Electronic Data Systems Corporation

views updated

Electronic Data Systems Corporation

7171 Forest Lane
Dallas, Texas 75230
U.S.A.
(214) 604-6000
Fax: (214) 991-8847

Wholly Owned Subsidiary of General Motors Corporation
Incorporated: 1962
Employees: 60,000
Sales: $5.47 billion

Electronic Data Systems Corporation (EDS) is a recognized leader in the management of information technology. The company designs, installs, and operates data processing systems for customers in the automotive, communications, energy, financial, government, health-care, insurance, retail distribution, transportation, utilities, and manufacturing industries. Innovators in facilities management, EDS originated the concept of long-term fixed-price contracts for this industry. It became a wholly owned, independently operated subsidiary of General Motors Corporation (GM) in 1984. EDS owns the largest private digital telecommunications network in the world and conducts business in all 50 states and in 27 countries.

This multi-billion dollar corporation sprang from modest beginnings on June 27, 1962. A frustrated IBM salesman named H. Ross Perot incorporated EDS on his 32nd birthday. Earlier that year in January, Perot had already fulfilled his entire annual sales quota because of a recent change in IBM’s commission structure. Not satisfied with the administrative job then offered him by IBM, he recognized an unmet need among IBM’s many computer customers. Most companies had few knowledgeable personnel to operate their new computer equipment. Perot wanted to offer skilled electronic data processing management services to these companies. He presented his ideas to IBM executives, but they were not interested.

At the age of 19 Perot received a much desired appointment to the U.S. Naval Academy. Although he valued his time in the military, he found the military too restrictive to make it his career. In 1952, while still in the navy, he was recruited by IBM. Initially he found their business style comfortable, but left ten years later to found EDS.

EDS developed a business concept later termed “facilities management.” Companies would concentrate their energies on what they did best, leaving the computing and data processing tasks to EDS, who could do them more efficiently and economically.

Ross Perot spent the first five months of his new business canvassing the east coast and midwest to find a first customer for his computer services company. He had bought wholesale computer time on an IBM 7070 computer installed at Southwestern Life Insurance in Dallas. Once he sold this time at retail, he was in business. Collins Radio in Cedar Rapids, Iowa, became EDS’s first customer, and a new industry was born. In November 1962, with money from his first sale, Perot hired IBM salesmen Milledge A. “Mitch” Hart and Thomas Marquez.

As EDS grew, Perot modeled employee behavior on the high standards of IBM. He demanded conservative dress, honesty with customers, and no alcohol consumption during business hours. He expected employees to stay sharply focused and highly disciplined.

Although he ran the company with almost military precision, Perot established a management that listened to employee suggestions and ideas. According to an April 1969 article in the trade journal Datamation, Perot’s goals were “to create a climate of complete intolerance to company politics, to provide the finest personal and financial advantages for employees, to make EDS an exciting place to work... to promote from within.... “He believed in loyalty, but held duty at an even higher level. A motto over his office door read, “Every Good and Excellent Thing Stands Moment by Moment on the Razor’s Edge of Danger and Must be Fought for.” Ross Perot expected employees to fight for their ideas.

In 1963 EDS signed its first long-term commercial facilities management contract with Herman Lay of Frito-Lay. While other services companies offered short-term contracts of 60 or 90 days at hourly rates, EDS wrote five-year fixed-price contracts. EDS set up a customer’s data processing system, provided the staff to run it, and once the system was running smoothly, removed some personnel and reassigned them to new projects. Because EDS could cut expenses over the life of the contract by decreasing personnel costs, its profits increased. The customers benefited because they could budget long-term electronic data processing costs. These longer contracts gave EDS stability.

The passage of Medicare legislation in 1965 gave EDS the opportunity to enter another lucrative market. Government agencies involved were about to take on a mountain of paperwork. EDS organized Medicare and Medicaid claims processing systems in many states. By 1968 Medicare and Medicaid contracts provided about 25% of EDS revenues, and by 1977 health care claims processing accounted for nearly 40% of EDS’s sales.

