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Get Four
|  | SEPTEMBER 29, 2004
EDS to Critics: Wait Till Next Year Top execs say its cost-cutting drive will pay off in 2005 and the ailing tech-services provider now has a "unifying strategy" Electronic Data Systems CEO Michael Jordan must be getting used to flying into the wind. Since coming out of retirement to take the helm in March, 2003, Jordan has seen EDS (EDS ) lose key contracts, miss Wall Street's earnings estimates, and, in July, suffer a credit-rating downgrade to junk. The latest: On Sept. 16, the troubled tech-services provider disclosed that third-quarter profits would slump by as much as $16 million as a result of reserves it expects to take related to the bankruptcy of client US Airways (UAIRQ ). Can Jordan steer EDS out of these dark clouds? Early this month, he told an investor conference that he planned to cut 15,000 to 20,000 jobs over the next few years, in addition to 5,700 he has already eliminated. But investors are losing patience. "He's behind by a couple of quarters," says one Wall Street analyst. Recently, BusinessWeek Dallas Correspondent Andrew Park spoke with Jordan, Chief Financial Officer Bob Swan, and Executive Vice-President Charlie Feld about their ongoing attempts to transform EDS. Here are edited excerpts of that conversation: Q: What tells you that you need to keep cutting costs? Jordan: We came to this conclusion last year as we examined our win-loss activity, and we were losing pursuits because our forward productivity curves weren't matching the competition [the curves point to productivity improvements that EDS can realize over the life of an outsourcing contract]. We came up with a broad-based program to take $3 billion, or 20%, out of our cost structure, which we thought was a solid, reasonably ambitious, but a doable target. If you look at the makeup of our cost structure, 60% of it is people and benefits. We got to 18,000 people because 60% of $3 billion is $1.8 billion, and the average salary and benefits [of] a worker is $100,000. What we're doing is scoping the magnitude of the program. And we also think it's important for our people to understand that there's going to be a lot of significant change -- not just headcount slashing but a lot of automation, leverage, change in practices, and so forth -- that will allow us to get these savings. It's not just, you know, taking 8% of heads willy-nilly across the board. [Instead,] it's a very, very targeted 40- or 50-item productivity program. Q: Where else can you still reduce costs? Feld: It really follows the manufacturing paradigm of a series of steps that gets continuous improvement -- Six Sigma kind of approaches. It was around simplification, consolidation, automation, process redesign, asset leverage, and innovation. In each of them, there's a major effort going on. For example, in simplification we've got a very wide footprint -- almost everything ever built over the last 40 years was under management at EDS -- and we're beginning to narrow that footprint just as manufacturing would reduce for variability in processing lines. As we get these programs implemented, there will be revenue upside, but we're not building that into this approach. Jordan: What we're doing is good industrial engineering, which hasn't been done in this business very much. We see lots of things that we can improve. Q: This is your second big cost-cutting program since you took over 18 months ago. Are you concerned about starting to cut into muscle the company needs so it can grow? Jordan: Well, not really. When we say, for example, we're going to introduce automation technology into desktop management, we know specifically what costs come out when you do that, and they're costs that are redundant at that point. You know, they're help-desk people or people who go out and touch the machines periodically, so you can really target where you're taking the people out. It's not like a slash-and-burn cost-reduction program where you shoot every 10th person. We're in the midst of reskilling about 8,000 people. We have to grow with the right kind of people in the right places. When somebody outsources, they're looking for 20% to 25% cost savings over a long period of time. So you've just got to keep improving. Swan: We don't view this as a chicken or egg [problem]. Our ability to grow in a marketplace where our customers are demanding return on their investment means we need to be the most cost-competitive enterprise in the world. Q: What are your growth expectations for the next couple of years? Jordan: Going into next year we've got a contract loss from the British government that we have to overcome. Our goal is to offset that next year [and] get into a positive growth mode in '06. Our goal is to grow at least with the market, which we see as 6% to 8%. Q: To what degree is the Moody's Investors Service credit-rating downgrade hamstringing sales? Jordan: It's obviously something we have to go sell against and present the facts. But we survey our top 250 existing customers, and they see us doing a better job now than we were a year ago, and so I think they're with us. In terms of new pursuits, we have to go explain to people our situation, but the fact that we're a company with positive cash flow and $4 billion the bank, you can sort of say, "What's the issue?" Q: Moody's has indicated concern about the pace of your turnaround. Are these internal challenges happening fast enough to keep you from falling way behind your competitors? Jordan: This is almost completely an internal turnaround. We've revamped our entire sales organization, we've revamped our technology strategy. We cut a lot of costs out, and we've introduced a lot of new service offerings, and we're currently forcing those technology changes down through the large part of our organization. When I read that from Moody's, it's obvious that they've never managed anything. I don't know what [they] expect. There has been a lot of change, and where it has not showed up yet is in the revenue growth, which is obviously the key thing we're trying to get done. This was a company without a unifying strategy. It was 400 different companies. We're essentially creating a new corporation with strong marketplace initiatives and strong technology and cost-reduction initiatives that just didn't exist before. I think we're making pretty good progress, and I think the actual numbers will accelerate in '05 because that's when it all starts to bite. Swan: We've stabilized, we're in the process of fixing, and as Mike indicated, we're laying the groundwork to get back to growth rates at or above market rates. So we feel good about the progress we've made on what we thought was necessary to turn a big ship. Feld: In any transformation, you've got to play your hand. The hand was a little rough, but it's getting played out. The second thing is to change the game, exploiting what we do well across the globe instead of account by account and going through this industrial engineering. The last improvement is getting alignment across the entire globe behind the plan. I'm tremendously confident that we're doing all the right things to begin to grow. The only thing that Mike and Bob have said is we can't plan it with revenue growth, we've got to plan it flat because we want to make sure it's in the bank. But I believe that if we get to this competitiveness, then we will just start naturally growing again -- and that will be all upside.  Edited by Thane Peterson
BW MALL
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