EDS Sloughs Off HP Threat

"HP is clearly a factor, but they are a more of an IBM-wannabe," Jordan said Wednesday in his first live briefing with analysts since replacing Dick Brown as CEO. In a press conference that followed the analyst briefing, Jordan took further swipes at his company's rival. "HP doesn't have much of a service business. Quite frankly, they don't have the infrastructure to leverage that we do. In the near short term and intermediate term, I don't see how they can be cost competitive with us or IBM [Global Services].

Although HP Services (which ranks No. 4 on the new VARBusiness 500) has won some key accounts, notably Ericsson, and the highly sought-after P&G outsourcing deal, Jordan questioned whether it will be profitable. "I think they are going to find that they have taken contracts where they are going to make negative returns," Jordan said. "Because they have no way of improving P&G's cost basis."

HP's top services executive sees it differently. In a recent interview with VARBusiness, executive vice president Ann Livermore said, "There's not a single services deal that goes down where the customer doesn't at least consider HP and invite us to the table to see whether we want to bid. That's a phenomenal position to be in."

To some extent though, Jordan has a point, says senior analyst Christine Ferrusi Ross. "HP's strength has always been on the distributed side," she says. "They don't have a lot of mainframe business. They actually will get some through P&G." If anyone besides IBM Global Services, EDS should be worried about CSC, which has won several big deals in its own right, specifically on the mainframe side.

Also at the analyst briefing here, Jordan spelled out his plans for turning EDS (No. 2 on the VARBusiness 500). While he wouldn't spurn any attractive offer, Jordan said he is not looking to sell EDS, saying there's no obvious buyer that would make sense.

"There's no real synergistic value for somebody to buy us," Jordan said.

He did say the company is looking to forge tighter partnerships than it had in the past with companies that include Dell, Oracle, Sun Microsystems, Microsoft, Cisco, SAP and EMC. Although EDS considers them partners already, "We have to be more firmly joined at the hip rather than occasionally dating," he said. When asked to elaborate, he said the company is still in discussions.

Among some other plans to turn EDS around, Jordan said EDS will:

• stabilize and grow its core outsourcing business;
• look for new growth opportunities such as the $200 billion business-process outsourcing market;
• clean up its balance sheet by raising up to $1.5 billion and its cost structure; and
• simplify its go-to-market strategy offering one face to customers.

To reduce costs, EDS will sell noncore assets, eliminate duplicative functions in selling and G&A, and eliminate 2 percent of its worldwide workforce of 138,000 employees. Half of those job cuts will be in the United States. The company expects to save $230 million through those measures. The company also plans to boost its offshore application development and call-center resources in locations such as India, Egypt, Ireland, New Zealand, Canada and Brazil.

The company's margins this year will be 12 percent, said CFO Bob Swan. Next year, he forecasts margins will improve to 13 or 14 percent, and in 2005 they are projected to return to the 15 to 17 percent levels. Much of EDS' problems have come from problem contracts -- notably the Navy Marine Core intranet project, customers that filed for bankruptcy protection including MCI and US Airways, and declining revenue from GM.

Forrester's Ferrusi Ross says none of Jordan's plans appeared surprising, noting the company is not selling off any core units such as its product life cycle management group Unigraphics or its ATKearney consulting organization.

"Ultimately this is about tweaking things," she says. "What it boils down to is fixing a couple of problem contracts, getting more operationally efficient and doing a better job at portfolio management."