In 1963 EDS executed its first insurance company contract with Mercantile Security Life. By 1990 EDS was the largest insurance data processor in the country. In 1968 it signed a Dallas bank as its first financial institution customer and later became the world’s largest provider of data processing services to banks and savings and loans. Beginning with eight credit unions in 1974, EDS serviced more than 3,000 in 1990. While in 1978 EDS had only three employees in its Washington, D.C., office, in 1990 6,000 people worked in EDS’s government arena.

In 1968, prompted by an employee’s question about the worth of the company’s stock, Perot began to investigate the advisability of a public stock offering. He made the initial release small: 325,000 of his own shares and 325,000 new EDS shares—about 7% of the company. The offering met with phenomenal success, opening at $16.50 per share and closing at $22. Perot and EDS each received $5 million dollars. The shares climbed to a high of $160 in 1970; by April of 1971 they had dropped to about $66, and in 1973, with a sharp decline in the stock market, EDS stock plummeted to $15 a share.

Perot served as president from the company’s inception in 1962 until he appointed Hart to that position in 1970. Hart was president until his resignation in 1977. Perot stayed on as CEO and chairman of the board and resumed the presidency from 1977 to 1979.

EDS pioneered the concept of distributed processing, by which systems and terminals communicate with each other from remote locations. It developed computer systems set up to serve a specific industry. These systems could then be modified according to each customer’s needs. In the 1970s EDS developed Regional Data Centers, where customers could transmit their work to be handled by EDS’s data processing equipment and personnel.

The company’s revenues doubled almost every year between 1964 and 1970. In the 1970s, revenue increases slowed to 22% in 1971 and 13% in 1977.

In the early 1970s EDS bought Wall Street Leasing, a computer-services subsidiary of Dupont Glore Forgan, Inc., one of the country’s leading retail stock brokers. Perot appointed EDS vice president, Morton H. Meyerson, to attempt the rescue of the financially troubled firm. With encouragement from the Nixon administration, which feared a financial disaster on Wall Street, Perot had begun by investing $10 million in Dupont Glore Forgan. By 1973 he had invested further funds in Walston and Company, another retail brokerage house, and had proposed a merger between Dupont and Walston. By early 1974 Perot was defeated by the losses at Dupont and Walston. He left Wall Street some $60 million poorer.

A lawsuit filed in 1976 by F. & M. Schaefer Corporation and F. & M. Schaefer Brewing Company, for whom EDS operated a data processing facility, contributed to the slowdown of revenue growth in the mid-1970s. Schaefer claimed that the EDS data processing system was inaccurate and deficient, resulting in inadequate and misleading information. EDS maintained that Schaefer filed the suit to avoid payment of more than $1.2 million owed to EDS. In the 1978 out-of-court settlement, EDS paid Schaefer Corporation $2.3 million and retained $1.3 million already paid by Schaefer.

In early 1976 EDS entered the international market by signing a contract with King Abdulazziz University in Saudi Arabia. Later that same year EDS signed a three-year $41 million contract with the government of Iran to provide computer services for their social security division and training for Iranian personnel. In December of 1978 EDS suspended all operations because Iran was six months behind in payments. The scope of the Khomeini revolution grew in Iran, and after the jailing of Iranian officials with whom EDS worked, Perot ordered home EDS employees and their families. A few employees remained, hoping the chaos would be resolved. The situation worsened with the arrest of EDS executives Bill Gaylord and Paul Chiapparone, with bail set at $12 million. Since diplomatic channels seemed closed, Perot took direct action. In early 1979 he organized a rescue team headed by Green Beret Colonel Arthur D. “Bull” Simons, whom Perot had previously hired to make private forays into Vietnam looking for servicemen missing in action. Although Gaylord and Chiapparone actually walked out of prison on their own when a mob released all prisoners, they needed the EDS team to get them out of the country.

In the mid-1970s EDS began a shift away from facilities management, since many companies were becoming interested in running their own data processing systems. In 1979, Morton H. Meyerson became president while Perot continued as chairman of the company. Under Meyerson, EDS diversified its business interests through acquisitions of turnkey systems—sale of systems to be installed—for hospitals, small banks, and the small-business field. With the purchase of Potomac Leasing in 1979, EDS moved into federal government contract work. The bulk of EDS business still remained in facilities management, with processing of health care claims a large percentage of the business through the 1970s and into the 1980s.

