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H. Ross Who? Eds Is Doing Just Fine On Its Own


Information Processing

H. ROSS WHO? EDS IS DOING JUST FINE ON ITS OWN

It hasn't been much of a year for companies in the computer business -- especially for the guys who crank out the machines that run big corporations. IBM's profits, according to Wall Street projections, will be $4 a share, down from $10.50 last year. Digital Equipment finished its fiscal year last June with a net loss of $617 million. And Unisys? It has taken charges of more than $1 billion in a frenzy of downsizing and is expected to finish 1991 awash in red ink. Even relative youngsters such as Apple Computer Inc. and Compaq Computer Corp. have had losses this year as prices plunged and recession-pressed customers stopped buying.

So who's cleaning up -- right in the middle of the downturn and by catering to the kind of blue-chip customers that once made IBM and Digital Equipment Corp. seem so recession-proof? Electronic Data Systems Corp., the computer services colossus. Instead of building computers -- a perilous business in this era of slow growth and plunging margins -- EDS, a unit of General Motors Corp., helps customers use them. For some, it serves as a systems integrator, designing and installing elaborate networks that incorporate hardware and software from many sources. For others, it takes over and runs entire data processing departments in return for an annual fee -- a business called outsourcing, in which EDS is the clear leader.

OUTSIDE MONEY. Both businesses are coming to look better than building and selling hardware. Systems integration, a $5 billion-a-year market, will grow to nearly $13 billion by 1995, according to researcher Ledgeway/Dataquest. Similarly, outsourcing, at $10 billion, will likely grow to $24 billion. EDS, riding the boom, is expected to show 1991 revenues of $7 billion, up 11% from 1990. Profits are likely to jump 13%, to about $564 million, on top of a 14% rise last year.

Indeed, Dallas-based EDS is now perhaps the most important rival that IBM, DEC, and other large computer manufacturers face -- even though it's one of their best customers, too. It's poised to grab the lion's share of the vast computer services market, which IBM, DEC, and the others are scrambling to get into. Consultant Andrew S. Rappaport extols EDS as a model of the "computerless computer company" that he described in a controversial article in the Harvard Business Review last summer: It's profiting from helping customers harness the computer's awesome power, largely through writing software and managing complexity for them.

Five years after the departure of its charismatic founder, H. Ross Perot, EDS is proving in spades that there was more to its success than one dynamic entrepreneur -- and, equally important, that there's more to EDS than a fat parent. The company has built a backlog of nearly $20 billion in non-GM business. And for the first time since GM acquired it in 1984, EDS will get less than half of its revenues from the auto maker (chart, page 85). EDS handles most of GM's computer operations under long-term, fixed-price contracts. "They are the toughest competitor we run up against," concedes J. Patrick Horner, a former EDS executive who now heads Perot Systems Corp., the $150 million competitor the former chairman founded three years ago. "We like to go where they're not."

As the vanguard of this movement -- with IBM, DEC, Andersen Consulting, and many others in hot pursuit -- EDS is poised to grab the lion's share. Lester M. Alberthal Jr., 47, EDS's mild-mannered CEO, plans to more than triple the company's size by the end of the decade and turn it into a global powerhouse. To do it, Alberthal, a 23-year company veteran, is shaking up everything from the organization chart to the corporate image. He's pursuing joint marketing pacts and acquisitions, such as the recent $250 million takeover of McDonnell Douglas Systems Integration Co., a giant in computer-aided design and manufacturing. That's one of a series of acquisitions that should generate at least $700 million, or 10% of annual revenues, next year.

FRACTURED. The big challenge for EDS, though, is to get closer to customers and their business problems. That will require quicker responses than monolithic marketing organizations can come up with, says Rappaport, president of Technology Research Group in Boston, a consulting company. "For a company like EDS to be successful, they need to continually fracture themselves," he says.

Alberthal is already starting to fracture EDS. He has reorganized it into 38 "strategic business units," each focused on a market such as health care or transportation. To increase agility, he's pushing authority into the ranks of EDS's 65,000 employees. Now, each unit develops its own marketing strategy and is held accountable for sales and profits. "It was a bold move and one that I was surprised they were able to take all in one step," says Douglas W. Sewell, a managing partner for integration services and technology at rival Andersen Consulting.

In the old days, it was enough for EDS to give customers cheaper and more reliable computer power. But now it must convince them that it can actually reengineer their businesses. "We can help you take technology and leverage it to improve your overall cost, quality, and time to market," says Alberthal, who became CEO in 1986.

Consider EDS's contract to modernize Chicago's public parking enforcement. EDS devised a system that includes handheld computers that print out tickets for use by parking enforcement officers. There's also a computerized inventory of the city's 25,000 parking meters. An electronic imaging system that can throw a digitized picture of a ticket onto a computer screen helped get ticket disputes out of court and into neighborhood-based hearings. The result is more rapid fine collection: Before the system went in, only 10% of tickets were paid in the year they were issued. That has jumped to 47%, says city Parking Administrator Inge Fryklund. She expects revenues from parking violators to rise 62% this year, to more than $60 million.

