Magazine

EDS: Setting the Record Straight


"Who else is hiding debt" (Special Report, Jan. 28) did a tremendous disservice to EDS, our shareholders, and BusinessWeek's readers. It was inflammatory to compare EDS with companies with hidden liabilities. We have none. While we discussed the issue in general with a BusinessWeek reporter, no one contacted us for this specific story. Had we been contacted, we would have explained that:

EDS does not engage in "off-balance-sheet" debt transactions. We arrange financing on behalf of our customers with third-party financial institutions. This customer financing covers IT-related capital assets (most notably computer hardware).

We do not include third-party financing in the total contract value we report, nor is it ever part of our financial statements as either revenue or profit. These transactions are separate from EDS.

We arrange third-party financing principally to reduce EDS' risk. The financial institution assumes all credit risks associated with the repayment of the customer loan. The only exposure for EDS is in the unlikely event of nonperformance by EDS, which would permit the customer to terminate the contract. In EDS' entire history of arranging this type of financing, we have never had to repay a customer loan due to contract termination for nonperformance. EDS assumes the risk for nonperformance in any outsourcing contract, whether it involves financing or not.

Consistent with generally accepted accounting principles, EDS discloses the outstanding balance of these loans as contingent liabilities. We have lengthy discussions about them with the rating agencies. The rating agencies do impute a small percentage of the outstanding amount to EDS in arriving at our A1/A+ ratings--among the highest in the industry. This reflects their comfort that all we retain is a small residual risk associated with performance of IT services.

I think your readers will agree this is a far cry from the "balance sheet bombshell" your article characterizes. It is simply good business practice and risk management. We ask you to set the record straight.

Scott Krenz

Vice-President and Treasurer

EDS

Plano, Tex.

Editor's note: We regret that we did not give EDS a fuller opportunity to respond, and we are happy to print the company's detailed response. I am somewhat amused by your including Robert A. Eckert of Mattel Inc. among your Top 25 managers (Cover Story, Jan. 14). [Setting] a sales goal at 25% of that achieved in a similar prior situation (i.e., compared to Star Wars merchandise) is absurd.

Certainly the relevant brand manager must have loved this business decision, especially at bonus time, as he or she will clearly meet that goal. Alternatively, the decision should not make investors very happy, based on lost profits; nor employees, based on the lost potential for employment. The idea of setting a goal this low seems unworthy of a major company CEO.

Michael Carlton-Jones

Cincinnati, Ohio

We all love Oprah. But Oprah as one of the "Top 25 managers of the year"? Give us a break! Oprah is to business management what Dennis Tito (who paid $20 million to ride on a Russian spacecraft) is to space exploration.

Edward A. Brown

Stow, Mass.

If Brian Roberts is a "Manager to watch" in 2002, he's certainly not managing his broadband service properly. The transition from Excite@Home to Comcast high-speed Internet service has been a total disaster. Comcast has badly damaged its reputation in northern New Jersey by not being prepared for Excite@Home's liquidation.

Richard Slocum

Summit, N.J. "A new push to privatize" (Education, Industry Outlook, Jan. 14) identifies some valuable openings for the private sector with the passage of President Bush's No Child Left Behind Act but misses perhaps the most important: Under the "supplemental services" section of the new law, parents of children stuck in failing public schools will be able to use their entire share of Title I aid-- $500 to $1,000 per child--to purchase private tutorial services.

Tutoring, after-school, and summer-school programs, including those of private or religiously affiliated organizations, are all eligible for these funds. A congressional analysis estimates children attending nearly 3,000 failing schools would qualify for this program immediately.

This new federal program not only introduces market forces into a sector desperate for their infusion of innovation. It presents the education industry with a powerful new direction for growth.

Don Soifer

Lexington Institute

Arlington, Va. The 2002 outlook for professional services is indeed grim ("First, kill the consultants," Industry Outlook, Jan 14). But the recession is not entirely to blame. Consultants have been the first to preach customer-relationship management, brand management, innovation, strategic alliances, and outsourcing to their clients--but the last to adopt such practices themselves.

By adhering to outdated business practices, the professional service industry has become rife with inefficiency, commoditization, and conservatism. Could it be that the consultants are in need of consultants?

Mark S. Bonchek

Concord, Mass. I applaud the use of "economic value added per employee" as a productivity indicator in charts accompanying the 2002 Industry Outlook (Jan. 14). It is much more valid than traditional "sales per employee," as you point out. An even more valid measurement is "economic value added per cost of employees," since inflation is included in both sides of the equation. The difficulty with VA per cost of employees is that the cost of employees is omitted from financial statements: balance sheet, profit-and-loss statement, and cash flow.

Henry Dahl

Tucson, Ariz. Despite Paul Raeburn's expectations of a biotech boom, the bubble may turn out to be just foam ("A biotech boom with a difference," News: Analysis & Commentary, Dec. 31). Unlike the Internet Big Bang, biotech will not have the impetus of online commerce or the productivity enhancement from digital hardware and software. There is no such quid pro quo to be derived from pharmaceutical purchases.

Biotech's market will be real and relentless, but it is unlikely to create a potential economic panic and job derailment--at least not on the order of the present downturn. It should remain steady without the riptide of an exuberant swell followed by a pelting crash. For a long-term investment, yes. For a short-term windfall, no.

R. Lyman Ruth

Chippewa Falls, Wis. I enjoyed your Jan. 14 editorial on Michael Bloomberg until I got to your last sentence. Only then did I look at the title, "Good luck, Mayor Bloomberg." This story emphasized Bloomberg's abilities and past successes. It was quite a buildup. At the end, you only wished him luck. If you really feel he is as capable as you indicate, why not wish him success? While luck may play a role, the more important role is the person's ability and efforts.

Frank C. Haugh

Fairview Park, Ohio


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