Electronic Data Systems Corp. (EDS)

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ELECTRONIC DATA SYSTEMS CORP. (EDS)

Electronic Data Systems Corp. (EDS) is the largest information systems and business process services firm in the United States. Second only to IBM Corp. in the worldwide systems consulting market, EDS offers network operations, systems integration, data center administration, applications development, and management consulting. In the late 1990s, at the prompting of new CEO Dick Brown, EDS began overhauling its own internal operations with the e-business technology it had spent years selling to other clients. The restructuring paid off as annual sales in 2000 reached $19.22 billion, compared to $18.5 billion in 1999. More importantly, the Plano, Texas-based firm's earnings more than doubled, from $420.9 million to $1.1 billion, over the same time period.

EARLY HISTORY

EDS was created in 1962 by H. Ross Perot, a former IBM salesman. Recognizing that companies were struggling to recruit employees with the technical expertise needed to operate new equipment, Perot had come up with the idea that IBM should offer electronic data processing services along with selling computer equipment. When IBM discarded Perot's idea, he resigned to found EDS. The firm's first client, Collins Radio, bought computer time, which Perot had purchased on a wholesales basis, on an IBM 7070 machine at Dallas, Texas-based Southwestern Life Insurance. The following year, EDS began securing data processing contracts with firms like Mercantile Security Life and Frito Lay. To differentiate his firm from competitors who marketed two-and three-month contracts, Perot established five-year contracts with a predetermined price. EDS operated by putting in place a computer system and supplying staff qualified to run it. EDS employees were replaced by the client's workforce once they had learned to operate the machines.

EDS began establishing Medicare and Medicaid claims processing systems in 1965. Three years later, Medicare and Medicaid accounts were generating 25 percent of total sales. The Dallas Bank signed on as the first financial institution to use EDS, and later became a world leader in providing data processing services to banks and savings and loan institutions. The firm also secured its first $1 million contract and conducted its initial public offering at $16.50 per share. Sales in 1970 reached $47 million. After reaching a high of $160 per share in 1971, stock plummeted to $66 by the year's end. As a result, Perot hired Morton H. Meyerson and charged him with the task of preventing further stock drops. However, stock fell to $15 per share in 1973. The following year, eight credit unions signed up for EDS service, and sales reached the $100 million mark. EDSNET, an internal communications network, was launched.

In 1976, EDS faced litigation filed by F&M Schaefer Corp. for what F&M alleged was the firm's erroneous and defective data processing system. EDS contended that F&M was merely trying to wrangle its way out of paying its $1.2 million bill. Eventually, EDS agreed to pay F&M $200,000 to settle the case. The firm also made its first international foray, securing a $41 million contract to provide computer services to the Iranian government for three years. EDS landed a contract from King Abulaziz University in Saudi Arabia as well. In 1978, after waiting six months for payment from Iranian officials, EDS discontinued its operations in the country.

Morton Meyerson was named president in 1979, and was appointed CEO shortly thereafter. Perot retained the role of chairman. EDS diversified by securing contracts with hospitals, small banks, small businesses, and other organizations it had not targeted before. The firm also acquired Potomac Leasing, gaining access to its first government contract. In 1982, Meyerson was lauded by the Wall Street Transcript as "The Best CEO in the Computer Services Industry," an award he also won in 1983 and 1984. In the early 1980s, EDS signed a federal government contract that was the largest such deal ever assigned. The firm also landed a $656 million contract, known as Project Viable, to develop the U.S. Army's computerized administrative system over a period of 10 years. The system became known as Army Standard Information Management Systems (ASIMS). In June of 1984, General Motors Corp. paid $2.8 billion for EDS, completing the most costly purchase to date for a computer services company. As specified by the terms of the deal, EDS retained its corporate culture and most of its workforce. GM assigned a class E stock to EDS, tying its value to the new subsidiary's performance. Perot was named to the General Motors board of directors, and EDS took over management of General Motors' unwieldy data processing system and began whittling down the automaker's data processing expenditures, which totaled roughly $6 billion each year. Eventually, EDS connected the firm's suppliers and dealers in one of the first major electronic data interchanges.

