Acquisitions: Motivations & Challenges Essay

Custom Student Mr. Teacher ENG 1001-04 19 October 2016

Acquisitions: Motivations & Challenges

a. Identify five main motivations (discussed in class) for acquiring a company. Provide a specific, real-world acquisition example for each motivation. b. Which three motivations are most relevant to Paragon Tool’s potential acquisition of MonitoRobotics in the Growing for Broke case? c. Identify the four main challenges (discussed in class) when executing a corporate acquisition. Provide a specific, real-world acquisition example for each challenge. 2. Blue Ocean Strategy a. Draw a strategy canvas for the Nintendo Wii and briefly describe what it says about why Nintendo has been successful in such a competitive industry. Include the Sony Playstation and the Microsoft Xbox on the canvas. b. Identify and briefly describe the six paths to finding Blue Oceans. Give a specific, real-world example of each path (other than the examples I gave in class).

3. Cisco Systems’ Acquisition Strategy a. Outcomes of nearly 75% of corporate acquisitions fail to meet managerial expectations. Identify 7 reasons why Cisco Systems has been more successful than most other companies in executing over 100 acquisitions (see the two attached articles). b. Identify 3 reasons why Cisco Systems began having trouble with its acquisition strategy. 4. Diversification at Starbucks a. Illustrate and concisely explain the Boston Consulting Group’s Growth-Share Matrix. Make sure you identify: i. the dimensions upon which the Matrix is based ii. each type of businesses embodied in the Matrix’s quadrants iii. the three functional assumptions of the model b. Specifically apply the model to Starbuck’s product diversification efforts since the 1990s (see the attached article). c. Concisely explain two reasons why BCG’s Growth-Share Matrix might not accurately reflect Starbucks’ historical development.

5. Google’s International Strategy a. Identify and briefly explain the three types of international strategy. b. Identify Google’s international strategy and explain why Google Finance would have only been possible under that strategy (see Tom Friedman’s “Outsourcing, Schmoutsourcing! Out Is Over” article below). c. Give a specific, real-world example of each of the other two types of international strategy. 6. Reconfiguration in the Personal Computer (PC) Industry a. Identify and briefly explain six distinct methods that firms can use to acquire the resources and capabilities they need to develop new products and businesses. b. Drawing on our discussion of the strategic sourcing framework, briefly describe and/or illustrate the relative advantages and disadvantages of these methods.

c. Both PC software and hardware manufacturers have been forced to adapt to the rapidly evolving industry in order to survive. Using the PC industry, provide a specific example of 5 of these 6 methods. d. Briefly explain why Xerox may be greatest success and the worst failure in the history of the PC industry. 7. Outsourcing at GM a. Concisely describe the Strategic Sourcing Framework. Be sure to identify the relevant costs/advantages associated with the make-or-buy decision.

b. In February 2006, GM announced a “huge package of outsourcing contracts.” See the attached article. Using the Strategic Sourcing Framework and our class discussions of GM, explain why GM chose to do this. c. Concisely describe the disadvantages GM faced in choosing to outsource, like this. 8. In the early 2000s, Boeing began aggressively outsourcing the development and production of the 787 airplane design. By late 2008, Boeing managers admitted that they made some mistakes in pursuing the outsourcing strategy and that Boeing would significantly curtail outsourcing. List Boeing’s initial motivations for outsourcing and the reasons behind its subsequent change of heart.

9. Diversification a. Concisely describe and explain the relationship between diversification and corporate performance. b. Give one example each of companies with very low diversification, very high diversification, and moderate diversification. Make sure these examples accurately reflect the relationship you described in part a. c. In class, I argued that Tyco could be considered an exception to the generally understood relationship between diversification and performance. Explain why you think this is true or untrue. d. Regardless of how you answered part c, identify 4 or 5 ways that Tyco’s diversification strategy is different from typical corporations’ corporate strategy.

10. Hybrid Engine Technology & Industry Evolution a. Concisely explain what type of industry disruption best describes Toyota’s introduction of the first hybrid engine car targeted for the United States mass market. c. Give a specific historical example (from any industry) of the other major type industry disruption. d. Using a technological S-curve graph (Walker Figure 4.5), illustrate the evolution of the automobile engine. In your illustration, make sure you capture the development of 1) hybrid, 2) hydrogen fuel cell, and 3) standard gas-powered combustion engine technologies. Also include in the illustration indicators of today’s date in addition to the dates at which each technology was (will be) introduced to the U.S. mass market. e. Concisely explain Utterback’s model of innovation (Walker Figure 4.4). f. Use Utterback’s model to specifically and concisely explain why hydrogen fuel cell engines might not be commercially viable for a very, very long time.

