EDS moves to cut costs; layoffs a possibility

IDG News Service - Financially troubled Electronic Data Systems Corp. is launching a companywide reduction of overhead costs that could involve layoffs, a company spokesman said today.
At this point, EDS has no concrete plans to reduce its workforce, but layoffs are a possibility, said Jeff Baum, an EDS spokesman. "There's no specific recommendation at this point [regarding job reductions]. Each business group will look at its operations," and decisions will be made later, he said.
EDS, the world's second-largest provider of IT services behind IBM, shocked investors and sent its stock tumbling when it announced on Sept. 18 that it would miss its revenue and earnings targets by a wide margin for the third and fourth quarters of 2002 (see story).
The company will provide more details about its plan to cut costs and boost revenue and profits when it reports its third-quarter results Oct. 30, Baum said. In the meantime, an open letter to shareholders from EDS Chairman and CEO Dick Brown posted on the company's Web site yesterday gives an indication of the steps being taken.
The letter states that in addition to cutting overhead costs, EDS will take the following steps:

• Rein in expenses related to its sales operations, where overspending contributed to the third-quarter shortfall.


• Try to generate revenue in the near term and improve its weakened cash flow by cross-selling additional services to existing clients.


• Review its services portfolio "to ensure it provides maximum financial value."


• Review its revenue-forecasting methodology, which failed during the third quarter that ended yesterday.


• Review underperforming contracts to improve their bottom lines, particularly in Europe.

Although the letter stressed that clients won't be affected by EDS's measures, one analyst cautioned that IT managers and CIOs should be proactive and reacquaint themselves soon with their companies' contracts with EDS.
"EDS will be going through every single contract it has to see if it's performing well, and if it's not, they'll look to make improvements," said Lorrie Scardino, a Gartner Inc. analyst.
For example, service providers like EDS sometimes make concessions and go beyond what's required of them in a contract in order to prompt a specific client to spend more, she said. But if the extra effort on EDS's part isn't yielding increased spending, then EDS will likely reduce the resources it's devoting to that contract, she said.
"If you're getting services and top-end resources from EDS that you're not paying for because you promised additional growth in your spending and a further extension into your enterprise, and you haven't delivered, those top-end resources will be removed," Scardino said.