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Ross Perot's Baby Takes Its First Big Steps


Information Processing

ROSS PEROT'S BABY TAKES ITS FIRST BIG STEPS

His computer-services startup is winning jobs in a booming market

It was just like old times again. In January, 1988, H. Ross Perot, the flamboyant, flag-waving founder of Electronic Data Systems Corp., donated $20 million to the University of Texas Southwestern Medical Center in Dallas. Then, a year later, Zale Lipshy University Hospital, which is affiliated with the medical center, handed Perot's new company, Perot Systems Corp., a contract to build a computer network. The contract was worth only $500,000, and Dr. Ronald F. Garvey, the hospital's chief executive at the time, insists there was no quid pro quo. Still, the familiar pattern said it all: Ross Perot was back.

Indeed, the Texas billionaire is once again inspiring awe, envy, and some anger among rivals. Perot "swoops in with his money and his power and his reputation," says Douglas W. Sewell, a managing partner for integration services and technology at Andersen Consulting, the nation's No. 3 systems integrator.

IMPRESSIVE ROSTER. Perot inked the hospital deal shortly after restrictions in a 1986 separation agreement with General Motors Corp. expired and he was again free to compete in computer services against Electronic Data Systems Corp., the industry giant that he sold to GM. And in the 2 1/2 years since, Perot Systems, which is headquartered in Herndon, Va., and runs a technical center in Dallas, has quietly built an impressive roster of some 35 clients, including American Medical International, banking giant NCNB, insurer ICH, and the F. W. Dodge Div. of McGraw-Hill, publisher of BUSINESS WEEK.

Analysts say the privately held company could reach $150 million in revenues this year. And Perot, with his usual swagger, predicts it will reach $1 billion by the end of the decade. "We're going great guns," he crows. That's more than just Texas bragging, says Stephen T. McClellan, a computer-services analyst at Merrill Lynch & Co. "So far, they've been a pretty stellar startup."

One reason for the company's success: Perot Systems is in a sizzling market. Yankee Group Inc., a Boston-based market-research firm, says that the worldwide business of managing customers' data processing centers and massive software development projects will be about $21.5 billion this year. And these businesses, known in the trade as outsourcing and systems integration, should grow at an annual rate of almost 20% for the next few years.

Perot Systems remains puny alongside the established industry heavyweights. EDS, the market leader, raked in revenues of $6.1 billion last year. IBM Corp. generated $3.6 billion in revenues from computer services last year, and Andersen Consulting, a unit of the accounting firm, posted $1.9 billion in services revenues. But Perot is set on breaking into the big leagues.

On Apr. 3, Perot announced that he had snared a $100 million contract with Robert Plan Corp., a Lynbrook (N. Y.) insurer, and a $400 million deal with First American Bankshares Inc. The pacts were especially impressive because in both cases Perot won the bidding against rivals IBM and EDS. Perot has even beaten out EDS for the business of one of GM's major suppliers, Kelsey-Hayes Co., a Romulus (Mich.) auto-parts maker. Neither side will disclose details of the contract, which is scheduled to be signed in May.

What Perot hopes to do is build another computer-services giant similar to EDS. He founded that company in 1962, and by 1973, it was taking in $100 million a year. In 1984, revenues had soared to $1 billion, and GM paid$2.6 billion in cash and stock for the concern. Perot stayed on to run EDS, but his penchant for speaking his mind about his new bosses ran afoul of the auto maker's corporate culture. So GM bought him out in 1986 for $750 million. As part of the deal, Perot agreed notto hire any EDS employees or compete with EDS until June 1, 1988. For an additional 18 months, he couldn't sell computer services on a for-profit basis. There was never much doubt that as soon as he could, Perot would be back in the computer business. The initials of the Perot family fund that put up $20 million to start the new company are HWGA, for Here We Go Again. Perot often refers to his new company as P. S., to imply a follow-on. And he wasted little time once GM's legal barriers fell. On the very day that the restrictions lapsed, Perot simultaneously launched Perot Systems and hired eight of EDS's top people. The list included Perot Systems President J. Patrick Horner, who had been president of EDS's Government Marketing Div.; Ross N. Reeves, an 18-year EDS veteran in charge of computer centers and networks; and Donald D. Drobny, president of EDS Communications Corp., which markets communications equipment.

Today, 35% of Perot Systems' 1,200 employees--and 60% of the top 50 people--are from EDS. Perot insists he bears no malice toward his old company, but some observers wonder about that. "Ross was a total loyalty freak, and he turned out to be the biggest Judas of them all," snipes one EDS executive.

EDS has kept a sharp eye on the former boss, moving quickly to block Perot's attempts to evade GM's restrictions. Although Perot couldn't run a for-profit computer-services business until the end of 1989, he figured that he could get his company up and running before that by agreeing to perform services at cost. So, in 1988, he offered to consult with the U. S. Postal Service if it would pay him just his expenses. Perot, who likes to be known as a superpatriot, figured he might win national acclaim if he were to turn around the U. S. Postal Service's flagging automation efforts.

But when EDS learned of the Perot plan, it immediately complained to Congress and the courts that the job had not been competitively bid. The Postal Service backed off. An outraged Perot likens EDS's move to "a sneak attack on Pearl Harbor."

Perot was not slowed down for long. He quickly found another loophole to exploit in his GM agreement. Perot realized that he could turn the prohibition against turning a profit into an advantage: If Perot Systems didn't have to allow for a profit margin, it could substantially underbid its rivals. Garvey of University Hospital in Dallas says that was a key reason he signed the early contract with Perot.

Despite Perot's ingenuity, his company hasn't enjoyed entirely smooth sailing. One co-founder, Gary M. Wright, has already left to start his own computer-services company. And in his ebullience, Perot sometimes has promised customers more than his company has been able to deliver. At McGraw-Hill's Dodge Div., for instance, the Perot Systems project is plagued with costly bugs and delays.

TRUMP CARD. That's not the only deal that hasn't gone according to plan. A year ago, Epic Healthcare Group Inc. in Dallas signed a $3 million outsourcing contract with Perot. But when the contract expired last fall, Epic dumped Perot. Perot Systems says only that it disagreed with Epic over how the business should be handled. Perot also lost a big chunk of business when ICH Corp. restructured its operations last year and scaled back its contract with Perot by one-third, to about $100 million.

But such setbacks haven't curbed Perot Systems' ambitions or dimmed its prospects. The young company is already branching out to Europe and the Far East. And wherever it goes, the company still has an impressive trump card to play--"a massive weapon called Perot," as Graham S. Kemp, president of G2 Research Inc. in Mountain View, Calif., puts it. Although Perot says he spends only about 20% of his time on the startup, his aura pervades it. Before the ink dried on an estimated $4 million contract with Springs Industries Inc., a Fort Mill (S. C.) textile concern, Perot sent Springs Executive Vice-President A. Ward Peacock a thank-you note and a copy of Ken Follett's best-seller On Wings of Eagles, the story of how Perot sprang some EDS employees from an Iranian prison during the 1979 Islamic revolution.

That kind of salesmanship has been Perot's hallmark for more than three decades. And it works, which may be why he's much more confident now than when he quit a high-paying sales job at IBM to launch EDS back in 1962. "That time, it was raw terror," he recalls. Now, he hopes, that's what his competitors will feel.Mark Lewyn in Dallas


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