How Cisco Makes Takeovers Work With Rules, Focus On Client Needs By Mike Angell, Investor’s Business Daily Investor’s Business Daily Investing in technology is risky. Just ask Cisco Systems. In 1997, the networking leader bought Dagaz, a company that made gear for digital subscriber lines. Dagaz wasn’t solid, and Cisco had to buy another company to get the right product. “You have to be ready to take those risks,” said Ammar Hanafi, Cisco’s business development manager. He’s been involved in almost every Cisco takeover since 1998. But Dagaz was an exception among the 70 companies Cisco has bought in the last seven years. That makes Cisco an exception, too.

According to a study by consultant A.T. Kearney, more than half of mergers don’t work out. Here are some of Cisco’s rules: Stay close to home – 73% of Cisco’s targets make network gear. Deals make geographic sense, too. They’re close to a Cisco unit or a key talent capital. Get early wins – targets have products customers want right now. Familiarity – Cisco has stakes in 15% of its targets. Think small – Cisco buys start-ups mostly Management stays – and quickly learns the Cisco way. Beyond those factors, Cisco looks at what the target firm wants to accomplish, the needs of Cisco’s customers and how targets fit. “Cisco is the best example of a company with a well-established acquisition and post merger strategy,” Kearney’s Max Schroeck said. Many failed mergers stem from companies trying to enter new markets or just cut costs. Successful mergers are between companies in related lines, the study says. That means joining people who share knowledge and experience.

Cisco stays close to network gear. It strays, but not far. Smaller forays have been in Net-based phone gear (3%), software for content delivery (15%) and wireless gear (8%). Customer Focus “We’re always focused on our customers’ wants and needs,” Hanafi said. “We’re always expanding the range of products we have as our customers’ own networks expand.” The best example may be Cisco’s first acquisition in 1993. CEO John Chambers, then Cisco’s top salesman, was negotiating an order. But the client leaned toward a rival. So Cisco bought the rival, Crescendo Communications, for $ 89 million. Crescendo’s product was no “killer,” Hanafi said. But by the third generation, it brought in almost half of Cisco’s sales. “The first generation should be good enough for a customer,” Hanafi said. “The second generation is usually a great product. By the third, it should be a market leader.”

Buy Vs. Invest But how does Cisco know this will be the case? Homework. Thirty people screen companies, probe market potential and talk to likely targets. Its engineers study products, and it queries customers. In some cases, this leads to an investment – one that helps Cisco learn about new technologies. If it’s a new market and product line, Cisco will invest. If the technology isn’t ready but looks right, Cisco will invest as well. “We’re always looking to enter new parts of the network,” Hanafi said.

“Sometimes there are companies that are not as strategic, but we’d like to know what they do.” Of the 20 companies Cisco bought this year, it had stakes in eight. Overall, it has stakes in about 15% of its possible targets. Sometimes investments prompt Cisco to go with a rival. Two years ago, Cisco bought a stake in a company called Tellium that made an optical switch. Following some changes at Tellium, and after learning about that market, Cisco bought Monterey Networks instead for $ 500 million. Cisco still has a “passive” investment in Tellium but may sell its stake when it can, Hanafi says. For the most part, Cisco targets start-ups. Chambers doesn’t believe mergers of equals can work. The Kearney study agrees. It said nearly one-third of mergers of equals destroy shareholder value. Cisco’s 1996 buy of StrataCom makes the point. At $ 4 billion, StrataCom was Cisco’s largest takeover to date. StrataCom’s sales force touted one data standard, Cisco’s another.

Users were confused. “Integrating the two sales forces was more difficult,” Hanafi said. Geography’s Role Cisco also has a rule that targets must be physically near one another. This year, Cisco added a fourth company to its Israeli portfolio. And it added its second Canadian company, a software firm called PixStream. These areas are promising new high-tech hubs, and Cisco needs to “go where the talent is.” “People asked us why buy PixStream? It’s in Waterloo, Canada,” Hanafi said. “It’s right next to the University of Waterloo, a good school for engineers.” Though it may take up to two years to identify a potential acquisition, Cisco doesn’t waste time closing the deal.