Always moving with the times, EDs became a systems integrator, sending in teams of experts to connect and coordinate a company’s entire computer systems, software, and telecommunications. In 1982, as the result of its experience in systems integration, EDS won a $656 million ten-year contract for Project Viable, to streamline and update the U.S. Army’s computerized administrative facilities and to build a network connecting 47 bases across the United States.

On June 27, 1984, although the company never had a contract with an automobile manufacturer, EDS became a wholly owned subsidiary of General Motors Corporation (GM). The $2.5 billion purchase price was the largest ever paid for a computer services business. GM agreed to maintain EDS as a separate entity, keep key personnel, and issue a special class of common stock, called class E, which would be tied to EDS’s performance, not GM’s. Perot would retain managerial control of EDS and serve on GM’s board of directors.

GM needed EDS to coordinate and manage its huge, unwieldy data-processing system and to cut its $6 billion annual data-processing costs. Roger B. Smith, GM’s chairman of the board, thought Perot’s management style would be an asset to his giant corporation.

Problems surfaced within a year when the differences in management style between Ross Perot and Roger B. Smith became evident. The August 1984 issue of Ward’s Auto World suggested “Mr. Perot is a self-made man and iconoclast used to calling his own shots.... Roger B. Smith [is] a product of the GM consensus-by-committee school of management, never an entrepreneur.”

EDS saw revenue increases as the result of the General Motors business. In 1985, the first full year after the acquisition, EDS revenues tripled to $3.4 billion. By 1986 personnel had almost tripled to 44,000 from 1984 levels. EDS also branched out into telecommunications and factory automation. Although EDS revenues increased substantially, profit margins fell to 5.5% in 1985. GM preferred contracts which stipulated a fixed percentage for profit; EDS, on the other hand, wanted to continue the fixed-price contracts it had been using since inception. Additional problems arose as the result of the differing company cultures.

In 1986 GM management bought Perot’s Class E shares for more than $700 million. For the first time in the 24 years since he started the company, Ross Perot was no longer in charge of EDS. Morton Meyerson also resigned.

At that time, Lester M. Alberthal became president and CEO. He had joined EDS as a systems engineer trainee in 1968. In June 1989 he was named chairman of the board of EDS. Under Alberthal’s leadership, EDS broadened its customer base and reduced its dependence on GM-generated revenues from 70% in 1986 to 55% in 1989. Revenues climbed to new highs.

Under Alberthal, the company diversified, moving into energy, transportation, communications, manufacturing, and other new areas of business. Diversification included further expansion of international business. Administration of the company was reorganized through a leadership council, to spread responsibility and authority for daily operations to lower levels of the EDS hierarchy and allow the top executives to focus attention on development of long-range strategy.

Within the GM alliance, EDS developed the world’s largest digital private telecommunications network: EDSNET. Consolidating the networks of both GM and EDS took three years, a staff of 2,000 people, and a cost of over $1 billion. In 1989 EDS opened its Information Management Center in Plano, Texas. The 153,000 square-foot facility serves as the heart of EDS’s extensive worldwide communications network and information processing centers where voice, data, and video transmissions travel to their destinations via state-of-the art media. This center is the hub of operations for 15 North American and 6 international Information Processing Centers located all over the world. EDS can respond immediately to the needs of its more than 7,200 customers, who are able to take advantage of the leading edge of information technology.

Throughout the years, EDS contributed to the community and the nation as part of its company policy. In May of 1989 and again in 1990, EDS supported Project JASON, which enabled 225,000 children around the country to witness live the undersea exploration of the Mediterranean Sea. Dr. Robert D. Ballard, the scientist who discovered the wreck of the Titanic in 1985, led this excursion. EDS provided satellite links and solved technological problems to ensure the success of this undertaking. EDS created an Education Outreach Program for the communities where the company is located. EDS “adopted” several public schools and worked with teachers to help improve the quality of education.

EDS emphasizes employee training, spending over $100 million per year on the Systems Engineer Development program, to give customers the best service available. The firm has the technology and skills to continue global expansion of its information technology services.

Principal Subsidiaries

E.D.S. Federal Corporation; EDS Financial Corporation; EDS Technical Products Corporation; National Heritage Insurance Company; VideoStar Connections, Inc.