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Electronic Data Systems pioneered the outsourcing industry, but fell on hard times several years ago after signing several major, ill-conceived deals, such as the giant Navy-Marine Corps Intranet project.
The reversal led big IT customers and the investment community to become wary of the companys prospects.
To turn the company around, EDS Michael Jordan came out of retirement in 2003 to become EDS Chairman and CEO.
Renegotiating bad contracts and jettisoning unneeded subsidiaries such as UGS and AT Kearney have helped bring the company back to respectability, according to Jordan.
In recent months, investment firms such as Lehman Brothers have begun recommending the companys stock once again.
Now EDS is looking to retain a sizeable chunk of the IT business at key client General Motors. EDS was a subsidiary of General Motors from 1984 to 1996, and retains about 60 percent of the automakers IT work.
In an interview with Executive Editor Stan Gibson at the companys headquarters in Plano, Texas, Jordan said that there is still more work to be done in returning the company to industry leadership.
You said in a recent speech that the turnaround of EDS is about halfway complete. Is that an accurate assessment?
In the sense of solving the major problems—the loss accounts, the Navy problem—were ahead of that. Weve gone through a trial and come back to a pretty good position. To drive the growth and sophistication of our business is going to take another two to three years.
The one thing we have left to do is to get Moodys to rate us investment grade, but we think well do that. We actually feel pretty good about where the company is headed. Our goal now is to continue to drive ahead, improve our margins, get a bit more growth and build some of our weaker areas like applications.
Was there a time when customers were holding back because of the viability questions?
Yes, that was happening in 03 and 04 after the Moodys downgrade. It was for that reason that we decided to go ahead with the sale of UGS PLM, to put a couple of billion dollars in cash on our balance sheet. We got through that and in 2005, we didnt hear very much about it.
You are getting some long term deals now. In many of them, youre part of a team or alliance.
One of our strategies in restoring competitiveness to our infrastructure business was the development of a standardized technology platform and an alliance structure.
As weve gone into head-to-head competitions, which are generally against IBM, the strength of our alliances have been pretty important. Best of breed technologies—EMC, Cisco, Microsoft—have let us push a lot of differentiation.
Are there specific wins that stand out—where EDS so-called Agility Alliance paid off?
I think Royal Ahold is a good example of a recent win.
IBM has had a few wins as well, such as ABN Amro. Were you bidding on that?
Yes. They won that. They did a good job on that. They had a pretty big position there already. We had a small position. IBM is in most infrastructure outsourcing situations. Its usually us and IBM. I think were winning our share.
Looking at how you stack up against IBM, their classical strengths would probably be research and development, vertical expertise and global capabilities. Youve been global for some time, you are strong in some vertical industries ….
Yes, like manufacturing, transportation and autos. And for the R and D piece, we are piggybacking on our alliance partners.
So the question is, is that R and D strategy working?
Yes. Our alliances are not just marketing alliances. Theyre showing us three-to-five-year product plans and we are baking that into our development strategy. We can say to customers what equipment theyll have and what the economics will be three to four years from now.
The customers seem to be open to the best of breed pitch?
Yes. Oh yes. IBM has built a reputation that is both a strength and a weakness. Theyre a very strong company and have a lot of the dominance in the data center world. On the other hand, there are a fair number of clients that think they got manhandled by IBM.
IBM does tout the ability to use IBM research to come up with a special sauce for a specific client. Can you go to your alliance partners for that?
We havent found a specific instance where that really makes a difference. In the services business, were adapting and implementing established technology with a flexible point of view. Very rarely do you want something from the labs that youll run your business on.
Next Page: Some advantages over IBM.
Some Advantages over IBM
Looking at IBM, are there any other vulnerabilities where you have an advantage?
Our ability to team is very important. EDS traditionally didnt do this well, but weve certainly made it a hallmark of the turnaround — being able to team with different software players and with Accenture in certain areas. I think thats been a real change for us.
Did that pitch help when there was doubt about the company? You could say, look, youre not putting all your eggs in one basket. Weve got these alliance partners.
Yes. There have been a couple of instances where weve had pitches about development and infrastructure and ongoing management and we teamed with either a specialized applications house or even with Accenture. Its not something that IBM is very comfortable doing.
IBM does make noises about being attuned to partnering. They are saying the right thing.
They are the greatest “sayers” in the world [laughter].
GM is a big topic of the moment.