GROWTH AS A UNIT OF GM

After its takeover by General Motors, EDS moved into Europe, setting up operations in the United Kingdom. The following year, in 1985, sales grew threefold to $3.4 billion. The firm's workforce also nearly tripled, reaching roughly 40,000. However, earnings fell by 5.5 percent. International expansion continued with the creation of units in Australia, Brazil, Canada, France, Germany, Mexico, New Zealand, and Venezuela. GM paid Perot more than $700 million for his remaining shares of EDS stock and dismissed him from the board. Eventually, Perot established a competitor to EDS, known as Perot Systems. Meyerson resigned, and Lester M. Alberthal was named as his successor. As this management shakeup was taking place, EDS diversified into factory automation and the telecommunications industry with the goal of growing its client base and reducing its reliance on the GM contract, which accounted for the majority of the firm's revenues. EDS also made its first foray into Asia by establishing a unit in Japan that housed two information processing centers and catered to automobile manufacturers, electronics firms, and financial institutions.

EDS forged two major deals in 1987. The Beijing Municipal Government's Commission for Science and Technology hired the firm to create the Beijing International Information Processing Co. It also secured a contract from Nippon Information Industry Corp. of Japan to develop Nippon EDS to offer computer and telecommunications services. International growth efforts resulted in the creation of an information processing center in Paris. The Health and Benefits Strategic Business Unit of EDS agreed to supply data processing services to the National Account Service Co., which was a joint venture established by five U.S. Blue Cross and Blue Shield plans. In 1988, Fortune magazine named EDS as the leading diversified services company in the United States. Also, Alberthal was named one of the top 10 executives of companies with more than $1 billion in revenues. Acquisitions that year included M&SD Corp.; the $347 million purchase of Mtech Corp.; General Data Systems Ltd.; VideoStar Connection Inc.; and a 50-percent stake in China Management Systems Corp., the top information services provider in Taiwan. Sales grew to $5.5 billion, and operations had expanded to 27 countries.

In March of 1989, EDS completed work on its 153,000-square-foot Information Management Center, a communications home base for the more than 7,000 EDS clients across the globe and the headquarters facility for 21 information processing centers, six of which were overseas. Hitachi Corp. agreed to develop Hitachi Data Systems Corp., a joint venture with EDS which marketed computer hardware made by Hitachi. In June, EDS began merging EDSNET with the communications network of General Motors to create the world's largest proprietary digital telecommunications network. The project, which took three years and 2,000 employees to complete, cost more than $1 billion. Systems management contracts secured during the year included a 10-year deal between EDS Hong Kong and Hong Kong's biggest bank, and an agreement between EDS Australia and Australia's leading private food producer. The firm also purchased BancSystems Association Inc. and the electronic fund transfer operations of Automatic Data Processing Inc.

Employees reached roughly 61,000 in 1990. The Army, Navy, and Defense Logistics Agency awarded EDS a $712 million contract. Efforts to increase its presence in the travel and transportation industry paid off when EDS secured major contracts with National Car Rental System, Continental Airlines/System One CRS, and Hospitality Franchise Systems Inc. In 1991, Stratus Computer began working with EDS Personal Communications Corp. on developing a Home Location Register (HLR) system for the burgeoning cellular telephone industry. CAPSCO Software Canada Ltd. and EDS Canada began working together to target Canadian life insurance businesses. EDS also began providing data processing and communications network services to China's Ministry of Railways. The firm restructured operations around new Centers of Service, such as e-commerce, customer services technology, document processing, performance services, and technical products. Sales in 1992 grew to $8.5 billion, 40 percent of which were attributed to the GM account. GFI Informatique merged with EDS France to form one of the top information technology (IT) service providers in France.

