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A CSC-led consortium has failed to reach an agreement with the German Ministry of Defense over a planned $7.3bn IT and communications outsourcing contract. The failure highlights both the level of caution displayed by the German government toward outsourcing, and the increasing reluctance for outsourcing vendors to take on mega-deals without sufficient rewards.

Computer Sciences Corp [CSC] leads the ISIC 21 consortium, which in April 2002 was named as the preferred bidder for the Project Herkules contract. Talks between the German Ministry of Defense and ISIC 21 broke down on Thursday because they could not agree on pricing.

CSC started the bidding process for the contract back in 2000, and the costs of competing for and negotiating the deal have been an ultimately fruitless drain on the company's resources for four years.

The refusal to agree final terms with ISIC 21 underlines the greater caution with which the country's public and private sector organizations approach outsourcing. CSC and its rivals IBM Global Services and EDS have all failed to replicate the financial success of their multi-billion-dollar US and UK outsourcing businesses in Germany.

The Germans' caution is highlighted by the timetable set by the UK Ministry of Defence, which is currently assessing bids for a £5bn IT infrastructure outsourcing contract. CSC is leading another consortium pitching for the UK deal, which it expects to be awarded in early 2005, having been put out to tender in April 2003.

The breakdown in negotiations also reflects the increasing caution among outsourcing vendors towards taking on long-term mega-deals. The recent financial problems suffered by EDS, in part triggered by its inability to generate a profit from its landmark contract with the US Navy and Marines, have highlighted that the development costs and operating risks of managing major deals often outweigh the expected profits.

CSC's experience in Germany could deter the global outsourcing vendor community from pursuing any future deals in the country, and particularly with central government agencies. However, the Ministry is now expected to re-open talks with a rival consortium including IBM, Siemens, and Deutsche Telekom, which unsuccessfully bid against ISIC 21 three years ago.

Source: ComputerWire/Datamonitor

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