Were still optimistic, although nothing has been finalized yet. Were optimistic were going to do well.
Is GM asking for very aggressive financial terms from the bidders?
I cant remember the specifics, but these guys are always tough. Theyre very demanding, GM and Ford both.
Do you have to be cautious about doing business with a customer that could go bankrupt?
I think its always important. I personally dont believe that GM is going to go bankrupt. They are in a position to extract significant concessions from the UAW.
I think bankruptcy is a last resort if they dont. But the UAW would be foolish to take their chances on bankruptcy.
IBM announced it was freezing its pension plan and encouraging people to move to a 401K plan. EDS has a pension plan—any similar thoughts?
Weve looked at that. Were still evaluating what the impact would be on our employees and on our cost to do the same thing, in a slightly different situation.
Looking at profitability—what are the key components youre looking for now in a contract that EDS was not finding a few years ago?
In 03, when I came in we changed our whole approach to doing contracts. If you look at our real problem accounts, in a lot of them we accepted such onerous terms and conditions that any mistake resulted in very high payments—way off the industry standard. So we have really tightened up our procedures.
We took our best technical people, our solution architects and moved them into the sales force—rather than having the sales guys try to do detailed design, sometimes imperfectly.
The second thing is that any major contract that has non-standard terms and conditions has to be approved by me.
What is the definition of non-standard?
It would be very onerous service levels and penalties. There is kind of an industry norm. In terms of technology, it would be not staying within the Agile Alliance. We incent our sales force to sell our standard solution. If they sell the hundred percent standard solution with the alliance, they get a few more bucks. We find that works wonders in getting their attention [laughter].
The Navy Marine Corps Intranet was a problem you addressed early on. Are you pleased with where that is now?
Yes, we are. We put in a new team in the beginning of 04. We had a couple of surprises we didnt expect in the first quarter of 04. Since then, weve really pretty much stuck to what we said were going to do. Were in the midst of looking at an extension.
It was a very vague contract—if we had it to do it over again, we would have done a lot differently. We feel that going forward, the Navy Marine Corps will be an important piece of business and a profitable piece of business.
Do you mean profitable over the lifespan of the contract? Or just that by the end of the contract, your run rate will be in the black?
We dissipated a lot of money, almost three billion dollars. But we think well get a good percentage of it back—maybe not all of it.
A parallel contract in some ways was the UK Ministry of Defence. Did you get involved in that personally?
Oh yes.
You must be convinced its not going to go the way of NMCI…
No, no. Its a very different contract. Its a very ambitious timetable. We think were pretty much on track to deliver the first user live by the end of this month and ramp it up in February.
In many respects its a more ambitious program than the Navy because its actually going to be extended to deployed forces, both seaborne and deployed overseas, with all the attendant security problems. Itll be a good technology project for us.
How do you stay within standards when its an armed forces project?
The design must be done to their specifications. Its different from our standard desktop environment as it must be, given their security.
So you were able to stretch the envelope for the sake of this deal?
Yes.
Next Page: Working with other vendors.
Working with Other Vendors
That deal was with an alliance of other vendors.
It was a consortium that included Fujitsu and included a few other people in the UK—also, Dell and Cisco are major suppliers. We are the team leader and the team is working well.
Some analysts are quite hot on the concept of multisourcing—like what GM is trying to do. They would say the UK Ministry of Defence contract is multisourced because there are multiple providers. Do you think multisourcing is a real trend?
To a certain extent. Over time, most large corporations will have two, maybe three services vendors. The key is not making it so complicated that there are too many interfaces to manage. Part of the GM project was to break things into logical bundles.
Not too many companies are doing it. Managing is very hard. GM is among the most sophisticated companies in the world and they have a very significant staff to manage this.
A rumor emerged recently about Hewlett-Packard acquiring Computer Sciences Corp. What is your take on that combination as a potential competitor?
I havent seen any substantiation to the rumor. We havent seen HP in any major competitions. I think theyre still trying to digest some of the very aggressive sales they made a couple of years ago.
CSC has also not been as visible on the radar screen as they were a year and a half ago. Consolidation in this industry is kind of inevitable, and thats fine with us.
Is a merger possible for EDS?
I dont see anything that would really help us.
Its not possible to talk about outsourcing without talking about globalization these days. Do you think youre well-positioned for the so-called “flat” world?
Our business is clearly less-impacted by the growth of the Indian players. We have about 14,000 people in what we call cost-advantaged locations and that will probably grow significantly over time.
