By Bob Djurdjevic
Shocking, is how Electronic Data Systems Corp vice chairman, Gary Fernandes, described Wall Street’s shredding of EDS stock on October 23, the day the erstwhile, world premier information technology services company announced its third quarter 1996 results. By the end of the day, the company had lost 19% of its value. On the face of things, it was a strange occurrence. EDS chairman, Les Alberthal, in a statement which accompanied the company’s financial figures, said that, in the third quarter, EDS recorded another solid financial performance, showing just how divorced from reality EDS executives had become. The worst was yet to happen. In the following two weeks, the EDS stock slide continued, until, by October 29, coincidentally the anniversary of the infamous ‘Black October’ crash in 1929, almost $11bn of shareholders’ value had been wiped out. Nor have the EDS shares fared much better since. They have been trading below the 12-month high of over $63.
Rumors and emotion
But these figures only reflect the stockmarket’s angle on EDS – and Wall Street trades on rumors and emotion, not facts and reason. So what are the real business issues facing EDS? This Dallas, Texas, company has to contend with two major challenges – its past and its future – its glorious past, and its hazy future. The glorious past – because everybody, including EDS executives, seem to be expecting the company, which practically invented facilities management, to keep on doing well forever more. The hazy future – because it is rapidly becoming clear that its glorious past is an insufficient guarantee of future success. Under the leadership of its founder, the infamous Ross Perot, and then for most of its more than ten years under General Motors Corp, EDS gained a reputation for competing fiercely for its contracts – gaining a reputation as a tough player and a tough employer. But during the first half of 1996, just before it was floated in mid-year, EDS began losing new contracts in a major way. They were down 49% from the same period in 1995. Then, in the second half of 1996, EDS saw two of its ‘megadeals’ fall apart – two UK deals which it had either booked, or had assumed were in the bag. Unraveling these deals with the Royal Bank of Scotland and Lucas Industries Plc, a British aerospace company, has perhaps more significance than initially meets the eye. This is because Europe, and the UK in particular, has been EDS’ best market. If EDS continues to lose business in its best market, the malaise could clearly spread further throughout the world. Why did these deals fall through? One Lucas employee says, When we got close to EDS, we discovered a prickly cactus. And David Jessop, director of payment services at the Royal Bank of Scotland, said in a letter to employees that, the contract with EDS was canceled in July because of a serious breach by that company…. For its part, one EDS executive said that the due diligence process surrounding the Lucas deal created some considerable problems for EDS, leading it to believe that taking on the 1,200 Lucas staff might result in some lay-offs. We did not want to do other people’s sackings, he said. Yet this is precisely what EDS had become known for in the UK, especially in the government sector. As the UK government has privatized government departments and cut costs during the past 15 years, EDS has benefited by being willing to wield the axe and sack the civil servants the politicians didn’t have the stomach to fire. In the UK alone, EDS has been awarded three of the five biggest outsourcing deals, including a $1.68bn 10-year contract with the Inland Revenue in late 1993. The Inland Revenue contract is EDS’ biggest UK coup to date, reportedly involving a transfer of about 1,900 civil servants over the past 18 months. But the transition has been far from smooth. The civil servants’ union claims that the deal has resulted in one of the public sector’s most efficient data centers being fragmented and that staff have been needlessly redeployed. In the aftermath of the souring relationship between EDS and Lucas, Computer Sciences Corp picked up the aerospace company’s $1.7bn 10-year outsourcing contract. It left EDS having to write off more than $1.7m in negotiating expenses. The Royal Bank of Scotland deal was a 10-year outsourcing contract said to have been the largest of its kind in Europe. Less than two years into the contract, which was to handle 300 million annual check processing transactions on behalf of the bank, the deal was canceled. In a memorandum to its staff the bank cited EDS’ failure to perform. In the Autumn of 1994, EDS’ chairman Les Alberthal predicted that the company’s international revenues would account for 50% of total revenues by the year 2000. Making that prediction come true now seems difficult. In fiscal year 1995, Europe accounted for 21% of EDS’ total revenues, the US share was 70%. The way things are going for EDS in the UK, the company seems to be having trouble keeping its current deals, not just winning new ones. A further blow this year: two top EDS Europe executives, Geoff Caroll and Thomas Butler, defected to Dutch rival Origin. Together, they claim to have brought in $8bn of business at EDS. One bright international spot for EDS seems to be South Africa. In October, JCI Ltd, a mining company, announced that it had awarded a $105m outsourcing deal to EDS. A short while before that, EDS also landed a $210m contract with South Africa’s Standard Bank Card Division. But these contracts will hardly make up for multi-billion dollar ‘megadeal’ losses in Britain – and it remains to be seen what effect, if any, the Royal Bank of Scotland fiasco may have on the latter South African bank deal. It was ironic that the EDS’ stock was getting killed just as the new contract signings were starting to improve. During the third quarter of 1996, EDS closed about $2.81bn of new business. This week, however, EDS reported fourth quarter net profits that rose 1.2% at $272.8m on revenue up 10.6% at $4bn; but net profits for the year to December 31 were down 54% at $431.5m after a one time charge of $850m as well as spin-off costs of $45.5m, on revenue that rose 16.3% to $14.44bn.
Lack of success
What went wrong? The main reason for EDS’s lack of success in the first half of 1996 was straightforward: its senior managers, once known for their aggressive pursuit of business, took their eyes off the ball; they became engrossed in managing EDS’s divorce from General Motors, and in digesting AT Kearney – a Chicago based management consultancy, instead of paying attention to what was happening in the marketplace. Meanwhile, the competition was taking their business. Will EDS’s future be as glorious as its past? This will depend heavily on whether or not its executives can shed the past and focus on the future. Success breeds complacency, which breeds sluggishness, which breeds failure.
This article first appeared as an opinion piece by Bob Djurdjevic of Annex Research in the January 1997 edition of Computer Business Review.