Green Light For EDS

Brown starts each workday by booting up EDS' Service Excellence Dashboard, a Web-based tool that tracks the company's top 1,100 customer engagements. If EDS is meeting client expectations, the system displays a green circle and detailed notes aside each project. But if Brown sees a red square with notes, he knows something is amiss and must act on it quickly.

"What we do [well is focus on the client. I have said to EDS people, 'You serve that client better than the client expects to be served,' " Brown said in an interview at EDS headquarters in Plano, Texas.

In three years at the helm, Brown has transformed EDS from a stodgy bureaucracy into a customer-driven service provider, industry analysts and partners say. The restructuring, in turn, produced a culture that demands accountability in every client engagement. For example, EDS insiders said one of the company's customer representatives once let a red indicator linger on the Dashboard, and the employee was dismissed.

"Back in 1999, [EDS went to work to transform the enterprise. We did heavy lifting. We made tough decisions. And it has positioned us very well today for where we are," Brown said. "We put on a drive for service excellence,I mean recognizable, noticeable, differentiated service excellence."

And that drive is paying off. Last month, EDS reported fourth-quarter 2001 revenue of $5.9 billion, a 14 percent year-over-year gain, and full-year revenue of $21.5 billion, a 12 percent increase. Fourth-quarter earnings rose 20 percent year over year to $396 million, and full-year earnings jumped 19 percent to $1.3 billion.

What's more, EDS' growth comes amid a stingy economy. Even EDS' chief competitor, giant IBM Global Services, recently reported a slight decline. In its 2001 fourth quarter, IBM Global Services posted a 1.4 percent revenue decrease, to $9.1 billion, although its fiscal 2001 sales climbed 5.4 percent to $35 billion.

Much of EDS' growth, Brown said, stems from the burgeoning IT outsourcing space, which represented 72 percent, or $15.5 billion, of the company's total revenue last year. And there's room for further growth. Between 2001 and 2004, the IT outsourcing market stands to swell from $165 billion to $245 billion, an annual growth rate of 12 percent to 14 percent, according to research firm IDC. Industry analysts also note that the market remains fragmented, with market leaders IBM Global Services and EDS accounting for only about a quarter of the total business.

Given that forecast, new IBM CEO Sam Palmisano may find beating back EDS one of his biggest challenges. At IBM's PartnerWorld conference last month, he acknowledged EDS' strength and its migration up the value chain. "In services, EDS has gained share," Palmisano said.

IBM is fighting back by courting solution providers to complement its services capabilities and exchange sales leads. But EDS, led by President of Global Alliances John Wilkerson, is tightening its channel relationships as well.

"This is a company stepping up to the next level," said Brown. "EDS is on the offensive."

One of Brown's biggest achievements in restructuring EDS has been streamlining its bureaucracy and honing its customer responsiveness, analysts say.

In an effort code-named Project Breakaway, he took 48 company units,essentially politically charged fiefdoms that sprouted over many years,and condensed the organization into four units with profit-and-loss responsibility: Information Solutions (IT outsourcing), A.T. Kearney (high-value consulting), E-Solutions (solutions consulting) and Business Process Management (business process outsourcing). PLM Solutions, a product life-cycle management unit, was added later, following an acquisition.

Amid the reorganization, EDS also shed 13,500 jobs. The move made EDS leaner and yielded huge cost savings. In three years, Brown has cut $3 billion in costs, and last year he delivered the first full year of double-digit operating margin (10.3 percent) at EDS since 1995.

EDS has become a much more "energized" company since Brown took over, said Julie Giera, an analyst at research firm Giga Information Group. "All the changes they have undergone in the last couple of years have been quite painful for them," she said. "They downsized, reorganized and a lot of longtime employees were let go that didn't get with the program."

EDS, too, is capitalizing on the broad set of services it brings to the table, from high-end consulting to a particularly strong business process outsourcing unit, Giera said. "IBM is doing some business process outsourcing, but they haven't pulled it together under a single business unit," she said.

