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 agreement.

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 million.

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 Tribune today.

“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 them.”

Cuddy was unable to specify how far the cost savings fell short of projections.

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.

Posted 1/3/2008