EDS Hopes to Expand as Slump Forces Cost-Cutting
HARD times might be good times here on the plains of north Texas, if Electronic Data Systems Corporation has judged its marketplace correctly. Once the domain of the flamboyant H. Ross Perot, the $6 billion subsidiary of General Motors Corporation wants to earn $25 billion by 1995. It is counting on corporate America's growing reliance on outside contractors to manage data processing departments.
Companies and government agencies have discovered they can save 20 to 50 percent of their information technology costs by going outside, says Stephen McClellan, a computer industry analyst for Merrill Lynch & Co. ``It can be done more efficiently and more effectively by a specialist. It's similar to going outside for travel agency services or building maintenance or legal advice.''
Banks have been quicker than most enterprises to outsource their information technology and services to companies such as EDS, International Business Machines Corporation, and Andersen Consulting (a subsidiary of the Arthur Andersen accounting firm). Last summer, First Fidelity Bancorporation of New Jersey turned to EDS in a deal worth $450 million over 10 years.
Analysts say the Dallas company stands to benefit from the current recession, and from a restructuring last spring. But some doubt whether the $25 billion target is feasible by 1995.
Reorganized in small units
Last year, chairman Les Alberthal reorganized EDS into nearly three dozen strategic business units (SBUs). Each unit provides information-technology and services for companies in specific industries, such as communications, finance, manufacturing, and distribution.
Breaking with Mr. Perot's top-down management style, Mr. Alberthal created a super-board called the Leadership Council, whose members are expected to free themselves from day-to-day management and concentrate on planning.
Charlotte Walker, managing director at Labe, Simpson in New York, calls the SBU structure a ``brilliant reorganization.'' It makes EDS ``as entrepreneurial as possible, to push the decisionmaking down. The head of each SBU becomes a mini-CEO responsible for revenues. Each SBU is smaller and more mobile - more flexible - and the CEO can act as if he's running a $100- or $200-million company. So doubling is easier to do than it is with a $6 billion company.''
Ms. Walker, however, doubts EDS will accomplish its $25 billion goal by 1995 - ``by the year 2000, maybe'' - not ``unless they take on a very substantial management agreement as they did with General Motors; say, if they took on an oil company,'' she says. ``That would probably give them a couple of billion dollars in contract revenues. EDS is probably going to continue to grow at about 20 percent per year and the marketplace will let it.
``The market itself is growing that fast, and its accelerating [its rate of] outsourcing,'' she says.
Industry sales are expected to reach $50 billion in 1994, almost double the 1989 total, according to the Yankee Group in Boston, which analyzes the computer industry. This figure includes business in facilities management, systems integration, and programming. EDS, with 1989 sales of $5.5 billion, is the currently the biggest player in the outsourcing industry - although about 55 percent of its 1990 revenue of nearly $6 billion came from its parent company, GM, in 1990.
EDS has been performing facilities management for GM since the automaker acquired the company in 1984. EDS shares still are publicly traded, as a GM ``E'' stock.
The Yankee Group predicts 1994 sales will reach $11.3 billion, with $8.2 billion from outside GM.
Mr. McClellan of Merrill Lynch says the $25 billion goal is realistic ``if you consider that that's a cumulative figure representing contracts that can extend to 10 years.''
The corporate acceptance of outsourcing prompts Terry Quinn, senior technical analyst at Kidder, Peabody & Co., to say ``absolutely'' the 1995 goal can be reached.
Software business may help
``The opportunities EDS faces are fairly robust and will improve as we go into a recession, and the greatest area of opportunity is outsourcing. Corporate management has come to the realization that they don't have to maintain control of the information process themselves,'' Mr. Quinn says. Quinn says EDS also stands to profit from its increased involvement in software, by developing it, acquiring it, and reaching agreements with software houses, as it did when it bought a 20-percent equity share of Ask Computer Systems in Los Altos, Calif.