Update: EDS ends talks in multibillion dollar contract

MIAMI — Electronic Data Systems (EDS) kicked off its annual meeting with financial analysts Tuesday with bad news: Final negotiations have collapsed over an outsourcing contract estimated at billions of dollars with French company Alstom.

In a brief statement issued Tuesday, Alstom said the two companies had been unable to reach “mutually acceptable terms for the transaction” and that consequently both parties had decided to terminate the negotiations.

However, this doesn’t mean Alstom has abandoned its outsourcing plans, as it continues to believe IT outsourcing will lead to reduced costs, higher operational efficiency and improved IT services.

An Alstom spokesman declined to elaborate on the reasons the Paris-based energy and transportation infrastructure company had for ending talks with EDS. As recently as Jan. 16, Alstom had described the negotiations with EDS in a press release as “well advanced.”

Meanwhile, over in the EDS Plano, Texas, headquarters, the Alstom contract was the first order of business for Chief Executive Officer and Chairman Dick Brown as he kicked off his company’s annual meeting with financial analysts.

“We have disengaged from that contract negotiation,” he told attendees in a speech that was also broadcast over the Web. “Frankly, given our objectives and our priorities and their needs, we just couldn’t come to an agreeable solution and we have mutually agreed to depart the discussions.”

He didn’t elaborate either on the reasons that led talks to break down, but it is well known that EDS is trying to improve its cash flow and that in its initial stages contracts of this magnitude tend to drain much cash from the outsourcer if the outsourcer is required to incur heavy initial investments.

Later on during his speech, Brown said the company’s “reinvigorated focus” on cash flow continues to be a priority with efforts to reduce corporate overhead costs, cut capital expenditures and sales of non-core assets.

Speaking in general about EDS’ strategy toward outsourcing megadeals — generally defined as those with a total value of more than $1 billion — Brown said the company is taking “a more targeted approach” that includes protecting EDS’ cash.

“We’re not going to stretch our resources (pursuing) 90-plus megadeal opportunities. We’re targeting major deals with near-term profitability and manageable cash utilization,” he said.  “We’re prepared to walk away from highly visible pursuits where these two key criteria just don’t line up.”

Moreover, EDS will increase its focus on small and midsized projects, which he defined as contracts whose total value is less than $250 million. “This will give us better value in our portfolio,” he said.

In November, the companies announced Alstom had chosen EDS as the preferred bidder to enter final negotiations for a project to outsource Alstom’s IT infrastructure and applications services in 14 countries: Belgium, Brazil, Canada, France, Germany, Italy, Mexico, Poland, Portugal, Spain, Sweden, Switzerland, the U.K. and U.S.

At the time, an EDS spokesman told Computerworld magazine that he estimated the value of the contract at several billion dollars. The deal would have involved the transfer of about 1,300 Alstom employees to EDS. In the fiscal year ended March 31, 2002, Alstom had sales of €23.4 billion (US$20.4 billion based on the conversion rate on March 31.)

Better news came out later on Tuesday when EDS announced that the U.S. Department of Defense (DOD) formally authorized the Department of the Navy to significantly extend the roll-out of the mammoth Navy Marine Corps Intranet (NMCI) multi-year project, which EDS won in October 2000 and which is valued at $6.9 billion.

The U.S. Congress and the DOD had capped the initial NMCI deployment at 160,000 seats, of which only 60,000 seats had been authorized for moving to the NMCI system, pending testing, EDS said in a statement. But on Tuesday, EDS got word that the DOD and Congress have given the Navy the green light to move all 160,000 authorized seats to the NMCI system and have given it permission to order an additional 150,000 seats.

When completed, the system will provide a wide range of network-based information services to Navy personnel, including integrated voice, video and data communications, and will link more than 300,000 desktops, EDS said.

EDS spent most of last year battling a variety of controversies, some of which have carried over into 2003, including an ongoing formal investigation by the U.S. Securities and Exchange Commission (SEC) prompted in part by a gigantic earnings and revenue shortfall the company announced in September for its third and fourth fiscal quarters of fiscal 2002.

“There is very little we are at liberty to discuss about the SEC investigation. We have been fully cooperating and we will continue to do so,” Brown said.

That earnings and revenue shortfall, which hurt top management’s credibility with Wall Street and clients and affected the company’s stock price, is also blamed for prompting Procter & Gamble Co. to pull back from what seemed a done deal to award EDS a multibillion dollar outsourcing contract believed to be among the largest in IT history.

EDS’ business in 2002 also suffered from the bankruptcies of some big clients, such as WorldCom Inc. and UAL Corp. EDS announced plans in October to reduce its workforce by 3 percent to 4 percent, or up to 5,520 jobs from the total of about 138,000 at that time, and to implement other cost-cutting measures.

Throughout the company’s struggles, IT analysts have recommended that clients keep a close eye on their EDS engagements, to ensure that service quality doesn’t slip as a result of the cost-cutting and layoffs.

After Brown’s presentation, new Chief Financial Officer Robert Swan reiterated EDS’ earnings per share expectations for fiscal 2003 of between $1.80 and $2, excluding the impact of discontinued operations, the same forecast the company issued a little over two weeks ago when it reported its fourth-quarter 2002 earnings.

Brown made a point during his presentation to say that EDS is committed to service excellence, which he said will not be affected by initiatives to cut costs and improve profitability.

Along these lines, EDS also announced Tuesday two new real-time online tools for measuring the performance of its partners and suppliers and the effect of that on EDS clients. The new Web-based Supplier Excellence Dashboard and Alliance Excellence Dashboard will complement the existing Service Excellence Dashboard, introduced in 1999, to give EDS “a 360-degree view” of its relationships with clients, partners and suppliers, the company said in a statement. Currently, the Service Excellence Dashboard is used by about 18,000 EDS employees and monitored around the clock.

EDS also announced Tuesday a hosting service that guarantees clients 100 percent availability for the hosted Web sites and applications.

EDS is the world’s second largest provider of IT services after IBM’s Global Services unit. It closed its 2002 fiscal year, ended on Dec. 31, 2002, with $21.5 billion in revenue.