The initial deal was announced in January 2006, a 10-year agreement under which Perot, one of the country’s top health care integrators, would implement and support a range of clinical and administrative systems from McKesson, a pharmaceutical distributor and health care software provider, at Triad facilities. Perot also handled network management and help desk services for Triad.
According to Perot, the termination is effective December 31, 2007. CHS will pay Perot a termination fee and reimburse it for certain shutdown costs, but so far the amounts haven’t been disclosed. Perot will provide some transition services to CHS into next year, and the two parties also are negotiating a new contract that could see Perot do systems integrations and infrastructure work for the hospital group.
Perot said it saw $20m in revenue from the Triad deal in the second quarter of 2007, with gross profit somewhere around zero. But Perot stopped recording profit on the software installation part of the deal due to the merger, it said.
Our View
As is the case with any outsourcer that loses one of its flagship deal, CHS’s decision is certainly unwelcome news for Perot. Such an early termination, not even two years into the contract, obviously dries up some of Perot’s revenue outlook.
And the beginning of these big outsourcing deals are typically heavy on investment for the suppliers, so hopefully Perot was either pulling in enough revenue from Triad to cover the upfront costs, or the termination fees are sufficient to cover any substantial losses thus far.
Perot said it pulled in $20m in Q2 revenue this year from Triad, somewhere below the average $30m quarterly run rate of the contract. It’s not clear how far along Perot was in terms of implementation and taking over Triad’s infrastructure.
Perot will likely provide answers to these questions in time, and with its strong health care business, it shouldn’t have too hard of a time redeploying any unutilized assets once the Triad deal ends. But CHS’s decision is a reminder that services vendors can take a hit as a result of client mergers.
Often merged companies will pick one of their outsourcing vendors to handle the newly formed company’s work, leaving the other vendor behind. Or previously outsourced work could now be done in-house. The best scenario for vendors, of course, would be to capture new business from client acquisitions. But this time Perot is definitely on the losing end.