IMAGE PROBLEM. EDS is out to deliver similar payoffs to clients ranging from GM affiliate National Car Rental to NASA. As struggling GM keeps its spending with EDS level, the company needs outside contracts more than ever to meet its growth targets. It aims to boost non-GM revenues by at least 20% a year vs. the projected 15% growth rate for all information technology services, such as consulting and managing data centers.

So far, EDS is ahead of target, with non-GM revenue up 26% in the first nine months of 1991. It also has signed some $5 billion worth of non-GM contracts in that period, almost 30% more than in all of 1990. And more non-GM business means fatter profits, says Stephen T. McClellan, an analyst with Merrill Lynch Capital Markets. He figures that pretax profits on GM contracts -- with no marketing costs and no risks for EDS -- are about 10% to 12%, or a few points lower than in EDS's other business (chart, page 85). GM insists it has a series of safeguards to be sure it's paying competitive rates.

To keep the momentum building, EDS is working on its image -- both internally and externally. "For the first 22 years of our existence, EDS the company really didn't have an image," says Alberthal. "All of the image-building was around what Ross Perot wanted for Ross." After GM acquired EDS in 1984 for $2.6 billion, the company was again overshadowed by public clashes between the cocky EDS team and defensive GM managers. Perot, then a GM director, openly criticized how GM ran its car business.

The EDS image had become so confused that executives at Westmoreland Coal Co. thought EDS worked only for parent GM. They learned otherwise from industry colleagues, but a call to an EDS listed in the Philadelphia phone book only reached a health spa. The two companies finally made contact last year, and Westmoreland signed a 10-year outsourcing contract with EDS.

A HUMAN FACE. To boost EDS's visibility, Alberthal has approved the company's first major ad campaign, spending an estimated $9 million in just the first half of 1991, to reach government and industry leaders. To rally the troops, the normally reticent Alberthal agreed to appear in an in-house video, cavorting in dark sunglasses to such lyrics as: "The future's so bright, we've got to wear shades." It's all part of a drive to humanize EDS. Alberthal says he agreed to ham it up after learning that the average age of his employees is now about 34. Many joined as part of EDS outsourcing deals, in which it often hires a customer's data processing personnel. Such newcomers aren't steeped in the Perot traditions of quasi-military teamwork. EDS hopes to reinforce those values -- while loosening some old strictures. Employees say, for instance, that it no longer warns new hires against "living in sin."

Alberthal is also trying to boost EDS's profile overseas. While only 18% of revenues last year came from abroad -- and half of that was from GM -- EDS aims to boost foreign sales to 50% within a decade. The best prospects are in Europe as it heads toward a unified economy after 1992. Malcolm J. Gudis, a senior vice-president in charge of EDS's international business, is betting that many European companies will outsource to cut costs and boost efficiency. EDS's global information network and centralized control will give it an edge, Gudis figures. And the GM connection doesn't hurt either. Last year, for instance, EDS signed a 10-year, $300 million outsourcing contract with Saab Automobile in Sweden, which is 50% owned by GM.

Analysts agree that EDS has a clear headstart with its telecommunications network, which already links 19 major data processing centers worldwide. But there's also the danger that EDS has built more network capacity than it can profitably fill. And rivals are quickly catching up. Cap Gemini Sogeti, Europe's leading technology-services company, sold 34% of its equity to Daimler Benz this summer. In return, it gets to extend Daimler's huge private network in Germany into other markets.

'BIG TEXAS BOOTS.' EDS's emphasis on outsourcing may prove a weakness, too. Thierry Dumont, head of European software services for International Data Corp., says EDS must expand other services such as systems integration. "They have little systems-integration image in most European countries," he says.

To boost its services capabilities, EDS recently swallowed one of Europe's largest computer-services companies, SD-Scicon, for $272 million, giving it a broad base of British and French customers. The challenge now will be to centralize control over Scicon, a $400 million company, without losing local talent or clients. That may require more delicacy than EDS has been known for.

While the company now usually hires European managers, its early Texas transplants sometimes left a poor impression. One British executive recalls an industry luncheon four years ago at which a top EDS executive was a speaker. His late arrival by helicopter drowned out the previous speaker. Then the EDS man left abruptly, not bothering to chat with other guests. "They wear big Texas boots and don't care where they plant them," says the British exec.

EDS is having better luck at projecting a good image back home -- especially at parent GM. Before EDS, "our data processing costs were going up about 16% a year. In the last four years, they've been flat to down," says Robert J. Schultz, GM vice-chairman. Among other projects, EDS is working on a computerized product-development system for GM, designed to get cars and trucks to market quicker and cheaper.

That's just the kind of synergy GM hoped to create when acquiring EDS, but it's also an example of the reengineering EDS promises other customers. The results won't be known for several years. But if it can pull off a big victory in its own backyard, EDS may finally be better known than what's-his-name.Wendy Zellner in Dallas, with Jonathan Levine in Paris and David Woodruff in Detroit


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