Hanafi has seen some sealed in as few as 10 days. Ultimately, Cisco buys talent. It woos people by telling them Cisco will help make their product No. 1. Integration Teams “We’re saying to them, ‘Use our sales force, our manufacturing size,’ ” Hanafi said. “Come in and we’ll help make you a leader.” That’s kept 75% of acquired companies’ CEOs at Cisco. Cisco sets up a chain of command, and the CEO of the acquired company stays in charge. Integration is easier. Cisco has made integrating companies a discipline. Hanafi has a team of 10 people who run this process. They send up to 65 others from sales, human resources, manufacturing and finance to meet with every worker to discuss salaries, benefits and roles.

”The first question people ask after being acquired by Cisco is, ‘What’s going to happen to my dentist?’ ” Hanafi said.

Cisco Shopped till It Nearly Dropped By John A. Byrne and Ben Elgin in San Jose, Calif., BusinessWeek It was an all-too-typical deal for Cisco Systems Inc. Monterey Networks Inc., an opticalrouting startup in which Cisco held a minority stake, was a quarry with no revenue, no products, and no customers — just millions in losses it had racked up since its founding in 1997. Despite those deficits, Cisco plunked down a half-billion dollars in stock to buy the rest of the company in 1999. But within days of closing the deal, all three of Monterey’s founders, including its engineering guru and chief systems architect, walked out the door, taking with them millions of dollars in gains from the sale. ”I came to the realization I wasn’t going to have any meaningful impact on the product by staying,” says H. Michael Zadikian, a Monterey founder.

Eighteen months later, Cisco shut down the business altogether, sacking the rest of the management team and taking a $ 108 million write-off. That dismal tale hardly jibes with Cisco’s widespread reputation as an acquisitions whiz. Not since the conglomerate era has a company relied so heavily on its ability to identify, acquire, and integrate other companies for growth. CEO John T. Chambers believed that if Cisco lacked the internal resources to develop new products in six months, it had to buy its way into the market or miss the window of opportunity. Some put a new name on it: acquisitions and development, a way for the company to shortcut the usual research cycle. Its belief in the strategy has led Cisco to gobble up more than 70 companies in the past eight years. Analysts and academics heaped praise on Cisco’s acquisitions prowess in articles, books, and business-school case studies.

In the early days, some of this praise was deserved, as Cisco morphed from a router company to a networking powerhouse. Its first acquisition, Crescendo Communications Inc., guided Cisco into the switching business, which generated $ 10 billion in sales last year. All told, acquisitions have laid the foundation for about 50% of Cisco’s business. But in early 1999, with exuberant investors enticing a growing number of unproven companies to go public, Cisco suddenly had to acquire companies at a much earlier stage. Cisco had long claimed an unprecedented success rate of 80% with its acquisitions. Chambers now says it fell to something like 50% during the Internet craze — still above the industry average.

”We bet on products 12 to 18 months out,” concedes Chambers. ”We took dramatically higher risks.” Chambers often maintained that his acquisition strategy was aimed at acquiring brainpower more than products. But an analysis of the 18 acquisitions Cisco made in 1999 shows that Monterey was no fluke. Many of the most valuable employees, the highly driven founders and chief executives of these acquired companies, have since bolted, taking with them a good deal of the expertise and experience for which Cisco paid top dollar. The two founders of StratumOne Communications Inc., a maker of optical  semiconductors purchased for $ 435 million, left Cisco. The chief exec of GeoTel Communications Corp., a call-routing outfit acquired for $ 2 billion, walked out after nine months. So did the CEOs or founders of Sentient Networks, MaxComm Technologies, WebLine Communications, Tasmania Network Systems, Aironet Wireless Communications, V-Bits, and Worldwide Data Systems — all high-priced acquisitions in 1999. Some simply felt Cisco had become too big and too slow. ”People who crave risk don’t do so well at Cisco,” says Narad Networks CEO Dev Gupta, who sold Dagaz and MaxComm Technologies Inc. to Cisco in 1997 and 1999, respectively.

”Cisco focuses much more on immediate customer needs, less on high-wire technology development that customers may want two to three years out.” Chambers maintains that Cisco’s turnover rates are the best in high technology. ”In our industry, 40% to 80% of the top management team and top engineers are gone within two years,” he says. ”Our voluntary attrition rate is about 12% over two years.” Difficulty holding on to top talent was not the only flaw in the Cisco acquisition machine. Cisco often paid outrageous sums for these unprofitable startups — a total of $ 15 billion in 1999 alone. Even some of the deals that Cisco considers successful look pretty dreadful using simple math. Its 1999 acquisition of Cerent Corp., a maker of opticalnetworking gear, is a good example. Cisco paid $ 6.9 billion for the company, or $ 24 million for each of Cerent’s 285 employees, even though the company had never earned a penny of profit and had an accumulated deficit of $ 60 million.

