EDS CEO: Navy contract under control

Calling the project to build a massive intranet for the U.S. Navy “the elephant in the living room,” Electronic Data Systems Corp. (EDS) Chairman and CEO Michael Jordan on Tuesday said the company has now gotten that assignment under control, although he acknowledged it has taken longer than he expected.

“This contract was a mess,” he said during a meeting with financial analysts in New York on Tuesday. “Now we have a very solid plan and are executing against it.”

The multiyear, multibillion-dollar Navy Marine Corps Intranet (NMCI) contract, signed in October 2000, has been a recurring financial and logistics problem for EDS. It has been marked by delays and has drained significant amounts of cash from the Plano, Texas, IT services provider. For example, EDS wrote down $559 million in deferred costs related to the NMCI contract for the fourth quarter of 2003, ended Dec. 31, which it closed with a net loss of $354 million, or $0.74 per share.

Going back to Jordan’s predecessor Dick Brown, EDS’ top brass almost on a quarterly basis has provided assurances about improvements to the NMCI project, an analyst said. “EDS has on a regular basis made statements that it understands the NMCI problems and that it has corrected those issues that impeded its performance on that contract,” said Lorrie Scardino, a Gartner analyst. “Until we actually see the results of those fixes, this is just a recurring message. What they said yesterday doesn’t sound too different from what they’ve said in the past.”

Jordan, who became chairman and CEO in March 2003, said that responsibilities in the NMCI engagement were vaguely specified. In particular, the agreements EDS reached with subcontractors were faulty because they didn’t make the subcontractors sufficiently accountable, Jordan said. “This was not a clear contract,” he said.

Moreover, the NMCI project suffered from a lack of leadership on EDS’ part, operating in isolation from the rest of the company, and from a lack of commitment on the part of the Navy, he said. This lead to delays, as personnel at local Navy bases failed to cooperate or as EDS employees faced thorny technical roadblocks, he said. Meanwhile, EDS made the mistake of committing capital too early and assuming costs not contemplated in the contract in order to avoid further delays, he said.

Now, Jordan and the new management team he has put in place over the past year have established a “firm” implementation schedule and developed a more efficient rollout plan in conjunction with Navy officials, he said. The EDS project team has been reorganized by putting some of the best, most experienced EDS employees on it, he said. Jordan expects EDS to begin recovering its NMCI investment in 2005.

When it was signed in 2000, the NMCI contract was valued at more than $4.1 billion for five years, with an additional three-year option that could put its value at more than $6.9 billion. It was extended in 2002 to seven years with a three-year option, and its value rose to $8.8 billion, a Navy official said Wednesday.

Speaking about EDS as a whole, Jordan contested the notion that EDS is in financial trouble. “This is far from the case. I’ve been in a financial turnaround and this is very different. This is a managerial turnaround,” he said. “We’re very confident in our ability to turn around this ship very quickly.”

In 2003, Jordan and his team focused on stabilizing EDS, which had been rocked by disappointing sales, loss of confidence in its top managers, problematic contracts and government scrutiny, such as a still-ongoing investigation by the U.S. Securities and Exchange Commission (SEC).

“Instead of operating as a $21 billion business, we were operating like 200 smaller businesses. We operated in silos,” Jordan said. “As a result we had a wide disparity in execution across our businesses.”

Now, the central management group has been strengthened in key areas such as account management, contracting and procurement, and the company realigned to function more organically as a whole. The company is executing on its strategy to strengthen its core IT outsourcing business and to expand into growth areas, such as business process outsourcing, he said.

In 2004, EDS top management will focus on fixing outstanding problems, and Jordan expects EDS to move to a growth strategy in 2005 and beyond. “We’re going from an unleveraged company to one that’s highly leveraged, from an unfocused one to one that’s highly aligned,” he said.

While it’s a welcome development to hear Jordan and his team sounding optimistic, their plan isn’t particularly ground-breaking compared with competitors’ strategies, Gartner’s Scardino said.

“It’s positive that they’re upbeat about what they’ve done and what they want to achieve in the next couple of years,” she said. “But the things they talked about aren’t earth-shattering. Theirs is a very similar strategy to the one other service providers have adopted long before them. I didn’t hear anything that is a real breakthrough or something the competition isn’t already engaged in.”