Financially troubled Electronic Data Systems is launching a company-wide reduction of overhead costs that could involve layoffs.
At this point, EDS has no concrete plans to reduce its workforce, but layoffs are a possibility, said Jeff Baum, an EDS spokesman. "There's no specific recommendation at this point [regarding job reductions]. Each business group will look at its operations" and decisions will be taken later, he said.
EDS, the world's second largest provider of IT services behind IBM, shocked investors and sent its stock tumbling when it announced on September 18 that it would miss by a wide margin its revenue and earnings targets for the third and fourth quarters of 2002.
The company will provide more details about its plan to cut costs and increase revenue and profits when it reports its third-quarter results on October 30, Baum said. But in the meantime, an open letter to shareholders from EDS chairman and chief executive Dick Brown posted on the company's Web site gives an indication of steps being taken.
The letter states that, in addition to cutting overhead costs, EDS will:
* rein in expenses related to its sales operations, where overspending contributed to the third-quarter shortfall;* try to generate revenue in the near term and improve its weakened cash flow by "cross-selling" additional services to existing clients;* review its services portfolio "to ensure it provides maximum financial value";* review its revenue forecasting methodology, which failed during the third quarter, to September 30;* review underperforming contracts to improve their bottom line, particularly in Europe.
Although the letter stresses that clients will not be affected by EDS's measures, an analyst cautions that IT managers and chief information officers should be proactive and immediately reacquaint themselves with their companies' contracts with EDS.
"EDS will be going through every single contract it has to see if it's performing well, and if it's not, they'll look to make improvements," said Lorrie Scardino, a Gartner analyst.
For example, service providers such as EDS sometimes make concessions and go beyond what's required of them in a contract in order to prompt a specific client to spend more, she said. But if the extra effort on EDS's part isn't yielding increased spending, then EDS is likely to reduce the resources it's devoting to that contract, she said.
"If you're getting services and top-end resources from EDS that you're not paying for because you promised additional growth in your spending and a further extension into your enterprise, and you haven't delivered, those top-end resources will be removed," Scardino said. "EDS is going to be saying, 'what have you done for me lately?'"