EDS setting the stage for business turnaround

Six months ago, outsourcing giant EDS was in serious trouble. The company was losing business, and an unexpected shortfall in earnings caused a stock sell-off that damaged EDS’s reputation and forced deep cost-cutting measures. CEO Richard Brown resigned, and it seemed that the company’s long tradition of steady growth was on its way out as well.

Just two quarters later, however, EDS is making a comeback. In October the outsourcing giant reported a 6% increase in sales for its fiscal third quarter. EDS has recently signed major deals with Sprint and the Department of Housing and Urban Development. And last month, the company launched a new unit that will focus on business process outsourcing (BPO), an area in which it had previously been losing deals to more business-savvy competitors.

What’s behind EDS’s swift turnaround? The first answer is a new management team. Following Brown’s departure, EDS signed Michael Jordan – no, not the basketball legend, a different Michael Jordan – to be its new CEO. Jordan, a former chairman of CBS, is getting an assist from Jeffrey Heller – a former EDS vice chairman now acting as president and COO – and Bob Shaw, who joined the company as CFO just before Jordan came on board.

Together, the new EDS management is changing the way the company works. A chief goal is to cut service delivery costs by between 15% and 20%, Jordan told investors at a recent briefing. The company hopes to achieve that goal through traditional cost-cutting measures, but also by consolidating EDS infrastructure and virtualizing its data centers. This consolidation, combined with technology acquired from partners such as Opsware, will make it possible for EDS to offer pay-as-you-go utility computing services that lower operational costs for EDS and its customers.

Aside from its virtualization effort, EDS is expanding its offshore outsourcing resources, from 9,000 employees to 20,000 employees over the next year. While some U.S. outsourcing providers are hesitant to go the overseas route because of potential controversy over its impact on the U.S. job market, EDS is facing the harsh reality that overseas workers can do many of the same tasks at a lower cost.

Now, with the launch of a new business group last month, EDS is setting its sights on the BPO market. Through the new group, EDS will take over certain aspects of business operations on behalf of its customers, including key functions such as financial administration, payroll and human resources.

To date, the BPO market has been dominated by less IT-focused outsourcing companies such as Accenture and KPMG. BPO requires a strong strategic consulting function, which is not EDS’s specialty. EDS acquired A.T. Kearney more than a year ago to beef up this function, but observers say the two organizations still have yet to effectively merge well enough to take advantage of each other’s strengths.

Will cost cutting, overseas expansion and penetration of the BPO market be enough to turn EDS around? The answer is uncertain. Despite gains in sales, EDS still posted a loss in the third quarter, and the viability of its virtualization and BPO efforts still have yet to be proven. In a very slow market, even one wrong step could grind the EDS turnaround to a halt.

Regardless of their long-term success, however, EDS’s new management should be commended for putting a halt to a dangerous tailspin. If EDS had told industry experts six months ago that it would level off this quickly, most of them would have laughed. Now it’s clear that the outsourcing giant has some serious leadership and may very well be on its way back up again.