Before You Sign—Options and Opportunity in IBM’s Latest Reinvention

Pillsbury - Global Sourcing Practice

Major mergers and spin-offs by IT service providers are rare, but when they occur (e.g., Xerox’s acquisition of ACS in 2010 and Atos’ subsequent acquisition in 2014, HPE’s 2017 spin-off of its Enterprise Services business and merger with CSC in the form of DXC), pause and consider your options. These are major corporate events that generally redirect a supplier’s focus and internal attention on change management, creating a new business model and developing a corporate culture—not easy stuff and in some cases can have a direct impact on “how” and “how well” services are provided to customers. At a minimum, important contracting work may preserve commitments and benefits of your existing deal.

On October 8, 2020, IBM announced a plan to spin off its Managed Infrastructure Services (MIS) business, which is part of its Global Technology Services (GTS) division, into a new publicly traded company (NewCo). IBM outsourcing deals are typically complex arrangements involving the many facets of IBM’s business (including hardware, software, services and cloud) and the spin-off will, at a minimum, require a novation, and is likely to split many customer relationships between IBM and NewCo. For some customers, this may be an opportunity to assess its current relationship with IBM/Newco (e.g., exercise change in control provisions to improve or terminate existing agreements) and certainly better understand “how” and “how well” your services are going to be delivered in the future.

IBM states that NewCo “will immediately be the world’s leading managed infrastructure services provider” with $19B in annual revenue. The purpose of the spin-off includes making NewCo nimbler, and more efficient and responsive to the market. Time will tell. Between 2008 and 2020, IBM Services (which includes GTS) has been in a long slide in both revenue and market share. IBM Services has slipped 29 percent from $59B in revenue in 2008 to $42B in 2020 (including GTS revenue slipping almost 34%).

Over the same period, IBM Services’ nine major IT services competitors doubled their revenue from ~$81B to ~$165B.

IBM and NewCo will soon be approaching GTS customers to begin the process of amending customer contracts (i.e., novating the contract to NewCo and/or splitting the contract between IBM and NewCo). Current IBM customers, like any customers where the change-in-control provision has been triggered, have essentially three options to consider:

  1. All is good, just correctly process the paperwork. You’re a happy customer. Great! Your contract will still need to be assigned and likely amended while making sure nothing is inadvertently lost or broken in the process. In fact, in some cases, your contract will need to be split into two contracts—one with IBM and one with NewCo—which may raise important topics worthy of discussion that may impact your “new” contracts (e.g., governance, volume discounts). It is best to get some help with this from someone who has been through it before.
  2. Things are mostly good, but what’s in it for me? You are reasonably content with IBM’s performance and pricing or in any event you are not interested at this time in switching out your horse mid-race. This is a good opportunity to recalibrate, make improvements and seek assurances that your services will not be adversely impacted as a result of the spin-off. Are you concerned about service performance? Are your prices above market? CMDB out of whack? Now is when you need market information, insights on what is rational to negotiate for, and a strategy to leverage this opportunity to reset your agreement so it works for both parties.
  3. It’s time for a change. You are a frustrated customer looking for an opportunity to accelerate a separation on reasonable terms. Maybe things will get better under NewCo, but you don’t want to wait to find out. You need to fully assess your options for exiting while making sure you have an alternate plan lined up.

Whether you are customer 1, 2 or 3, assess your situation and consider how to best mitigate risk and capture opportunity for your organization.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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