IBM Takes Over Dow Chemical Job From Rival EDS

International Business Machines Corp. won an information-technology outsourcing contract from Dow Chemical Co., taking over a job that caused hundreds of millions of dollars in losses for computer-services rival Electronic Data Systems Inc.

Analysts said the seven-year contract has an estimated value of more than $1.1 billion. Under the contract, IBM will run Dow's in-house computer network and e-mail systems. It also will design and build a voice network using voice over Internet protocol to cut telephone costs for Dow's employees in 63 countries.

EDS said it and Dow "mutually terminated" their outsourcing agreement Sunday after the Plano, Texas, company conceded it had defaulted on contract schedules and milestones, and concluded it was less expensive to negotiate a halt to the work than continue under the original terms.

Dow, of Midland, Mich., signed EDS to a seven-year contract to manage its computer networks, including an ambitious plan to embrace an Internet phone system. However, the work resulted in huge losses for EDS after it was unable to meet project hurdles. The contract cost the company $230 million in operating losses in 2003, EDS said this year.

This year, EDS took a $94 million charge against earnings in the first quarter and followed with a $135 million charge in the just-ended second quarter. EDS last week said it expected to have $90 million in additional "transition" costs this year and $20 million next year from the contract.

IBM, of Armonk, N.Y., already has begun moving the work to its global services employees.

Bruce Caldwell, an analyst with Gartner Inc., a market research firm in Stamford, Conn., said IBM has developed expertise in running networks under a two-year-old outsourcing contract with New York investment bank J.P. Morgan Chase & Co. He noted that IBM also has worked closely with networking giant Cisco Systems Inc., and has developed extensive network-management software. "That all tends to help IBM understand how to pace the effort involved and the investment involved so it is profitable," he said.

Bob Zapfel, IBM's general manager of global services, said, "We were pretty conscious of the problems our competitor had in managing the project," in part because IBM already is outsourcing other functions for Dow, including installation of personal computers and some financial processes. He noted that VOIP is much more mature today than it was when Dow started the project about three years ago.

—Gary McWilliams contributed to this article

Write to William M. Bulkeley at bill.bulkeley@wsj.com