Can Streamlined EDS Win Customers?

By Stan Gibson  |  Posted 2006-01-22

Can Streamlined EDS Win Customers?

The oil portrait of a young Ross Perot is back on the wall. Buried in storage during the Dick Brown era, the picture has been dusted off and rehung outside the top executives offices at Electronic Data Systems Corp.s headquarters.

The symbolism: For CEO Michael Jordan, the turnaround of his company wont be complete until the venerable outsourcer and systems integrator returns to the greatness of the Perot era.

That means simplify its offerings in ways that customers can get their hands around.

"I remember EDS as a great company. Now, were respectable. I would like to restore the company to the leadership position," said Jordan in an interview last month.

Two years ago, hemorrhaging cash and with big customers disgruntled—such as the U.S. Navy , which wouldnt pay—EDS bonds and bank debt were rated "junk" by Moodys Investors Service Inc., raising concerns about the companys financial viability.

For EDS, going back to the future in search of greatness means turning the clock back quite a ways—to before 1984, when the charismatic but iconoclastic Perot sold the company he founded in 1962 to General Motors Corp.

From that point, many agree, a slow decline set in, leading to a near-death experience that culminated in the ouster of Brown as CEO in March 2003 and the hiring of Jordan to reverse the downward spiral.

Jordans efforts are starting to accrue for the bottom line. In the companys third fiscal quarter, EDS signed $5.3 billion in contracts, an 83 percent jump from the $2.9 billion recorded a year earlier.

EDS swabs the decks of the NMCI mess. Click here to read more.

Earnings in the quarter were a modest $8 million, but thats better than the net loss of $153 million the year before. The company predicts fiscal 2006 pro forma earnings per share of $1 or more, up from fiscal 2005s anticipated per-share earnings of 55 to 60 cents. EDS will announce its fiscal 05 results Feb. 8.

"They executed a plan," said Peter Allen, partner and managing director for global practices at Technology Partners Inc., in Houston. "That plan was to go after smaller deals and demonstrate that they are back. We think they have executed very well on that. They are willing to sign deals worth $200 million to $1 billion rather than wait for the next mega-deal."

But going from pretty good to great will take some doing in an industry filled with tough competitors both in the United States and offshore.

IBM Global Services recent results tarnished an otherwise-bright IBM quarter, showing that the market for technology services is unforgiving. Further, the ascent of Indian outsourcing juggernauts such as Wipro Ltd., which last week reported revenue of $617 million for its third fiscal quarter, up 33 percent from the previous year, continues to put the squeeze on larger rivals such as EDS, which lags in using offshore resources compared with its peers.

Meanwhile, a vote of confidence—or lack of one—is expected by the end of this month when GM announces the winners of some 40 technology outsourcing contracts. EDS now has 60 percent of GMs technology work, which amounts to 9 percent of EDS business. EDS can ill afford to see that share decline sharply.

Whatever GM decides, other large commercial and government customers seem willing to trust EDS for their IT work. Last week, EDS signed a 10-year deal with Chicago-based United Airlines Inc. covering 36,000 desktop users. Last fall, EDS proved it can compete head-to-head with the "iron" of the services business—IGS—striking a five-year deal worth $500 million with Royal Ahold, an international grocery chain based in Amsterdam, Netherlands.

"The two finalists were IBM and EDS," said Wim Vanderkaluw, program manager for the outsourcing organization at Ahold. "IBM was not as developed in end-to-end services management. In retail, EDS was very strong. That was very important."

EDS is winning bids such as the one with Ahold through a disciplined approach that stays close to the companys expertise in vertical industries and draws on the wares of a group of technology partners called the Agility Alliance.

Next Page: Partnering up with vendors.

Partnering Up with Vendors

The group consists of Sun Microsystems Inc., Microsoft Corp., Dell Inc., EMC Corp., Oracle Corp., Cisco Systems Inc., SAP AG and Siebel Systems Inc.

"Were implementing established technologies," Jordan said. "Very rarely do you want something from the labs to run your business on."

For the most part, the vendors in the alliance, have, like EDS, an intense rivalry with IBM. "We believe we can provide a better alternative to IBM," said B.J. Jenkins, vice president of global marketing at EMC, in Hopkinton, Mass.

What Ahold saw in its bid from EDS is what other customers can expect to see: a standard set of technologies and vendors but enough wiggle room for customers to have it their way, within reason.

GM shakes up the outsourcing industry. Click here to read more.

