Update: Sears ends $1.6B outsourcing pact with CSC

Claims failure to live up to contract terms; CSC disputes termination

Sears, Roebuck and Co. ended its $1.6 billion IT outsourcing agreement with Computer Sciences Corp. as of May 11, citing CSC's "failure to perform certain of its obligations" under the 10-year contract, according to a filing issued Friday with the U.S. Securities and Exchange Commission.

Sears last June tapped El Segundo, Calif.-based CSC to provide IT infrastructure support services for its desktops, servers, Web site systems, voice and data networks and decision-support technology (see story).

In its own filing today, CSC disputed Sears' charge and said the termination for "cause" was "contrived to avoid or reduce termination fees of tens of millions of dollars." CSC said that Sears also had an option to terminate the contract for "convenience" or "upon mergers and acquisitions involving Sears." The termination fee varies depending on the type of termination and the date, according to the CSC filing with the SEC.

Kmart Holding Corp. and Sears on March 24 announced the completion of a merger that combined Sears and Kmart into a major new retail company named Sears Holdings Corp.

CSC claimed it had made investments in conjunction with its outsourcing agreement with Sears, and those assets included software, property, plants and equipment. The company said it will vigorously pursue recovery for its assets and commitments. Sears said it expects to incur no penalties as a result of the termination.

The matter has already reached the courts. According to Sears' SEC filing, a federal court judge denied CSC's request for an injunction that would have stopped Sears from terminating the contract for cause. In a pending arbitration proceeding, CSC also failed to get an emergency hearing. There was no ruling on the merits of Sears' assertion in either case, and additional legal action is pending.

In the meantime, CSC is obligated to continue providing services for an extended period of time, according to Sears' SEC filing. Christopher Brathwaite, a spokesman for Sears, declined to comment on the length of time that CSC will continue to provide services.

At the time that Sears and CSC announced their outsourcing deal, the companies said that the majority of the 200 Sears employees who were responsible for managing Sears' technology infrastructure were expected to take jobs with CSC.

Neither Sears nor CSC would comment about the termination of the contract.

Former Sears CIO Gerald Kelly Jr. had orchestrated the outsourcing deal with CSC, but Kelly left the company shortly after the merger closed in March. At the time of his departure, Karen Austin, who had been the CIO at Kmart, had already been named CIO at the newly formed Sears Holding Corp.

Copyright © 2005 IDG Communications, Inc.

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