Lucas loses its tread

Aborted IT outsourcing deal revives accident-prone reputation

WHEN George Simpson, the much-praised Rover boss, took charge of Lucas last year, the City breathed a sigh of relief. Here was a man who could cure the car and aerospace parts maker of its attraction to banana skins. Analysts, who distrusted the old management's obsession with engineering, moved Lucas from their "whoops" list to a "buy".

So it came as a shock last week when the group hit more of the slippery fruit. In terse statements Lucas and EDS, the computer services giant, said they were breaking off an outsourcing deal that should have been worth pounds 1bn over 10 years. Instead Lucas was signing up with Computer Sciences Corporation, EDS's bitterest rival. "I've never seen anything like this before," says Richard Holloway, a financial analyst specialising in the computing industry.

Outsourcing of information technology is one of the fastest- growing areas in British business. According to Mr Holloway, its value grew by 37 per cent last year. British Aerospace and the Inland Revenue have both handed their IT work to outsiders in pounds 1bn-plus deals, reasoning that specialists could do the job more efficiently. There are no big British players: EDS, founded by the former US presidential hopeful Ross Perot and now owned by General Motors, is the UK leader, though CSC of California is closing fast.

Lucas announced in October that it wanted to outsource its IT, and said the bidder would also be expected to buy two subsidiaries: Lucas Engineering & Systems, a consultancy with an excellent reputation in manufacturing; and Lucas Management Systems, which developed project management software. It issued a prospectus setting out the state of these companies. The successful bidder would take on 1,200 Lucas staff - half from these companies, half from the IT departments.

EDS, CSC and IBM said they were interested, but in early March EDS was given exclusive negotiating rights. It then started "due diligence" work, sending auditors into Lucas to see if the prospectus was accurate.

It says it was not - or at least that LMS's figures were out of date and wildly flattering. EDS decided it could not make money without making redundancies.

Lucas claims its prospectus was accurate. "We don't believe we told them a falsehood," a spokesman says. In any event, EDS came back with a much lower offer for LMS two weeks ago. At about the same time Lucas said it was restarting talks with CSC.

But both sides say the price was not the real issue. According to EDS insiders, the US company was initially given the impression that there would be a long-term partnership, allowing EDS to bring Lucas's disparate computer systems into line. Its reward would be linked to its success in improving performance. The problem, EDS says, was that when the negotiations got under way, the Lucas team seemed either to oppose the whole deal, or wanted to make sure EDS was a simple subcontractor, not a strategic partner. EDS says a simple subcontract would have meant sacking even more staff. With the unions already objecting to its outsourcing deal with the Inland Revenue, it shied away from more bad publicity.

There was also a breakdown of personal links, with EMS characterising Lucas's views as "typical West Midlands automotive", while the EDS folk - though English - were tarred with a "slick blue-suited American" brush.

A Lucas spokesman says EDS's interpretation could just be sour grapes. "It could be that it's a bunch of refuseniks who wanted to stick their head in the sand. But it could equally be that EDS came into an IT group that was pretty smart, and that it wasn't able to find the margin enhancement it had expected."

Whatever the truth, it looks like a banana skin for Lucas and EDS; whether it is a triumph or a slip for CSC, only time will tell.