EDS faces headwinds, aims to reconnect

Electronic Data Systems is among the world’s largest IT services providers, with $20 billion annual revenue and 122,000 employees. But the company has struggled over the last few years to recover from a string of debilitating events.

Electronic Data Systems is among the world’s largest IT services providers, with $20 billion annual revenue and 122,000 employees. But the company has struggled over the last few years to recover from a string of debilitating events.

A high-profile contract with the U.S. Navy has gone notoriously poorly – three years of financial problems with the Navy Marine Corps Intranet project have cost EDS $145 million in operating losses, according to Gartner.

EDS also struggled to fulfill contracts with Dow Chemical and the U.K. tax body Inland Revenue before losing each to competitors. Plus it’s dealing with an ongoing probe by the U.S. Securities and Exchange Commission; a lawsuit filed in August by former client and satellite TV group BSkyB; and a downgrade in July of its long-term credit rating to junk bond status by Moody’s Investors Service.

Now comes word that EDS plans to cut 15,000 to 20,000 jobs over the next two years as part of its ongoing recovery strategy. Michael Jordan, chairman and CEO of EDS, revealed the staff reduction plans at a SmithBarney Citigroup technology conference earlier this month.

Jordan, former head of CBS, took the helm of EDS in March 2003 – after the company ousted Dick Brown – and began assembling a new management team and plotting how to stabilize the company.

Today, EDS is 18 months into its turn-around plans, says Kevin Lightfoot, a company spokesman. Those plans include reorganizing EDS’ internal divisions and refocusing on its core outsourcing business. On the services front, the company is pushing its “agile infrastructure” offerings, which center around utility computing technologies that dole out and bill for resources on an as-needed basis.

The intent is to help clients transform their businesses, not simply relinquish control of systems operations, Lightfoot says. “In the past we just took over clients’ IT services and ran their computer systems and networks. Really, it was, ‘we’ll run your mess for less.'”

Another big part of EDS’ makeover plans revolves around cost reductions. The company expects to remove $3 billion in expenses over the next 30 months by focusing on three key areas: streamlining supply chain and purchasing activities; consolidating service-delivery facilities and internal work processes; and workforce reductions.

Jordan’s recent comments about staff reductions “are pretty well in line with what we’ve been saying about our ongoing drive to improve our cost structure, as part of our overall transformation effort,” Lightfoot says. The final number of positions cut could be modified, he says. “It really depends on how well we transform the business, how we improve our overall productivity, and how well EDS sells new business into this new low-cost structure.”

Lorrie Scardino, a research director at Gartner, says the staff-reduction news is not as dismal as it sounds. Some reports have portrayed the announcement as an imminent 20,000-person layoff, but that’s not the case, she says. Rather, it’s a long-range goal to reduce the workforce as EDS transforms its business model.

In a traditional outsourcing deal, a service provider takes over a client’s IT environment and operates that custom environment using its own economies of scale to reduce costs, Scardino says. “Those custom deals have a high labor component – too high if you think about opportunities available to automate a lot of that work and move to more standards-based computing.”

Now EDS is looking to pitch more standardized, utility-based offerings, and if clients accept those offerings, EDS won’t need the staff it retains today. Neither will its competitors, which are pursuing similar efforts.

“The outsourcing providers will require less labor to do the same work that they’re doing today,” Scardino says.

Since January, EDS has stuck with a consistent message, and the actions the company is taking appear to be consistent with that theme, Scardino says.

It’s a welcome change: EDS in the past has been known for saying one thing and doing another, she says.

“The Dow Chemical issue is an example of EDS’ executive leadership team doing what it said it would do. They said they were going to get rid of their problem contracts, even if it meant canceling the contracts,” Scardino says.

Problems with Dow

Dow Chemical was a problem contract from the start – bid and won under the old leadership that practiced a “win at all costs” mentality. EDS priced the deal without sufficient experience and wound up losing lots of money, she says.

EDS will feel the effects of the Dow Chemical loss most among prospective network services clients, Scardino says. “I think in the network space EDS is at a disadvantage right now because of that.”

Looking ahead, partnerships are important for EDS’ survival. EDS and competitor CSC don’t have the hardware and software products that IBM and HP do to feed their services businesses, so they need to rely on vendor partnerships – historically a weak area. “Partnerships in the IT services market have never been a strength of the IT services providers,” Scardino says.

It’s also important that EDS not focus exclusively on outsourcing to the detriment of its consulting business.

“The fear is that EDS will be known as a source that can do what you’re doing today for a lot less money but really can’t help introduce new business models,” Scardino says.