Turnaround Time

EDS says it's set to come back, with plans to lower service-delivery costs and offer higher-level services
Some observers question whether EDS has made as much of its A.T. Kearney acquisition and the consulting talent it gained with it as IBM has made in integrating PricewaterhouseCoopers' consulting business with its Global Services practice. Sales at the A.T. Kearney unit, which last month installed A.T. Kearney veteran Henner Klein as CEO, dropped 26% in the third quarter to $192 million. Klein declined to be interviewed.

Others believe Jordan is on the right track in giving Kearney employees back some of the autonomy they'd lost under Brown. It's "a huge boost to morale," says Technology Business Research analyst Humberto Andrade. At the same time, Jordan is "ensuring they work closely with EDS to secure big accounts."

Meanwhile, EDS's biggest account will soon be up for grabs. Revenue from No. 1 client General Motors Corp., which spun off EDS back in 1996, fell 7% in the third quarter to $546 million. Dan McNicholl, GM's chief strategy officer of information systems and services, says the company's original agreement with EDS guaranteed the services vendor the majority of GM's IS service business for 10 years. But the agreement also allows GM to put up for competitive bidding what McNicholl calls "a material amount" of services work. EDS retains about 75% of GM's IS services work, but McNicholl says that some providers that have won several GM outsourcing contracts have put very senior "trans-project" teams in place to position them for 2006 when the EDS contract expires. Accenture, Cap Gemini, Hewlett-Packard, and IBM all handle some of GM's contract work.

Another issue for EDS is that its plans for flexibility may not be reaching the sales staff. Art Cox, VP for group IT at appliance maker the Electrolux Group, was recently looking for an outsourcing partner to manage the company's desktop environment, which includes more than 13,000 PCs. Cox narrowed the field to EDS and IBM. Ultimately, he says, he chose IBM "because they agreed to do things our way." EDS wouldn't budge on certain pricing options and couldn't offer the variable-cost plan that IBM did, Cox says. EDS may have lost more than just a desktop-services deal. Cox says he may expand his outsourcing relationship with IBM to include server-management and other higher-value services.

HP may someday be as big a threat to EDS's future as IBM. The vendor, which is intent on becoming a major services player, last year booked just over $6 billion in IT services revenue, compared with EDS's $19 billion and IBM's more than $28 billion. But under services chief Anne Livermore, HP inked a $3 billion desktop services deal with Procter & Gamble, after EDS lost the opportunity. Like IBM and unlike EDS, HP can bring significant R&D resources to bear. "We were able to put something on the table that EDS couldn't," says Joe Hogan, HP's VP of marketing for outsourcing. "They have to react to the technology that's in the market; we invent the technology that's in the market."

EDS also has yet to clear a number of internal hurdles, including reining in several problem contracts. The build-out of the Navy and Marine Corps intranet is proving to be a quagmire. EDS says it lost $90 million on the contract in the third quarter, and analysts are skeptical as to whether the company will ever make money on it. "They still haven't been able to reach the service levels at which the contract becomes profitable," says Soundview Technology Research analyst John Jones.

Jordan in part blames local Navy commanders for setbacks on the project, which is about one year behind schedule. EDS crews were often denied the access they needed to work on the project at a number of bases, he told investors last month. Now, EDS is working with top Navy brass to ensure access. "The roadblocks to the rollout are being unblocked," Jordan said. EDS is also renegotiating other contracts that imposed "onerous terms and conditions" on the company, he said.

"There's a lot of hidden value in EDS that will be realized as the macroeconomic picture improves," says American Technology Research analyst Garrity. With new technology and services in place and a more-disciplined approach to contract management, EDS may at last be getting out of its own way.

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