EDS Plots to Avoid 'Problem Contracts'

Company moves to 'agile enterprise' business strategy

Electronic Data Systems Corp. has launched a major overhaul of its business strategy in an effort to remove the term problem contracts from its lexicon. But the firm's most important contract, the beleaguered, multibillion-dollar Navy/Marine Corps Intranet (N/MCI), continues to be an anchor tied around the company's neck.

During Plano, Texas-based EDS's latest earnings conference call with analysts, on July 28, CEO Michael Jordan announced an "agile enterprise" business strategy: a network-centric utility computing model based on "best-of-breed alliances."

However, the most critical aspect of the new strategy is a major revamp of EDS's entire services delivery structure, said Jordan. "This will result in significant consolidation of solution centers [and] data centers, and change the way we approach the application development business," he said. "This is how we're going to achieve the next $3 billion in cost savings."

And that part of the company's strategy for economic revival may already be at work supporting the N/MCI contract, a $6.9 billion deal awarded in 2000 that's now valued at $8.8 billion as a result of a two-year extension.

After completing an internal review of N/MCI program management in January, the company put in place "very rigorous contract review processes" focusing closely on "our ability to deliver what we propose in the contract, which we did not do as well in earlier years," said Jordan.

SLA Changes

In addition, EDS recently announced a joint commitment with the Navy to implement commercial service-level agreements by Sept. 1. It is also about to sign a contract performance modification that will allow EDS to bill the Navy for services it is performing but that aren't covered by the contract.

"We recognized the need to make the SLA process more reflective of commercial best practices," said Navy Capt. Chris Christopher, deputy director for future operations and business initiatives. He stressed that the SLAs are being refocused on efficiency and are not being adjusted so they're easier to achieve.

Christopher also confirmed plans to modify the N/MCI contract to add a range of application hosting services, including server management, network management, security services, storage services, and hardware and software support. He added that the change would also enable the Navy to order hosting services from standard packages rather than customizing them for every N/MCI user organization.

EDS has a lot riding on the changes. According to Robert Swan, EDS's chief financial officer, the N/MCI deal "continues to be a drag" on the firm, with a $12 million reported drop in revenue compared with last year due to a decision earlier this year not to defer construction costs related to the contract. In addition, Jordan acknowledged that continued "uncertainty" surrounding the deployment of N/MCI seats at the Navy's Bureau of Medicine and Surgery yielded a $100 million negative cash flow setback this year.

Lorrie Scardino, an analyst who covers EDS and N/MCI at Gartner Inc. in Stamford, Conn., said the changes indicate that the company is moving in the right direction but that challenges remain ahead.

"I don't think that EDS is out of the woods yet by any stretch of the imagination," said Scardino. "The financial issues loom large. Any IT services provider, especially one the size of EDS, has to have stable financials," she said.

The termination last week of what the company called its "other commercial contract" -- the troubled deal with The Dow Chemical Co., which EDS declined to identify by name during the July 28 earnings call -- is another positive sign, said Scardino (see story, page 1). However, she said EDS faces an uphill battle, since IBM, which took over for EDS on the Dow contract, and Hewlett-Packard Co. are the leaders in the utility, or adaptive, computing market.


Copyright © 2004 IDG Communications, Inc.

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