EDS Next Challenges Loom

Opinion: The company's successful turnaround is only the beginning of a long journey.

EDS has taken many of the tough steps necessary to execute a corporate turnaround. The company has shed incompatible units, eschewed risky deals and cut costs. CEO Michael Jordan said in eWEEKs recent cover story that these steps have taken hold and are starting to pay off.

There are signs that he is right. But, more important, he has convinced big customers that his company is not going away, and he has convinced most of the technology and financial analysts that the EDS turnaround is the real deal.

Jordan is frustrated that Moodys isnt on board. The bond-rating company still is not recommending EDS debt as investment grade. But lets take a bit of a leap and assume the turnaround is indeed well on its way. Whats next?

/zimages/3/28571.gifEDS is in the midst of a turnaround that is fattening up its bottom line. Will that mean more customer wins? Click here to read Stan Gibsons analysis.

EDS is righting its ship just as gale-force competitive winds are gathering. The Indian powerhouses are growing at tremendous rates. Wipro just reported a big quarter. And, analysts say, in a few years, top Indian companies such as Wipro will be right up there among todays heavyweights such as IBM Global Services, EDS and Accenture.

To fend off the Indian companies and gain share versus IGS, EDS executives are trying to get more application development and BPO (business process outsourcing) deals into EDS portfolio.

The reason is simple: Those types of deals carry a profitability rate of 20 percent, compared with a profitability rate of only 10 percent for IT infrastructure outsourcing. "We need to fix the mix," said Steve Schuckenbrock, one of EDS chief operating officers.

/zimages/3/28571.gifClick here to read about what EDS CEO Michael Jordan says must be done for the company to be great again.

Winning application development deals will mean beefing up EDS operations in low-cost countries such as India. EDS lags behind some competitors in offshore operations.

Then theres consolidation. In a market such as IT outsourcing thats not growing at a rapid rate, it may make sense at some point for EDS to merge with another big player. In a recent interview, Jordan said there were no other companies that would bring great advantage to EDS. He did, however, favorably mention partnering with Accenture on one account.

One analyst noted that a company such as Accenture could be complementary to EDS. "Their strengths are in opposite halves of the outsourcing and consulting world," said Lance Travis, an analyst at AMR Research, in Boston. Accenture is noted for its business transformation services, said Travis, while EDS is better known for IT infrastructure work—even if it is seeking to change its own mix to BPO and application development.

Like all big mergers, such a move would be risky. But in a market in which mergers are expected over the next few years, it would pay to be proactive rather than reactive.

Finally, Jordan wont remain CEO forever. He came out of retirement to take the EDS helm and in another three years or so will probably be headed back into retirement. Jordan has brought aboard a number of his own people for key positions. Often mentioned as a Jordan successor is Charlie Feld, vice president of portfolio development, who joined the company when EDS acquired his consultancy, the Feld Group.

Feld, in turn, brought with him Feld Group executive Schuckenbrock, who, in an unusual arrangement, is co-COO with his longtime friend Ron Rittenmeyer, who joined the company in July 2005, having most recently been managing director of The Cypress Group, a billion-dollar private equity company in New York.

All these moves add up to a more competitive EDS than the industry has seen in years. The measure of success, however, will be in how many deals EDS can win versus archrival IGS, which, Jordan said, EDS encounters in nearly every major bid.

Out and about

Showing that it can indeed flex its mus- cles to win big deals, IGS signed a 10-year, $1.1 billion deal with clothing retailer Gap. Gap will send approximately 400 workers over to IBM in the deal, which has a three-year extension option.

E-mail Stan Gibson at stan_gibson@ziffdavis.com.

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