By KEVIN NEVERS
Two and a half years after NiSource Inc. reached a 10-year $1.6 billion
outsourcing agreement with IBM—and eliminated more than 5 percent of its
employees corporate-wide—the company is conceding that the originally
projected cost savings will not be realized under that agreement.
NiSource has accordingly amended that agreement with IBM and will assume
responsibility once again for a range of business support functions which IBM
has been performing.
“With this amended agreement in place, we’re on a path to more effectively
manage our employees and administrative expenses, while ensuring delivery of
services needed to meet the company’s needs,” NiSource President and CEO
Robert Skaggs Jr. said in a statement released last month.
Under the amended agreement, IBM will continue to “focus on information
technology operations,” one of the twofold components of the original
When inked in the summer of 2005, that agreement was projected to save
NiSource on the order of $530 million in operating and capital expenses over
its 10-year lifetime, while earning for IBM $1.6 billion in service fees and
project costs. Outsourced to IBM, under the agreement: business support
functions like human resource administration, payroll, accounts payable,
procurement, sales cents, and billing and collections.
In Indiana the positions of 84 NiSource employees were eliminated as a result
of the outsourcing, while another 66 employees were offered jobs with IBM or
its subcontractors. Of the 8,500 people then employed by NiSource in the 20
or states in which it has subsidiary operations, 445 of them lost their jobs,
while 572 were offered positions with IBM or its subcontractors. In short,
the outsourcing in one or another affected the positions of nearly 12 percent
of those employed by NiSource or its subsidiaries.
At the time NiSource estimated that the business support functions which it
outsourced to IBM—plus the “transformational” information technologies which
it was supposed to receive from IBM—would have cost the company in excess of
$2 billion had it not struck the deal, hence the estimated savings of $530
According to a Dec. 12 filing with the U.S. Securities and Exchange
Commission (SEC), however, “the cost savings expected under the original
outsourcing agreement will not be achieved,” due at least partly to the
unforeseen delay in implementing “certain information technology systems.”
NiSource did not indicate in the filing whether and why the cost savings
initially expected of the outsourcing in particular failed to materialize.
“It came to a point where we thought it would be better to look at the
overall contract and look at ways to better utilize IBM’s strength, which is
(information technology),” NiSource spokesman Tom Cuddy told the Chesterton
“It’s not unusual to restructure multi-year service agreements,” Cuddy noted,
“to make sure expectations are in line with current business needs and
operations. The important thing to remember is that information technology is
one of IBM’s core strengths and we remain committed to our relationship with
Cuddy was unable to specify how far the cost savings fell short of
Under the amended agreement, NiSource expects to pay IBM approximately $700
million in service fees and project costs over the remaining seven and half
years of the agreement. In addition, NiSource will incur the following
additional costs: an upfront cash payment of $44 million to IBM for the
acquisition of technology assets and in payment for future services; and
transition costs estimated at $10 million for the transfer of certain
business support functions back to the company.
“As I mentioned in NiSource’s third quarter earnings release, our team is
focused on clearing the decks and positioning the company for long-term,
sustainable growth,” Skaggs said. “This restructuring represents another
important step in that process. Going forward, we remain committed to
enhancing and expanding NiSource’s core strategic assets, executing on an
array of promising growth projects, and synchronizing our investments with
complementary commercial and regulatory initiatives.”
NiSource will transition the various business support functions back to the
company on a phased basis through 2008, and indeed as early as last year “had
already begun to bring certain finance and accounting functions back within
the company,” including general accounting, fixed assets, and budgeting,
NiSource indicated in its filing with the SEC.
IBM, on the other hand, will retain “interim operational responsibility” for
NiSource’s Customer Contact Center, NiSource also indicated in that filing,
although the company intends to deal directly with Vertex, which currently
operates the center as a subcontractor for IBM.