The last 12 months haven't been kind to Electronic Data Systems, the world's No. 2 information-technology-services company. EDS (EDS) has weathered the bankruptcies of major clients WorldCom and USAirways, a massive third-quarter earnings shortfall, and a probe by the Securities & Exchange Commission that was upgraded in January to a formal investigation. The outfit, which will report its 2002 results on Feb. 6, says its accounting is sound, but spooked investors have pushed EDS stock down to $17.13 a share on Feb. 3, a 75% decline since last March.
You might expect things to be running more smoothly at A.T. Kearney, the venerable management-consulting firm EDS acquired in 1995. But EDS's troubles and the dramatic downturn in the consulting market have only exacerbated an enduring cultural clash between the tech giant and Kearney. As EDS has tried to cut costs, it has also reduced Kearney's autonomy and compensation, riling many of the firm's old guard. Last August, EDS sued former Kearney CEO Frederick G. Steingraber, accusing him of allegedly bilking the firm out of $100,000 in bogus expenses. Steingraber was ousted from his position of chairman emeritus shortly after the lawsuit was filed. He's contesting the charges, and his lawyer calls the suit to be "an ambush" (see BW, 2/10/03, "Family Feuds Don't Get Nastier Than This").
That puts Kearney's Dietmar Ostermann, who replaced Steingraber as CEO, on the hot seat. The 40-year-old native of Hamburg, Germany, recently sat down with BusinessWeek Dallas Correspondent Andrew Park at Kearney headquarters in Plano, Tex., to talk about the consulting firm's efforts to repair its relationship with EDS. Edited excerpts of their conversation follow:
Q: Kearney held its annual worldwide officers' meeting in Dallas in mid-January. How did it go?
A: Obviously, the management-consulting markets are nowhere near where they were a couple of years ago, so it has been a tough time for everybody in the industry. People were certainly interested in where we're going.
Q: Where's Kearney going, and what changes are in store?
A: I came in with the burning desire to make the relationship between EDS and A.T. Kearney better. All independent surveys show CEOs like the results we deliver, and we can build on that. We see geographic growth opportunities in Japan and China. We see growth opportunities in new service areas such as business-process outsourcing. We can add things to EDS's capabilities that will catapult the enterprise forward. And we can develop the culture of A.T. Kearney as a partnership culture in an industrial corporation. These are the planks of our strategy.
Q: Kearney was involved as a consultant in 42% of EDS's major sales pursuits last year. Can you give a couple of examples?
A: We were square and center in helping to close the [$4.5 billion] Bank of America deal. We also were involved in the [$1.3 billion] ABN-Amro pursuit. Those were two of EDS's biggest deals in 2002. That's just the tip of the iceberg. It took us a while to figure out how to do this correctly. We really pushed to contribute A.T. Kearney insights to the major pursuits and bring management-consulting tasks to those deals.
Q: What was your solution?
A: We figured out that these pursuits take a long time, and to have a full-blown management-consulting team in there for 12 months without generating any revenue is counterproductive. We need to insert ourselves early in the process and change what the client is trying to achieve. Then you scale your involvement back.
We had to learn how to interact and how to reengineer EDS's process so that Kearney would add the most value. That's where our clients are starting to see that EDS has more to offer than IBM, because IBM doesn't have an A.T. Kearney.
Q: How many of EDS's contracts are initiated by A.T. Kearney?
A: Not that much. You will see that massively changing in 2003. Out of our 270 partners, we probably have now 60 or 70 who actually understand how to successfully navigate through EDS. Two years ago, it was less than 20.
Q: But you can't spend all your time assisting EDS on big deals, right?
A: That wouldn't be financially viable. We're running a $1 billion business here. It's just as important to say no and stay out of [some contract pursuits]. We need to be competitive as a management-consulting firm, and be profitable -- but, at the same time, support those EDS pursuits. We also have to get involved after the pursuit is sold so it's financially attractive for A.T. Kearney. Nobody else has been able to figure that out.
Q: Does your allegiance to EDS ever lead you to steer your clients to EDS?
A: If we did it once, we would be out of business. I would never guide the client to do something that isn't right for the client. None of our partners wants to be an EDS sales executive. They want to be a trusted adviser.
Q: What's your outlook for this year?
A: We believed that the difficult times in management consulting in 2002 wouldn't be as bad as they became. Believe me, I thought we would get out of this economy. The U.S. improved a lot. We gained a lot of market share. But Europe was terrible. Even some spots in Asia were not up to expectations. Latin America -- I mean, what else could happen in Latin America?
I think 2003 will be just as difficult as 2002. I believe there will be war. That will have huge consequences for our business in Southeast Asia. Do I believe we will make our plan? I've been overly confident in the past, and I've been blamed for that, so I'm not going to say we will 100%. [But] I think we have a good shot.
Q: In January, Consulting magazine ranked Kearney as the industry's most stressful place to work. What's your response?
A: It's a wake-up call. We made a commitment to show better in that same survey next year. One of our most important values is concern for our people. We have not done a great job of communicating that, and we have also been facing the economic realities of 2001 and 2002. Being part of a publicly traded company, we have acted fast and decisively in certain things, and we probably went overboard. We will change. But most important, we will do a better job in our mentoring program and communications program.