Merger negotiations between EDS and long-distance telephone service provider Sprint Corp. dissolved in 1994. That year, EDS added to its international holdings with the purchase of French consultancy Eurosept and Brazilian consultancy F.C. Consultoria. In August of 1995, General Motors revealed its intent to spin off EDS as the largest independent computer services firm in the world. Valued at $25 billion, EDS was worth 10 times the amount General Motors had paid for it 11 before. In September, EDS bought A.T. Kearney for $628 million. When A.T. Kearney's 1,900 consultants had been integrated with the 1,600 consultants from EDS, the firm became one of the leading business consultancies in the world. In June of 1996, EDS stock was listed on the New York Stock Exchange after General Motors finalized its spin-off of the firm. EDS agreed to pay General Motors $500 million and provide computer services at a discount until 2006.

REORGANIZATION AFTER SPINOFF BY GM

BellSouth Telecommunications selected EDS for its $4 billion computer systems operation contract in 1997. The deal marked the first billion-dollar contract secured by EDS in more than a year and a half. In August of 1998, EDS was listed on the Standard and Poor's stock index. At that time, employees exceeded 90,000, and operations spanned more than 40 nations. Alberthal resigned as CEO and chairman, and was succeeded by Richard H. Brown in early 1999. According to William Schaff in an August 1998 InformationWeek article, Brown's challenge would be to maintain the firm's competitive edge as demand for IT outsourcing grew. "Companies are outsourcing more IT functions, including their Web sites and E-commerce systems, as they focus on their core business. This puts EDS in a good position, but the booming market has also attracted strong competitors, including Computer Sciences Corp. and IBM Global Services, which have started winning some of the megacontracts that used to be EDS's private domain." Another issue facing EDS was that costs were growing as quickly as revenues, undercutting earnings growth.

One of Brown's first accomplishments was the purchase of Advanced Computing. He also oversaw the $12.4 billion, 10-year dual outsourcing agreement between EDS and MCI WorldCom, through which MCI WorldCom contracted EDS to handle a portion of its IT operations for $6.4 billion, and EDS contracted MCI WorldCom to oversee a chunk of its network operations for $6 billion. As part of the deal, EDS acquired MCI Systemhouse Corp., which designed, constructed, and operated systems that connected computers with data, voice, and Internet networks. It also offered e-commerce services such as call center management. Eventually, MCI Systemhouse was folded into a new Web-based electronic business unit called E-Business Solutions, which later became known as E.Solutions.

Decreased earnings in 1999, due in large part to increased competition and rising costs, prompted the firm to undertake a $1 billion reorganization effort which resulted in the layoff of 13,000 employees. Brown also combined the 48 business units of EDS into four divisions. In 2000, EDS purchased France's Captimark Corp., a customer service management systems provider. Rolls-Royce hired EDS to oversee its IT services; the contract was valued at $2.1 billion. The firm also secured a $6.9 billion IT systems contract from the U.S. Navy. At the dawn of the new millennium, EDS employees totaled roughly 115,000 and the firm operated more than 800 offices across the globe. Sales continued to grow, and profits more than doubled, reflecting the success of cost cutting measures launched by Brown in 1999. According to Inter-netWeek, when Brown took over, "not only did EDS have aging systems, but it wasn't using the e-business technology it recommends and deploys for so many of the large enterprises that make up its clientele. Upon his arrival, Brown kicked off an extensive systems-modernization effort and insisted upon the implementation of e-business applications." For example, the firm began training its employees via online courses, which drastically cut training costs.

In early 2001, EDS bought the outsourcing operations of online travel agent Sabre for $670 million and Germany's IT systems provider Systemantics for $570 million. In June, EDS also agreed to acquire collaborative software manufacturer Structural Dynamics Research for $950 million to bolster a push into Web-based collaborative product design. The deal reflects the firm's continued efforts to broaden the reach of its e-business solutions operations.