Due to its expected earnings and revenue shortfall, Electronic Data Systems is likely to take a variety of measures to cut costs and improve margins, a situation that EDS clients must monitor because it could affect the quality of the IT services EDS provides to them, according to analysts.
EDS, the second-largest provider of IT services behind IBM, warned last week that earnings and revenue will fall way short of expectations in its third and fourth fiscal quarters, an announcement that surprised and shocked investors and sent EDS's stock plummeting.
Ripples from the warning continued all of last week, with Wall Street analysts raising additional questions about the credibility of the company's top management, its financial health and some business practices. The stock closed on Thursday at $US12.90, compared to its close of $36.46 on Wednesday the week before, the day when the company issued its warning after the financial markets closed in New York. The stock's 52-week high is $72.45.
It is common for IT service providers facing a financial crunch to review their portfolio of contracts, with a special focus on contracts that aren't generating the expected revenue and profits, said Lorrie Scardino, a Gartner analyst.
Thus, it's likely that EDS will be looking to make its "under-performing" contracts more profitable by seeing if it can meet its service-level obligations with less resources, Scardino said. A way to do this is to reduce the staffers and physical assets the service provider has assigned to a project, she added.
For example, if EDS is contractually bound to solve a specific problem in one hour, and it has consistently been solving that problem in 15 minutes, it means EDS could remove resources tied to that task and still meet its obligations, Scardino said. However, the client would notice a drop in the service level it has become accustomed to, she added.
"In situations like these, the service providers look at what they've been giving away for free," she said.
Consequently, IT managers and chief information officers should pull out their EDS contracts and reread them, so that they know how the service arrangement could change, and proactively talk to EDS about any concerns they may have, she said. In some cases, a renegotiation of the contract might be necessary for a client to secure a service level it may have come to depend on, she added.
"IT managers need to do due diligence on the resources that are on their contracts now, to make sure they retain the resources delivering value to them," she said.
It's also possible that EDS will resort to switching staffers among projects, to put its best people on the most profitable projects and vice versa, she said.
Given the hard times EDS and many of its competitors are facing, IT managers looking for IT services providers might do well to consider the second tier of vendors in terms of size, such as Affiliated Computer Services and Unisys, because they may be able to offer more flexibility in their service agreements than their larger competitors, she said.
Then there's the issue of potential layoffs and the effect of the financial travails on staff morale at EDS, two things CIOs should monitor because they could also affect the quality of EDS services if the company doesn't handle them properly, said Andrew Efstathiou, a Yankee Group analyst.
However, at this point, EDS remains a viable provider of IT services, he said.
"I don't think EDS will go out of business," he said. "Its financial condition is deteriorating, but it's not in extremis."
Efstathiou doesn't expect to see EDS facing a client exodus either, because the company remains one of just a few IT services providers capable of handling very large and complex projects. "Few firms can undertake the scope and scale of very large IT services projects," he said.
An EDS spokesman said on Friday the company is operating on a "business as usual" basis. "Our resources are more than adequate for us to serve our current clients and aggressively pursue new business," said Jeff Baum. "EDS is fundamentally strong."
Despite its financial problems, EDS is still in final negotiations for two outsourcing contracts each worth over a billion dollars and won a big project in the UK worth over $US140 million.
A Procter & Gamble spokeswoman said on Friday that the company continues negotiating with EDS for an outsourcing contract for the provision of back-office services. Analysts have estimated the value of this contract at between $US4 billion and $10 billion, which would make it one of the biggest in the history of IT services. Procter & Gamble has nothing new to update on the process since it confirmed last week that EDS is the only candidate and that the companies were close to finalising a contract, she said.
Meanwhile, EDS is on track to finalising a five year, $US1.46 billion outsourcing contract with ABN AMRO Bank at some point during the fourth quarter, Hans van Zon, an ABN AMRO spokesman, said on Thursday. The contract calls for EDS to provide a variety of IT services to the bank's Wholesale Clients unit. ABN AMRO first announced it was in final negotiations with EDS for the contract in August, and at the time said it would be finalised during the fourth quarter.
And on Friday, the UK government's National Health Service Information Authority announced that it had awarded EDS a $US142 million contract to develop and deliver a directory and e-mail service.