EDS new, disciplined approach eschews the go-go days of the Brown era, which saw the company ink deals with questionable margins and onerous terms nearly impossible to meet. Such signings resulted in albatrosses such as the NMCI (Navy Marine Corps Intranet) deal in 2000, which racked up EDS losses to the tune of $800 million a year at its nadir.

Jordans arrival in 2003 marked a spate of renegotiations of bad deals such as the NMCI contract. Other renegotiated deals include a $4.7 billion, five-year pact with the United Kingdoms Department for Work and Pensions.

Fortunately for EDS, customers listened to its plight and responded—not necessarily lowering the bar or otherwise offering concessions, Jordan said, but by altering service-level agreements to be achievable by EDS, while still guaranteeing good service to customers.

Perhaps humbled by its reversals, the new EDS has learned to listen as well, said Vanderkaluw.

At different Ahold-owned stores, such as Stop & Shop Supermarket Cos. in the United States, Ahold has specific service levels it insists on. "We demanded our own service levels," Vanderkaluw said. "[EDS] started listening to what we wanted. I compare it to 10 years ago, when they offered a specific service level, and you had to take it."

Even with its particular needs, Ahold was open to EDS standardized, Agility Alliance pitch. "EDS brought their standard approaches for service management [to] the table. Its already working with other companies," Vanderkaluw said. "They convinced us that the solution they had now was what other companies were doing."

But, once again, Ahold demanded flexibility from EDS and got it, insisting that IBM storage gear be included in the bid.

"In their first bid, they had EMC in their solution. But we said we had a lot of IBM," Vanderkaluw said. "We talked to EDS and explained the impact of changing our platform. We are not converting to the standard platform that EDS is using." Vanderkaluw said he was willing to accept a higher price in return for EDS accommodation of IBM equipment.

Accommodating the IBM gear took some doing, however. Jordan has given marching orders to his troops never to sign a deal that deviates from Agility Alliance offerings without his personal approval. That was needed in the case of Ahold.

"EDS had to go back to Plano. They have strict procedures to offer this solution and the pricing ... The process of dealing with deviations also worked," Vanderkaluw said.

Like many customers over the past few years, Ahold did serious due diligence to assure itself that EDS woes were not terminal in nature.

"During the RFP [request for proposal] process, we looked at the problems that EDS had had," Vanderkaluw said. "We looked at where and why there were problems, like with the Navy contract. We worked with McKinsey [& Co.] and other advisers, like banks, and got the idea of where EDS was. We thought they were well on track with their recovery."

Nonetheless, he added, "We also put in clauses in the contract if things go wrong." Those clauses amount to an ability to break the contract without penalties, should EDS corporate health take a turn for the worse.

Aholds caution notwithstanding, analysts buy into Jordans optimism. "EDS was like a wounded lion. EDS healed some of its wounds and is coming back stronger than it used to be. EDS is definitely back," said Eugene Zakharov, an analyst with Technology Business Research Inc., in Hampton, N.H.

Back? Perhaps. Great? Not yet. TBR maintains that EDS lags in making effective use of offshore resources. TBR said EDS offshore head count is now 14,200 people, or 12.1 percent of its work force.

In contrast, TBR said Accenture has 19.5 percent of its people offshore, and IGS has 13 percent. Affiliated Computer Services Inc. leads the pack with 33 percent of its work force offshore, according to TBR.

Unless EDS can gain greater savings from shipping work to low-cost destinations, it will be hard put to offer aggressive pricing and still maintain its margins, said TBR analyst Patrick Sayers.

Click here to read more about EDS turnaround and globalization.

IGS continues to loom as EDS toughest competitor. The IBM unit won a $2.2 billion deal in September from ABN AMRO Bank N.V., beating EDS. "They won that. They did a good job on that," Jordan said. "They had a pretty big position there already. We had a small position."

Despite having vast expertise among its ranks, EDS often fails to bring that to its customers, said Gartner Inc. analyst Lorrie Scardino in Stamford, Conn.

"Theyve got a lot of people who would be qualified as consultants but arent being used as consultants," Scardino said. "They need to get vertical-industry knowledge to the point of engagement."

And the Agility Alliance has to endure to become something more than a marriage of convenience for all concerned. Some partners could go off in their own directions. EMC, for example, is known to be counting heavily on its own services revenue for the future.

But EMCs Jenkins insisted the partnership is alive and well. "Weve been working very well together, and there has not been any friction, really," Jenkins said.

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