In the last 12 months, two billion-dollar IT services contracts and several other major deals have been canceled by clients as the result of their merging with companies that have established relationships with other suppliers, or whose boards favor an in-sourcing approach.

Last April, human resources outsourcing supplier Exult was ditched from a contract by flagship client Bank of America after the latter acquired FleetBoston Financial and decided to extend the role of FleetBoston’s incumbent HRO supplier Fidelity Employer Services to cover its own operations.

The move precipitated a steep decline in Exult’s stock market valuation, and turned the one-time sector pioneer into a wounded takeover target. Exult was subsequently bought by Hewitt Associates for $691m last June.

In an even more dramatic move, financial services giant JP Morgan pulled the plug on a $5bn deal with IBM Global Services last September following its merger with Bank One. Jamie Dimon, CEO at Bank One and a known outsourcing skeptic, took over the reins of the merged company and decided to reverse JP Morgan’s earlier move to outsource 4,000 IT staff to the computing services giant in January 2003.

Last week, CSC announced it had entered a legal dispute with Sears, with which it signed its largest-ever deal in the retail sector last June. Sears told CSC two weeks ago it was canceling the contract for cause, but CSC is convinced that Sears is only canceling the deal because it is merging with rival retailer K-Mart Holding and wants to consolidate its contracts without having to pay early termination fees.

[CSC] is convinced the termination for ’cause’ is invalid, contrived to avoid or reduce termination fees of tens of millions of dollars, the company said in a statement filed with the US Securities and Exchange Commission.

According to Sears, CSC tried to get a preliminary injunction to stop Sears terminating for cause, and tried to get an emergency hearing in arbitration to get an order to the same effect, but was unsuccessful on both counts.

Phil Morris, consultancy director at outsourcing advisory firm Morgan Chambers, told Global Computing Services that Sears’ decision to cancel the CSC deal so early suggests it is doing so for reasons beyond dissatisfaction with the service.

Any large-scale outsourcing deal can be terminated for ’cause’ at some point, as there will always been some service that does not get delivered on time, he said, but for an organization to pull the trigger on such a vital service suggests that something else is going on. Technical performance is rarely the sole cause for termination of contracts.

Many clients are often driven to entering outsourcing deals by the same sort of pressures such as need to reduce cost or reduce assets that might at a later date move them to merge with another company or sell off part of the business.

Indeed, the Sears deal might not be the only one of CSC’s contracts under threat from the client’s merger with another company. CSC signed a 10-year, $735m deal to provide infrastructure management services to network equipment manufacturer Marconi. The company is widely expected to be bought out by a larger company in the near future after its market valuation was decimated by the loss earlier this month of a key contract with BT.