Sprint expands outsourcing relationship with IBM: carrier expected to leverage $400 million deal for new enterprise business

America's Network, August 1, 2004 by Al Senia

Sprint and IBM have significantly expanded an existing outsourcing arrangement, an indication that Sprint intends to get even more serious about improving its customer service in both its wireline and wireless operations. But there could be a price involved.

In early July, Sprint concluded a five-year, $400 million deal with IBM Global Services that is intended to accelerate new product delivery to customers, as well as improve Sprint's overall business practices. Although details are sketchy, it appears new e-commerce and Web apps for Sprint customers will come out of the arrangement. Approximately 1,000 Sprint IT employees are being transferred to IBM as part of the deal. The fact that Sprint is turning to IBM for its application development appears to be a key element of the pact.

DEEPER TIES

Sprint executives note that the deal deepens an ongoing relationship with IBM and allows Sprint to focus on core services. "By leveraging the expertise and technology of business partners like IBM, Sprint is able to focus on areas of growth and innovation," explains Michael Stout, Sprint's CIO.

The centerpiece of the agreement will see IBM take over application development and maintenance support for Sprint, which executives believe will allow the carrier to deliver better-differentiated products more efficiently. A Sprint spokesman explained that another key benefit involves tapping IBM's IT expertise to allow Sprint to achieve Capability Maturity Model Integration (CMMI) Level 3 certification for software application development and management. That's a fancy way of saying that Sprint will use IBM to institute better IT business practices.

"IBM is going to take steps to help Sprint cut costs and transform its business operations," explains Scott Stoffel, a company spokesman.

FINANCIAL BET

All well and good, but as Sprint gets more aggressive with its outsourcing, the financial bet grows larger. Sprint first announced IT service contracts with IBM and EDS last September. In February, Sprint and IBM announced a five- year, multibillion-dollar agreement to turn over Sprint's customer care operations to IBM.

The latest deal shows that Sprint is satisfied with IBM and comfortable with outsourcing even more of its operations, although it represents something of a risk for the carrier.

"This is really turning into a partnership," explains Eric Paulak, research vice president with Gartner, Inc. "The strategy sounds good, it's taking advantage of the relationship they have, but there are weaknesses here."

One of the inherent weaknesses, Paulak notes, is financial: Sprint is paying IBM $400 million over the next five years and will realize some financial savings, but there's no guarantee the agreement will generate massive new business. IBM, Paulak notes, has committed to bring Sprint to the table on a specified number of potential business deals, but there's no revenue guarantee from IBM involved.

"They are kind of betting the farm here," says Paulak.

On the other hand, Sprint is known as a conservative company and is leveraging IBM's reputation to claw its way into the enterprise market. That could pay off long term.

"They are trying to differentiate themselves from the RBOCs who are trying to take away their business," says Paulak. "The question is, who is bringing who business here? Sprint needs a sales force that provides it access to top (enterprise) opportunities." IBM just might end up helping Sprint fulfill that challenging task.

FAST FACTS:

Sprint and IBM partner up:

* New $400 million contract runs for five years.

* Expands existing relationship to include IBM
application development.

* Sprint gains cost savings and efficiencies.

* IBM provides access to potential enterprise accounts.