of companies but the financial attraction is not as great today and the outsourcing business is starting to mature so it will not be as dynamic as it was a few years ago but it will be stable and much more profitable. Just an opinion.
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