Even if earnings bounce back to 2000 levels of roughly $ 335 million, it would take Cisco about 20 years to recoup the purchase price. Of course, deals such as Cerent found their rationale in Wall Street math. If investors were willing to pay 100 times earnings for Cisco’s stock in 1999, then a Cerent profit of, say, $ 300 million could effectively increase the market cap of Cisco by some $ 30 billion. Call it bubble economics. Besides, many of these deals were done for highly inflated Cisco stock instead of cash. Even so, that wampum could have been used to buy other assets that could have delivered greater returns. Only in the months since the bubble burst has it become evident just how muddled Cisco’s mergers-and-acquisitions strategy became. In its haste to do deals, Cisco often purchased companies it didn’t need or couldn’t use.

In some cases, the buying spree led to overlapping, duplicative technologies, political infighting, and just plain wasted resources, as Monterey shows. ”M&A works to some extent, but at Cisco, it got out of hand,” says Iqbal Husain, a former engineering executive at Cisco. After losing many of the leaders of these businesses, product delays and other mishaps were not uncommon. When Cisco closed down Monterey, for example, the company still hadn’t put a product out for testing, which alone would take as long as a full year.

”By the time the product was there to test, the market wasn’t,” says Joseph Bass, former CEO of Monterey. Chambers says he has moved to correct the flaws. Its acquisition binge has slowed —  from 41 companies from 1999 through 2000 to just two purchases in 2001. While Chambers expects to do 8 to 12 acquisitions this year, he insists that market conditions will let Cisco wait at least until a target company has a proven product, customers, and management team before cutting a deal. ”We’re making the decisions to acquire a company based on a later point in time, which dramatically lowers the risk,” Chambers says. Anything more ambitious, Cisco now knows, may be foolhardy.

A Costly Acquisition Strategy Often lauded for its buyout successes, Cisco has purchased more than 70 companies in the past eight years. In 1999 alone, it paid $15 billion for 18 startups, many of which never delivered on their early promise. Here are the most noteworthy: COMPANY PRICE STATUS SKINNY CERENT $6.9 Alive and Although Cerent has generated $1 billion well billion in estimated sales for Cisco, two decades could be needed to recoup the steep price.

PIRELLI $2.2 Alive but A disappointing attempt to bolster OPTICAL billion struggling Cisco’s long-haul optical networking. SYSTEMS But Pirelli’s technology still trails that of rivals. MONTEREY $500 Dumped This upstart optical company never NETWORKS million in April produced a viable product, and Cisco cut its losses with a $108 million write-off in April. AMTEVA $170 Sold at a Lackluster revenue forced Cisco to million loss in July sell this unified-messaging business. MAXCOMM $143 Part of their Founders and key technologists walked TECHNOLOGIES million DSL strategy out soon after the deal closed. Data: BusinessWeek

The Toronto Star April 28, 2006 Friday SECTION: BUSINESS; Pg. F01 LENGTH: 631 words HEADLINE: Starbucks develops taste for independent films BYLINE: Sharda Prashad, Toronto Star BODY:

First it was coffee, then CDs, now it’s movies. Today, the independent flick Akeelah and the Bee will make its debut in theatres, with a marketing boost from Starbucks. The java giant is advertising the Lionsgate Entertainment Corp. film about spelling bees, starring Laurence Fishburne and Angela Bassett, by using promotional coffee sleeves, coasters and displays in stores. Neither party has disclosed the amount of cash that’s changing hands in this deal, other than divulging Starbucks will be receiving a cut of the film’s profits for its marketing efforts. And when the DVD goes on sale, it will get a share of those profits – the DVD, by the way, will be available at Starbucks.

Akeelah’s soundtrack will also be flogged at the coffee house. “Our customer is the demographic that Hollywood needs as it is facing a double-digit decline in the box office and slowing DVD sales,” Howard Schultz, Starbucks’ chairman, told Business Week earlier this year. “We have a unique cross-section of assets – a foundation of trust and confidence in Starbucks – that can promote a move that our customers know is relevant.” But is the purveyor of java risking its strong brand appeal by moving away from its coffee core with this latest venture? Starbucks, named for a character in the literary classic Moby Dick, currently has 11,000 outlets in 37 countries and is planning to open 1,800 this year. Its long-term plan is to have 30,000 outlets around the world. “Starbucks doesn’t sell coffee, it sells a retail environment that’s chic, urban and  authentic,” says Jay Handelman, marketing professor at Queen’s University School of Business.

