Lost Contract Highlights Bad Week For EDS

It's been a rough week for EDS. On Thursday, the IT services firm lost out on a multibillion-dollar contract to provide payment systems for the British tax authority--a contract it had held since the early 1990s. One day earlier, high-profile board member James Baker resigned, and rival IBM boosted its own fortunes with a major contract win.

The lost tax auhority contract was biggest blow of the week. The British government awarded Cap Gemini Ernst & Young a 10-year, $5.2 billion contract to operate a tax-payment-processing system for its Inland Revenue department beginning next year. EDS, which had held the contract since 1994, had been lobbying hard for the business. Its efforts included taking out newspaper ads in London's financial papers to promote its capabilities.

However, Soundview Technology Group analyst John Jones says poor performance by EDS led Inland Revenue to seek a new outsourcing partner. A system developed by EDS to handle the processing of tax credits struggled to keep up with the volume of applications, resulting in late payments to hundreds of thousands of U.K. citizens, Jones says. "The customer satisfaction issues at EDS now span three continents," Jones wrote in a sharply worded research note issued today. EDS was bidding for the contract in partnership with Bermuda-based Accenture. Cap Gemini Ernst & Young has tapped Fujitsu Services to help fulfill the contract.

An EDS spokesman says the company is "extremely disappointed" not to have received the contract but believes it offered the best solution at the best value.

Also this week, President Bush called on former Secretary of State and EDS board member James Baker to lead a diplomatic mission to Europe in an effort to quell dissatisfaction with Bush's decision to limit Iraqi rebuilding contracts to companies in nations that support the war effort. Baker accepted and announced his resignation from EDS's board yesterday. Baker wasn't happy with the board's decision earlier this year to replace chairman and CEO Dick Brown with Michael Jordan, one analyst says.

Meanwhile, IBM won an eight-year, $1.2 billion contract to manage European and North American IT operations for tire manufacturing company Michelin. Under the contract, unveiled Thursday, IBM will manage and maintain servers, workstations, PCs, and a range of other IT systems for Michelin. On Wednesday, Zurich Financial Services said it had chosen IBM to consolidate and operate its IT systems worldwide. Terms of the deal were not disclosed.