Can Streamlined EDS Win Customers?

Analysis: EDS is in the midst of a turnaround that is fattening up its bottom line. What does that mean for the company's 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.