In Search Of Agility

Nextel Communications Inc. senior VP and CIO Dick LeFave, who is committed to spending more than $100 million with IT-services company EDS over the next two years, believes turnaround CEO Michael Jordan has done a good job righting the vendor. Morale is up, and customer service has improved, says LeFave, who has just one more request for Jordan and crew: "I'd like to see them stay out of the newspaper."

EDS's customers will determine whether its strategy will pay off. One it must convince is its former corporate parent, General Motors Corp. EDS gets about two-thirds of the automaker's spending on IT outsourcing, which translates to about 10% of EDS's annual revenue. But its contract with GM expires in 2006, and the work is open to bidders. Jordan says he's confident EDS will hang on to the bulk of its GM business. "We have made a lot of changes to improve our delivery and solve some of our problems. We look forward to a vigorous recompete," he says. Jordan's optimism would seem to be borne out, at least in part, by the automaker. GM CIO Ralph Szygenda, in an E-mail, says EDS remains "a significant strategic supplier" to the automaker. However, for EDS to retain that status over the long term, it will need to be able to keep up with "GM's increasingly global business processes in a unified and coordinated way," Szygenda says.

Despite improved financial stability, one challenge for EDS is that it hasn't been making a big splash with customers. Its sales have been flat over the past several quarters, and its win rate on new contracts is anemic.

EDS has prevailed in outsourcing deals valued at more than $500 million just 5% of the time during the 12 months ended in June, compared with 21% over the previous 12 months, according to research firm Sanford Bernstein. It also faces problem contracts beyond Dow Chemical. In August, British Sky Broadcasting Corp. sued EDS over a failed customer-relationship-management implementation agreement that EDS signed in 2000 but walked away from two years later. EDS filed a counterclaim against BSkyB for payments EDS says it's owed.A 10-year, $800 million deal to build a case-management system for the United Kingdom's Child Support Agency also is in jeopardy because of technical problems. In July, Sir John Bourn, head of the United Kingdom's National Audit Office, said in a report that the system wasn't living up to expectations and called the results of the program "disappointing." One analyst believes EDS may end up terminating that contract as well. The company's well-publicized troubles, along with a downgrade of its debt to junk status by Moody's Investors Service, are "something you have to sell against," Jordan concedes.

Some customers say that the positive changes Jordan has brought to the company outweigh the negative headlines. In December 2003, Blue Cross Blue Shield of Massachusetts signed a $320 million, multiyear contract renewal with EDS. The insurer's CIO, Carl Ascenzo, has noticed the same thing Nextel's LeFave has: Since Jordan's arrival there has been a noticeable uptick in morale of the EDS staffers with which he deals and customer service has improved. "They've become easier to work with," he says. Accountants from Blue Cross Blue Shield of Massachusetts went over EDS's books before he renewed the contract. "We concluded that their [financial] situation wasn't of a magnitude that would cause us any problems," says Ascenzo, noting that the insurer conducts similar due diligence with all its major vendors.DaimlerChrysler AG also had sufficient confidence in EDS to commit to a long-term deal to consolidate and standardize the automaker's IT infrastructure, according to a DaimlerChrysler spokesman. EDS brings specialization and expertise in areas the company needs, such as server management, he says, so DaimlerChrysler gets more value than if it had done the project itself. "We weren't concerned about their financial situation when we made the deal," he says.

Some industry watchers believe, however, that EDS still faces significant financial challenges that are hampering its ability to capture new business and invest in training and technology development. EDS this year will generate $100 million in free cash flow, which is generated from daily operations and represents cash that's left after deducting for capital investment, estimates Cindy Shaw, an analyst at Schwab Soundview Capital Markets. That's not enough for a company with more than $20 billion in annual revenue, Shaw says. "Their balance sheet is still comparatively weak."

Some of EDS's biggest rivals can draw upon heavier war chests to pursue engagements. While EDS's free cash flow represents one-half of 1% of revenue, Accenture's free cash flow is 12% of its revenue, and IBM's is 11%.

EDS is counting on the expansion of its business-process-outsourcing services to drive additional revenue. A year ago, it created a BPO services group headed by former Perot Systems executive Guillermo Marmol. The company plans to push more aggressively into fast-growing vertical markets such as manufacturing and human-resources management. "We're gearing up for it," says Jordan, adding that EDS may look at acquisitions or partnerships to build out its portfolio of business-process-outsourcing service offerings.

To ensure that it's price competitive with overseas rivals, EDS is pushing much of its call-center and processing services to near-shore destinations such as Canada and offshore locales such as China, Eastern Europe, and India. "We have to recast our economics to be competitive," Jordan says. The company needs to cut its service-delivery costs by 20%, he says. "That's a big part of our plan to move ahead."EDS also is partnering with software vendors to build out its business-processing-outsourcing capabilities. In August, for instance, it unveiled an alliance to deploy Siebel Systems Inc.'s CRM software at customer contact centers it runs on behalf of BPO clients.

But at the end of the day, EDS's future success--some say longevity--will hinge on how well customers buy into its agile enterprise strategy and how well EDS executes. Jordan's message to CIOs: "We have to wring the last nickel out of your cost structure to be competitive."