Were not just in India, were in Eastern Europe and Latin America. Its a trend, you have to react to it. For [U.S.] government work, weve been setting up lower cost centers, like one in El Paso.
Some of the Indian players are growing at very rapid rates.
They are competitors in certain major pieces of application work although they dont have the front end of say, Accenture.
They might buy the front end.
Yeah, they could. But in the infrastructure business, we dont see them. Theyre not there. Its getting to be kind of a game between us and IBM—data center, virtual server, remote management—all of that.
It sounds like you see HP as a challenged competitor in some ways.
I think theyre challenged in that they signed a bunch of very difficult contracts from the economic standpoint. My recollection is they offered significant savings, which was required to win the contract, but didnt have the infrastructure to achieve the savings.
After an initial foray into the business, they havent been as aggressive. I think under the previous leadership, they were all things to all people—consumer electronics, printers, digital photography, PCs, high-end servers, software—it was like they wanted to cover everything on the waterfront. The pull-back from broad-based investment is a smart thing.
AT Kearney—why was there not the synergy that one might have expected?
Kearneys a very different kind of consulting firm from, say, an Accenture. Kearney is more like a McKinsey. It didnt fit. There was too big a gap between high-value consulting and outsourcing or even applications.
Its a boutique.
Its a boutique and it just didnt fit our corporate culture—you couldnt reward properly the people who were building the business.
You couldnt pay them enough?
Yes, in our structure. And they wanted to build ownership. I was with McKinsey for ten years and I do know the prima donna mentality.
Youre saying that Kearney had a few prima donnas then?
Sure, they all do. The good ones are prima donnas.
Were you a prima donna?
Yeah, sort of [laughter]. In very few situations were we in the same clients together.
Looking at IBM and its acquisition of PriceWaterhouseCoopers Consulting, which is now IBM Business Consulting Services, you can say they have a little of that, cant you?
Theyre more on the Accenture model. They bought a big resource and got a lot of people. Theyre also finding out its a burden to keep 20,000 people billing. So I think theyre still trying to figure out how to run a consulting business. They [IBM] are basically a hardware and marketing shop. Theyre still having adjustment problems.
So you think that some of those people will be leaving IBM?
The rumors are a lot of their senior people will probably [leave] when their lockup period is over.
Would you be interested in bringing some of them on?
Yes.
Next Page: A return to the Ross Perot era.
A Return to the
Ross Perot Era”>
What was your biggest surprise when you came to EDS?
It was really how fragmented the company had become in the GM years. Accounts acted as their own separate companies. It was not the EDS I knew. In the 80s, I used to run a company right down the street. We knew EDS. And they were just like us—very disciplined.
That was the Ross Perot era. Are you trying to return to the Ross Perot era in some ways?
Yes—the discipline, the metrics, the clarity, the accountability.
It had gotten soft during the GM years?
Yes.
So youre getting the company back onto a fitness regimen with more rigorous discipline.
Establishing cost standards and business metrics where none have existed. Developing significant technology to roll out and how were going to do it. Were just in the midst of this right now—driving down through the top 10,000 leaders in the company to create a highly aligned and clearly accountable organization.
Weve gone through a financial transformation and were in the midst of an organization transformation.
Ross Perot was into people, wasnt he? I dont see him as numbers-driven. He wanted to find people he called “eagles” to run his company.
This was a great organization with great morale. Our task is to rejuvenate leadership groups to make them look like the old ones and drive it down to the organization.
Starting Sunday, were having the top 200 leaders here for two days to talk about how were going to change the organization and way we do business. Then we have another 2500 in for the big sales kickoff. Were pretty serious.
It sounds like you want to re-think things and shuffle the deck—that further radical changes are contemplated.
Not so much radical changes as were just turning up the dials on management effectiveness. Were a very complicated company and weve made a lot of good improvements in the last few years. A lot of that has been driven by major financial changes at the top, major technology programs and so forth. We want to engage the whole organization in running our business.
Is acquisitions part of what might be on your plate for the coming year?
We acquired Towers Perrin last year and were looking at a bunch of others to fill in gaps.
When it comes time for you to leave EDS, what do you want your one big accomplishment, or legacy, to be?
I knew the founders—I knew Ross, Mort Myerson. I remember EDS as a great company. Now, were respectable. I would like to restore the company to the leadership position.