In this article: For more information on... Borden Foods to stick with outsourcing The closing of Litton Enterprise Solutions should be a wake up call for CIOs. Outsourcing is an intensely competitive business these days, and pricing is sharp.
Borden, the maker of Creamette, Prince, and other brands of pasta, had inked a 65-month, $28 million deal with Litton in February. Former IT chief Tom Nance had outsourced a wide variety of technology tasks to LES earlier this year, including development and operation of Borden's PeopleSoft Inc. (version 7.5) suite of financial, distribution, and manufacturing applications. LES was also responsible for managing Borden's Columbus data center operations and other applications in addition to the enterprise resource planning (ERP) package. Litton Industries' decision to exit the business leaves Borden, and other LES customers, with less than a year to find alternative arrangements. So much for a five-year contract.
Closing LES may have been inevitable. Litton CEO Michael Brown noted in June that the unit's fate was under review, since profitability levels were lower than its mainstay military equipment business. LES was formed in 1997 and had won a wide variety of outsourcing roles, including ERP operations, data center management, systems and network management, and electronic commerce integration services. It has more than 200 employees.
Sources say LES's downfall was due to the operation of a large, multimillion dollar data center in Woodland Hills, Calif. The company tried to be a full service provider, and its sales force was selling a wide variety of services. LES sources insist the company's outsourcing deals had reasonable profit margins, but the legacy data center costs dragged down profitability.
The closing of LES should be a wake up call for CIOs, though. Outsourcing is an intensely competitive business these days, and pricing is sharp. Competing against IBM, EDS, and a host of larger companies puts the horde of smaller players in a difficult situation. They have to bid low to get the jobs, but sometimes don't have enough volume to achieve the economies of scale in any one type of project necessary to make a profit. Some of the start-ups and recent entrants in the ERP outsourcing business, and the related Web-based ERP outsourcing approach known as applications service providers, may not be able to provide a long term solution to CIOs.
Phil Wainewright, editor of ASP News Review, an online newsletter devoted to the ASP market, says if a company goes belly up in this world, there's not as much impact on the deal as with an ERP outsourcing arrangement. "The important thing with ASPs is that they typically have more of a packaged solution rather than the completely customized arrangement you get with traditional outsourcing. So transferability between providers is easier," says Wainewright, in London.
But Borden officials appear philosophic about the fact that they have to start the outsourcing process again from scratch. "It's hard to be shocked these days. Businesses are acquired and divested every day," says the company spokeswoman. Borden should know. It is owned by the leveraged buyout king, Kohlberg Kravis Roberts &Co. KKR has been slicing and dicing companies for two decades--it was a principal player in the RJR Nabisco drama that formed the basis of the nonfiction best-seller "Barbarians At the Gate."
As for LES, current management is now trying to find a new owner. In a statement earlier this week, LES president Jeffrey Erle, said, "I'm trying to sell it. A whole host of people expressed interest. If you know of a vendor that wants to buy an IT firm, let me know." //
Larry Marion is an editor and consultant with more than 20 years of experience in the use of computer technology in manufacturing and finance. He is the former editor of Datamation, Electronic Business, and LOTUS magazines. He can be reached at email@example.com.
Additional reporting by contributing writer Beth Stackpole. She can be reached at firstname.lastname@example.org.Update:
Borden Foods to stick with outsourcing
August 19, 1999--Despite the premature cancellation of an outsourcing contract from Litton Enterprise Solutions (LES), Borden Foods Corp. continues to believe in hiring other companies to run information technology infrastructures. Gerry Gluscic, vice president of IT at the Columbus, Ohio maker of pasta and sauces, says Borden is not ready to dump the concept of outsourcing the management, operations, and development of its PeopleSoft enterprise resource planning suite.
"We will certainly continue to outsource," Gluscic says. Borden may opt to continue an outsourcing arrangement with any new owner of LES, or it may search for a new outsourcing partner. "We are waiting to see what happens with LES. Then we'll make a decision on how we want to go forward."
Earlier this month Litton Industries Inc., the parent of LES, decided to close the unit effective July, 2000. LES has promised Borden and its other clients that it will continue operating its Woodland Hills, Calif. data center and providing outsourcing services.
Gluscic says LES has provided a high level of service since the outsourcing deal was made in February. "We think LES was a good partner," he says. "We chose LES because of its depth in the ERP area."
A surprisingly large number of other organizations have already approached Borden about providing ERP outsourcing services, Gluscic adds. He refused to name names, though.--L.M.