Circuit City awards $775M IT outsourcing contract to IBM

Circuit City Stores Inc. has awarded a $775 million outsourcing contract calling for IBM to run much of its IT operations over the next seven years. Circuit City officials said they expect the pact will let them cut IT costs by 15% over the life of the contract.

Under the outsourcing deal, announced last week, IBM will manage Circuit City's IT systems, security and Web site, explained a Circuit City spokeswoman. IBM will also manage Circuit City's help desk operation, she said.

The Richmond, Va.-based consumer electronics retailer said that the outsourcing plan is part of a larger set of restructuring actions, including layoffs of workers in stores and a realignment of its regional organizational structure.

"We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace," said Philip  Schoonover, chairman, president and CEO of Circuit City, in a statement. "These actions represent the execution phase of the work initiated this winter to accelerate Circuit City's transformation. We expect to deliver improvements in our selling, general and administrative expense rate while maintaining appropriate investments to drive our key strategic initiatives such as digital home services, multi-channel and home entertainment."

The spokeswoman said that the outsourcing pact will affect about 130 IT staffers at the company's headquarters. About 50 of the IT workers will become IBM employees, and the rest will be laid off with severance packages calculated based on years of service, she said. She said that the company expects IBM to be running IT operations by the start of the holiday sales season.

Evan Schuman, a retail industry watcher and blogger, noted that while retail companies often outsource some IT operations, the Circuit City pact is larger than most. "Certainly, outsourcing IT projects is nothing new with large retailers, but to outsource this much is a big step," he said. He said other retailers can be expected to follow Circuit City's lead, particularly as in-store technologies become more sophisticated and require internal IT employees to focus on them rather than on the more mundane infrastructure management tasks.

Ron Hira, a professor of public policy at Rochester Institute of Technology, criticized the move, anticipating that IBM will move much of the work offshore. "I think the IBM takeover of some of the Circuit City IT department means a loss for American technology workers," Hira said in an e-mail. "IBM has been the most aggressive mover into the offshore outsourcing business model."

Hira noted that IBM last June announced plans to invest $6 billion in India to expand its workforce there.

Patrick Thibodeau contributed to this story.

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