“If they were just selling coffee, why would they (customers) pay $4?” Since Starbucks is in the business of selling an urban experience, the professor says, the foray into a movie such as Akeelah and the Bee is consistent with that brand since the film is an urban, intellectual tale. If the movies and coffee were selling different experiences, the brand strategy wouldn’t work since customers would be confused about what Starbucks stood for, adds Andrea Wojnicki, marketing professor at University of Toronto’s Rotman School of Management. Should the movie do poor box office sales, it won’t necessarily affect the Starbucks brand, she says. Starbucks is about connoisseurship, she argues. It introduced people to the subtleties of coffee and it’s attempting to do the same with its CDs, which it started selling in 1995. The CD venture has also involved an urban experience.

In 2004, for example, it coproduced Ray Charles’ Genius Loves Company and last year it held exclusive distribution for Alanis Morissette’s Jagged Little Pill Acoustic. Should the movie become a box office flop, Starbucks isn’t necessarily in trouble, says Wojnicki. It could hold up its connoisseur flag and say its campaign is about appreciating art and not about flogging blockbusters. It could also be argued that Starbucks took a growth opportunity that has stretched its brand too far, argues Mary Crossan, business policy professor at the University of Western Ontario. “When they start to move into movies, they’re not leveraging their resources or capabilities (in coffee).”

Starbucks has stated that it is not interested in producing movies, just promoting them, but Crossan warns that companies need be careful about taking focus away from the core business. And Starbucks has made some poor business choices. It has failed in previous ventures, including an attempt to get into the Internet business in the 1990s and an in-house magazine called Joe that folded after three issues. But Akeelah star Angela Bassett thinks the movie business is a good move for Starbucks. “Everybody’s got something to sell,” she told Newsweek. “You just have to be sure of what you’re trying to sell.”

Copyright New York Times Company May 19, 2006 I was on my way from downtown Budapest to the airport the other day when my driver, Jozsef Bako, mentioned that if I had any friends who were planning to come to Hungary, they should just contact him through his Web site: He explained that he could show people online all the different cars he has to offer and they could choose what they wanted. ”How much business do you get online?” I asked him. ”About 20 to 25 percent,” the Communist-eraengineer-turned-limo-proprietor said. The former secretary of state James Baker III used to say that you know you’re out of office ”when your limousine is yellow and your driver speaks Farsi.” I would say, ”You know that the global economy is spinning off all kinds of new business models when your Hungarian driver has his own Web site in English, Magyar and German — with background music.”

Jozsef’s online Hungarian limo company is one of many new business models I’ve come across lately that are clearly expanding the global economy in ways that are not visible to the naked eye. I was recently interviewing Ramalinga Raju, chairman of India’s Satyam Computer Services. Satyam is one of India’s top firms doing outsourced work from America, and Mr. Raju told me how Satyam had just started outsourcing some of its American work to Indian villages. The outsourcee has become the outsourcer. Mr. Raju said: ”We told ourselves: if business process outsourcing can be done from cities in India to support cities in the developed world, why can’t it be done by villages in India to support cities in India. Things like processing employee records can be done from anywhere, so there is no reason it can’t be done from a village.” Satyam began with two villages a year ago and plans to scale up to 150.

There is enough bandwidth now, even reaching big Indian villages, to parcel out this work, and the villagers are very eager. ”The attrition level is low, and the commitment levels high,” Mr. Raju said. ”It is a way of breathing economic life into villages.” It gives educated villagers a chance to stay on the land, he said, and not have to migrate to the cities. A short time later I was interviewing Katie Jacobs Stanton, a senior product manager at Google, and Krishna Bharat, founder of Google’s India lab. They told me that Google had just launched Google Finance, but what was interesting was that Google Finance was entirely conceived by the Google team in India and then Google engineers from around the world fed into that team — rather than the project’s being driven by Google headquarters in Silicon Valley.

