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The largest and most complex it outsourcing deal in history is living up to that billing. Now into its third year of building the modern NMCI (Navy Marine Corps Intranet), Electronic Data Systems Corp. continues to unravel decades of antiquated technology, dozens of incompatible processes and an almost-uncountable number of rogue applications that were serving as the organizations administrative IT system.
The work has been slow going. By most accounts, the Navy is pleased with EDS progress, and officials said NMCI is already saving the government nearly $1.2 billion a year.
But the delays have put EDS, of Plano, Texas, well behind schedule and well off its projected revenue collections for the project. The resulting cash crunch, which forced EDS to take a $334 million write-off in the first quarter as a result of NMCI, has raised questions about whether EDS overpromised on the deal and can manage to stay the course and see NMCI through to completion.
“There were not enough people around who really understood that this was an enterprisewide solution,” Al Edmonds, president of EDS Government Solutions unit, said of the drafting of the $7 billion NMCI deal.
Complicating the work has been the unexpected discovery of more than 100,000 applications, some of them decades old, rogue tools installed by users and being used to communicate and run important day-to-day Navy business.
Old applications in nearly one-quarter of the seats cannot be transferred to new Windows 2000 machines, forcing EDS to install, in NMCI parlance, “dual desktops,” leaving sailors and Marines with two PCs on their desks. The Navy and EDS have narrowed the number of applications in use to 35,000 thus far, but the pair still has more application rationalization ahead before the migration of those that make the final cut can begin.
To date, some 5,000 applications have been certified on NMCI. Ultimately, the goal is to reduce the number of applications to around 2,000, but getting participants in numerous departments to agree to change their software tools has eroded some user support, officials said.
Also slowing progress on NMCI is additional technology testing imposed by the Department of Defense. EDS is currently transitioning about 4,000 seats per month, and that figure is expected to rise this summer now that some of the hurdles are being overcome, officials said. Initially estimating that NMCI would integrate about 200 networks, Navy officials now say it will touch as many as 1,000.
The drain on resources is also jeopardizing EDS finances at large.
“[NMCI] is dragging an otherwise-strong portfolio of contracts down,” said EDS Executive Vice President and Chief Financial Officer Bob Swan. Swan added that the problems with the deal stemmed from “insufficient due diligence [in a] push to close the deal.”
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Nevertheless, EDS executives insisted the company remains willing and able to fulfill its NMCI obligations. As for the client, “We didnt know how many networks, PCs, applications we had,” said Capt. Chris Christopher, staff director in the NMCI Office, in Crystal City, Va. “The NMCI is giving us the tools and the insight to understand all those.”
EDS has taken over responsibility for roughly 237,000 of the contracted 365,000 NMCI seats. But only 79,412 of those are completely deployed and generating the full contract price for the service provider. That puts the 10-year project roughly a year behind schedule in just its first two-and-a-half years, based on initial estimates. The Navy said it expects the number of seats turned over to EDS to rise to 300,000 before the end of September, according to Christopher.
And while Navy and EDS officials remain committed to NMCI, it is getting harder for EDS to trumpet the deal as a win for the company.
Like most deals of its kind, EDS doesnt get much in payment from the Navy until implementation milestones are met. With the project lagging behind schedule, return on investment for EDS is still a ways off, analysts said. Even the seats that EDS has taken responsibility for are being only partially paid for by the Navy because service levels have not yet been met.
While NMCI was originally expected to become cash-flow-positive this year, EDS in its last earnings announcement put that date out to mid-2004. Performance dates have been pushed out nearly two years, with the contract now due to expire in 2010 if a three-year extension option is exercised, which could raise the final price to nearly $9 billion, officials said.
On the EDS books are “$1.7 billion of assets, consisting of unbilled revenue, property and equipment, and other assets, attributable to [NMCI],” according to SEC filings. In addition, the company has more than 3,000 employees dedicated to the operation and has invested more than $600 million into it.
Now referred to in EDS documents as the companys pre-eminent “problem contract,” the hope, according to officials, is to make the best of the situation and learn from it. While a great deal of money still stands to be made with NMCI, EDS officials said that breaking even may be a best-case scenario, with profitability a long shot.
Clouding the future of the project is the continued wavering of political support. The House Armed Services Committee is now seeking to cut 10 percent of NMCIs funding next year out of concern about the ability of both EDS and the Navy to execute the contract as planned, a committee staffer said. Lawmakers have raised misgivings this year about the DODs IT programs overall, but the proposed cut of $160 million to NMCI is by far the largest reduction.
The cut would equate to a reduction of 35,000 seats, said Bill Richard, enterprise client executive for the NMCI Program at EDS. “Its a concern for everyone,” Richard said.
EDS Swan said in an analysts meeting in New York two weeks ago that NMCI was among the things that “keep me up at night.” In outlining the current state of fiscal affairs at the services company, “Were still counting on the massive NMCI investment to start paying off, albeit late. Were realistic, not optimistic,” he said.
At the same meeting, EDS CEO and Chairman Michael Jordan called NMCI a “strain on our balance sheet.”
But even Jordan maintained the companys diligent focus about seeing the project through. “The perception is that were not here for the long term,” said Jordan. “It isnt true, though our competitors are making hay with that.”