No turnaround at Electronic Data Systems Corp. would be possible without first clearing away the wreckage of by far the worst deal in the companys history: the Navy Marine Corps Intranet contract.
Signed in 2000, the $7 billion contract for the worlds largest intranet was costing EDS $800 million annually at its low point. It has taken several years to stem the losses, but this year EDS is looking for a positive cash flow of about $150 million.
"This was a going-out-of-business strategy," Mike Koehler, who is in charge of the NMCI contract at EDS, said in an interview here last month. Even though the contract is gradually becoming cash-flow-positive, EDS CEO Michael Jordan said its unlikely the contract will turn a profit over its life span. "Three billion [dollars] has been dissipated. We wont get all of it back, but we will get a good percentage," said Jordan.
The NMCI overhaul went hand in hand with other cleanup chores carried out by Jordan. The company severed a money-losing and acrimonious outsourcing relationship with The Dow Chemical Co. in 2004, sold off subsidiary UGS in 2004 to raise cash and is in the process of selling the bulk of management consultancy A.T. Kearney Inc. to a management group.
A key step in getting the NMCI contract back on track was changing language so that EDS could satisfy its terms and get paid. Although EDS officials wont reveal the exact terms, they claim the changes clarified ambiguities rather than lowered the bar for service. "The government didnt lower the bar, but we raised the bar," said Koehler.
Another step was the establishment of a single consolidated project management office, replacing several local offices, with the cooperation of Rear Adm. James Godwin, the man in charge of the deal for the Navy. Although Godwin declined through a spokesperson to be interviewed for this story, the spokesperson said the Navy has made progress refreshing some original desktop systems and testing a wireless network.
In a demonstration that EDS has learned key lessons from the NMCI debacle, the company last year signed a deal with the United Kingdom Ministry of Defence worth up to $7.6 billion over 10 years. And in a desktop-centric contract reminiscent of NMCI, EDS last week inked a deal with Chicago-based United Airlines Inc. to install and maintain 36,000 desktop systems.
"NMCI learnings are leverageable," said Koehler. Three months ago, EDS staffers traveled to the United Kingdom with U.S. government personnel to discuss the ins and outs of project management with U.K. MoD staff.
Koehler joined EDS two years ago and went to work immediately on the NMCI contract. He found a warehouse full of computers that EDS was incapable of delivering to the military. The only problem was that EDS had paid Dell Inc. for the computers but, under the contract, could not be paid by the Navy for them until they were installed and working.
In addition, EDS had spent hundreds of millions of dollars on network infrastructure but could not be paid for that until end-user systems were working. At that time, the lag between PC order and installation was six months—far too long. That time is now eight to 12 weeks, due to the need to configure the systems for the militarys legacy environment, said Koehler.
The NMCI contracts base period ends in September 2007. With the contract no longer taking on water, Koehlers goal now is to get the Navy to re-enlist for another three years.