In the two years since he took over as CEO of Electronic Data Systems (EDS), Michael H. Jordan has encountered more than his share of challenges. Among them: declining revenues, money-losing contracts, financial restatements, and an ongoing Securities & Exchange Commission investigation into past accounting and financial reporting. His tenure so far has been about putting out as many of those fires as he could, not stimulating new growth.
Now that's changing. Jordan plans to spend about $1 billion this year to jump-start ailing EDS. His investments include upgrading the company's technology, streamlining operations, and working more closely with a federation of 10 tech titans, including Microsoft (MSFT), Cisco Systems (CSCO), and Sun Microsystems (SUNW). Jordan is hoping that EDS can maintain its No. 2 position in information-technology services -- after IBM (IBM) -- and expand its presence in the hot field of business-process outsourcing. To target those projects, EDS is contributing $420 million to a joint venture with consultancy Towers Perrin.
BusinessWeek Correspondent Andrew Park spoke to Jordan on Feb. 9, two days after the technology-services company had reported fourth-quarter earnings and unveiled the growth plan. Following are edited excerpts:
Q: Why invest for growth now?
A: We spent a lot of last year planning how we wanted to reshape our service offerings and our technology strategy, which led to the alliance structure. We soft-pedaled the investment in 2004, because we were still in the cleanup phase and we didn't want to confuse the investment community.
With that out of the way, we felt that 2005 was a good year to really launch this program that would not only help our own delivery economics but really make a dent in the marketplace. Last year, our business generated about $1.2 billion of free cash flow, but a lot of it went into junk -- nonbusiness, nonoperational stuff. This year, we'll also generate $1.2 billion in free cash flow, but this time we can spend part of it in fixing our business and really preparing ourselves for growth.
Q: Why is business-process outsourcing (BPO) such a priority?
A: The BPO arena is the growth area -- financial-payment services, human-resource outsourcing services, call-center services -- and that's a business we've been in for a lot of years. It hasn't been growing, and we decided to put some investment behind it, modernize our platforms, and really get serious about growing in the BPO arena. We'd like to double the size of it from $3 billion to $6 billion in three to four years.
Q: So the Towers Perrin venture is clearly only the first step. Where will you take it from there?
A: We're developing a purchasing and supply-chain management outsourcing offering, in conjunction with A.T. Kearney [EDS's consulting arm], and we're looking for domain partners to help us in the finance and accounting outsourcing.
Q: Are you thinking about another acquisition, or a partnership, in finance accounting?
A: There may be some small M&A opportunities. Basically, we're looking for Big Four partners.
Q: How have your partnerships with other companies changed?
A: Our past alliances were meeting for a drink at a bar. This is settling down, sharing an apartment together. They're now sharing with us what their product plans are, so we're looking at how those developments are going to fit into an integrated offering for us around, say, integrated storage and server management. They will be our preferred suppliers, we'll get better economics, and we'll get a much tighter linkage in technology terms.
We're [also] working jointly on projects in the field. We had a pretty nice win to do a revenue-management offering for the government of British Columbia. One of our hardware suppliers was a key part of the pitch team.
Q: Do your partners have a greater willingness or incentive to work with you now?
A: For most of them, IBM is their main competitor. And therefore, a vibrant aggressive EDS is a very important part of their forward strategy. In the past, there was no central technology direction within EDS. It was everybody did their own thing. Now, they've got somebody to talk to.
We're really tapping into not just their product development but into their advanced technologies. We had a nice little win with the state of Washington, with Microsoft for a very advanced digital-archiving system. Had we not been [in Redmond] cheek by jowl with them, we wouldn't have had the opportunity. So we're setting up a similar lab down in Silicon Valley to work with Cisco and Sun.
Q: Your forecast for bookings growth this year of 11% struck a lot of people as conservative. Is there upside?
A: We certainly think there's upside. We're in the hunt for some big deals, and those will help us get above that. We'd rather surprise on the upside than the downside.
Q: General Motors (GM), which accounts for about $2 billion in revenue, is renegotiating its contract with EDS this year. One analyst thinks you'll lose two-thirds of that revenue. Is that possible?
A: I think GM is impressed with the change in strategy in the company and its technology thrust. We've actually turned our relationship with GM very positive.
Q: How important is 2005 for EDS?
A: We have got a lot to prove. We've done a pretty good job of trying to get the negatives off the table. But we really have to execute a very complex technology and delivery reorganization plan that's going to affect lots of people. This is a big year. This is the year we show the world what we can do.