In addition, EDS has brought aggressive Internet and managed services offerings to the table, said David Rauktys, managing director at Boston-based FAC/Equities. "They aren't the legacy dinosaur they would have been perceived as three or four years ago," he said.

With its retuning, EDS also has fostered a new attitude about partnerships, which analysts say the company needs to snare midmarket share. "Partnerships and alliances were unheard of [at EDS until the last two years,absolutely unheard of," said Giera. "But the whole organization has changed, and that is capturing the imagination [of technology buyers."

Brown and EDS' business unit executives say the company's product independence gives it an edge over IBM Global Services and other vendor services organizations. "If you listen to our competitors that do services and hardware, they all say their No. 1 objective is shareholder value," Brown said. "Doesn't it stand to reason that they would be giving some guidance to their services people to deploy their own hardware and software?"

Other high-tech services players say EDS' success serves as an example of how solution providers can offer IT outsourcing to the midmarket.

Mike Mogavero, executive vice president at Data Systems Worldwide (DSW), said his services-focused company likes to think of itself as a smaller version of EDS. The Woodland Hills, Calif.-based solution provider specializes in consulting, application development, infrastructure services and managed hosting.

"I really respect their model," said Mogavero, who is working on partnering with EDS in a deal. "But remember, they are also a reseller. They sell a boatload of product. They sell more Sun equipment than anybody else, and nobody characterizes them as a reseller. But they don't lead with product. They lead with services, which is our message."

Recently signed EDS customers say part of their decision to go with the integrator is the strict accountability to customers that Brown has instilled. Case in point: In January, EDS edged out IBM in landing a five-year, $234 million IT outsourcing agreement with Nextel Communications.

"EDS brought a totally different perspective than we expected," said Dick LeFave, senior vice president and CIO of Nextel. "We expected them to be a little bit stiff. We didn't expect them to be as competitive as they are."

EDS won the contract after delivering a trial engagement on schedule and providing top-notch service, LeFave said. Most impressive, he added, is Brown's commitment to keep tabs on customer satisfaction.

"Anytime there is an issue with a customer, he knows about it. It is transmitted to him, and he deals with it directly," LeFave said. "Nextel wants to get things done quickly. We don't need a bunch of empty suits around."

As part of the outsourcing deal, Nextel plans to transition about 290 employees to EDS. Ultimately, the pact is expected to save Nextel $140 million over five years, LeFave said. In addition, EDS, Sun Microsystems and Nextel are collaborating on wireless solutions involving Sun's Java technology.

IBM holds a slice of the Nextel business, but it's not as deep as the relationship with EDS, LeFave said. "EDS' focus on our business, the technology, the price, the services all came together in a package we couldn't turn down," he said.

Nextel isn't the only one applauding EDS. When EDS inked a deal to provide services to Sun about 18 months ago, Sun Chairman and CEO Scott McNealy didn't want to publicize the agreement. But after EDS got the Sun business unit formerly located in the World Trade Center back up and running, McNealy had a change of heart. Now he's doing sales calls with EDS.

The integrator, however, isn't resting on its laurels. For instance, Brown recently launched Project Next Level, an initiative to expand the EDS sales team by 50 percent, to 700 people. He also has tweaked EDS' sales structure, including commissions, to ensure that the integrator's top sales talent target the biggest deals. The efforts are aimed at closing 28 megadeals,with a total contract value of about $48 billion,that EDS has in the pipeline this year.

"A lot of the CEOs I meet haven't got the time for a beauty contest at the front end with [decisions such as 'Who should be my strategic consultants, who should be my solutions architects, who should be my fulfillment capability, and who should be my data center managers and operators?' The handoffs take time. They haven't got it. And EDS goes from front to back and does it all," Brown said.

For EDS, the biggest threat to bringing home its share of those customer engagements may be IBM's financial muscle, according to analyst Rauktys. "IBM has levers they can play with in terms of software and hardware they can discount," he said.

Still, EDS has a strong brand, a long track record and "they're out pitching and winning very large-scale outsourcing contracts because essentially customers trust them," Rauktys said. "That's a very powerful marketing position to be in right now."