It’s called ”around sourcing” instead of outsourcing, because there is no more ”out” anymore. Out is over. ”We don’t have the idea of two kinds of engineers — ones who think of things and others who implement them,” Ms. Stanton said. ”We just told the team in India to think big, and what they came back with was Google Finance.” Mr. Bharat added: ”We have entered the generation of the virtual office. Product development happens across the global campus now.” Last story. I’m in gray Newark speaking to local businessmen. I meet Andy Astor, chief executive of EnterpriseDB, which provides special features for the open-source database called PostgreSQL. His primary development team, he tells me, consists of 60 Pakistani engineers in Islamabad, who interact with the New Jersey headquarters via Internet-based videoconferencing.

”The New Jersey team — software architects, product managers and executives — comes to work a couple of hours early, while the Islamabad team comes in late, and we have at least five to six hours per day of overlap,” Mr. Astor said. ”We therefore have multiple face-to-face meetings every day, which makes a huge difference for communication quality. We treat videoconference meetings as if we were all in the same room.” What all these stories tell me is that we are seeing the emergence of collaborative business models that were simply unimaginable a decade ago.

Today, there are so many more tools, so many more ideas, so many more people able to put these ideas and tools together to discover new things, and so much better communications to disseminate these new ideas across the globe. If more countries can get just a few basic things right — enough telecom and bandwidth so their people can get connected; steadily improving education; decent, corruption-free economic governance; and the rule of law — and we can find more sources of clean energy, there is every reason for optimism that we could see even faster global growth in this century, with many more people lifted out of poverty.

GM’s Landmark in IT Outsourcing By Steve Hamm – BusinessWeek – 2/2/2006 A huge package of outsourcing contracts announced Feb. 2 by General Motors seems to signal shifting fortunes in the $600 billion-a-year information-technology services industry. EDS, GM’s longtime primary supplier, lost ground, while Hewlett-Packard’s sometimes-overlooked services unit got a big lift. The profile of India’s tech industry rose when GM named one of the country’s leading companies, Wipro, as a tier-one supplier. All told, about $7.5 billion in five-year contracts were awarded. Another $7.5 billion in contracts are expected to be parceled out as new projects come up over the next couple of years. EDS, which formerly had about two-thirds of GM’s outsourcing business, still has the biggest share. It got contracts worth $3.8 billion — or about half of the business. HP’s contracts totaled $700 million, and GM called it out as one of the major gainers.

IBM got $500 million in contracts. FINANCIAL SHADOW. The package is significant beyond its sheer size because it’s an indication of how GM Chief Information Officer Ralph Szygenda is reshaping the way the company handles tech outsourcing. He handed contracts in large chunks to companies that will handle them on a global basis rather than country by country. Also, GM and the tech suppliers worked together to create new standards for managing technology, which means all suppliers will do things in a uniform way. Szygenda says the new strategy will allow GM to improve global collaboration while assuring reliability of its computing systems and cutting costs. “It lets GM focus on innovation rather than spending a lot of time on managing its suppliers,” he said at a press conference. GM’s financial woes cast a shadow over the announcement, however. The carmaker reported a $4.8 billion quarterly loss on Jan. 26.

While Szygenda said low prices were only a secondary impetus behind the way he structured the outsourcing contracts, some suppliers didn’t even participate in the bidding, most notably, Accenture. Others said they didn’t bid on all of the pieces because they were concerned they wouldn’t make enough money on them. “A BIG KICK.” Yet those who did win contracts were jubilant. “HP selectively bid on areas where we know we can do a great job and where focus was on core areas of importance to HP and GM,” says Steve Smith, senior vice-president of HP Services. His business is often overshadowed by IBM and Accenture, but it has been gaining momentum lately.

Its revenues grew 6% in HP’s fourth quarter, to $3.9 billion. Last quarter, IBM’s services revenues were in the doldrums, declining 5%, to $12 billion. Wipro had already been doing some work for GM, but the new package gives it a credibility lift. Its contracts were worth $300 million over five years. Wipro Executive Vice-President Girish Paranjpe says the company is delighted to be picked. “It’s a huge morale booster for us to be able to play with the big boys,” he says. “Also, because we’re the only tier-one player GM picked from India, it’s a big kick for us.”

If GM’s new strategy for managing outsourcing works well, it could become a model for other large corporations. The package has five-year contracts instead of the more traditional 10-year pacts and splits the work up among several suppliers instead of relying predominantly on one. “This is a tipping point for IT,” says Robert McNeill, principal analyst at Forrester Research. “Organizations will have to add skills to their vendor management function and make transition management a key for success when moving to a more flexible services model.” Another lesson from the contract: Even financially troubled companies are spending big on IT. That’s great news for the tech titans that got a bigger piece of the GM pie. It should even provide solace to EDS, however diminished its share.

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