EDS after the big win

William Dvoranchik is smiling. "2000 was a good year for EDS," says the president of the federal government group at Electronic Data Systems Corp., which in September won the largest competitive contract for a government information technology program: the Navy Marine Corps Intranet.

The potentially $6.9 billion NMCI contract wasn't the only good news.

EDS announced Feb. 7 that it had achieved better-than-expected earnings and record contract signings for the fourth quarter of 2000 and for the year. Although the NMCI contract — signed in late 2000 — is not expected to be a large contributor to EDS' financial growth until late this year, revenue from the company's government work around the world grew 34 percent in the last year.

Not many technology executives can report that kind of success in the current climate of poor federal sales, the result of a slow recovery from the Year 2000 rollover buying freeze, a faltering telecommunications industry, low margins on IT hardware and a slate of year-end layoffs in the e-business and e-government sectors.

EDS struggled to win new business and meet expectations in the past, but it appears that steps taken by Dick Brown, EDS' chairman and chief executive officer, who took the helm in 1998, and Jim Daley, executive vice president and chief financial officer, have turned around the company's performance and prepared it to ride out an economic downturn, industry analysts said.

"A few years back, they were out of control. They didn't have good direction, didn't control costs. They were slow to react — all of the things that cause you to not win business," said Gary Helmig, managing director for research at Wit SoundView Group Inc., an investment banking firm.

Brown and Daley radically streamlined the company and restructured the sales organization to better nurture large contracts and bring in new business, Helmig said.

"The megacontracts give them a lot of brand awareness," Helmig said. "Winning the Navy contract does a lot for the EDS brand."

The NMCI contract is just one indication of how the company is building new relationships with long-term customers. EDS has been a contractor with the Navy on its Information Technology for the 21st Century (IT-21) and PC LAN+ programs. Under NMCI, EDS will outfit 300 Navy and Marine Corps bases with a common computing and communications environment that the contractor will maintain and manage.

"What the win of NMCI did for EDS was a tremendous shot in the arm. I've never seen one program raise morale at the company so much," said Rick Rosenburg, EDS vice president and program executive for NMCI.

The contract boosted confidence on Wall Street, and EDS' stock price rose from $40 a share the day of the award to the low $60s in mid-February.

And the climate has never been better for IT outsourcing.

"We see people needing us more than ever," Brown said Feb. 7 in a conference call on the company's 2000 earnings. "But what they use us for is different. It's more of a defensive use."

Brown cited contracts for information assurance, managed network storage and other measures that increase productivity and efficiency to help clients survive a slower economy.

The Bush administration is likely to encourage outsourcing as it downsizes the federal government, said William Loomis, an analyst at Legg Mason Wood Walker Inc. The success of some outsourcing contracts in the last few years also should produce more activity in the future, he said.

A Model Program

NMCI could become the model for how other federal agencies make decisions about outsourcing.

"We're trying to explain how simple this really is," Dvoranchik said. "The question is, "Can you act as the agent for change?' "

The key to making the users of NMCI comfortable is allowing manageable choices that do not compromise the standardization and economies of scale the contract is intended to achieve, Dvoranchik said.

"This is what every [chief information officer] is searching for" because it approaches IT from the enterprise level, he said.

What NMCI calls for is exactly the type of work EDS has been doing for large commercial customers for 20 years, he said, but the concept is fairly new to the federal government.

Not only was the win positive for EDS, but it also established the Navy as a leader in using IT, Rosenburg said.

"We've known from the beginning that this would be an incredible undertaking," said Scott Randall, director of Navy Networks and Information Assurance Directorate at the Space and Naval Warfare Systems Command in San Diego. "When we looked at NMCI, we knew that no single company was going to have the wherewithal to take on something this big."

The strength of EDS' subcontractors — such as WorldCom Inc., Raytheon Co. and Microsoft Corp. — adds to the company's arsenal, as does the 40 percent small-business component, Randall said. Most of the small-business subcontractors already provide local IT services at each Navy site.

Staying Competitive

Because EDS knows how important the contract is to the future of federal outsourcing programs, it is willing to put resources from every division behind the company's NMCI team, Dvoranchik said.

"It is not an issue of a strain on resources for us," Dvoranchik said. EDS has augmented its staff by about 100 employees; it is also offering training for workers who might be displaced by the transition at Navy sites so that they can move into similar jobs with the subcontractors, he said.

Supporting NMCI also will not shift EDS' focus from existing government contracts or from pursuing new federal opportunities, he said. EDS is trying to grow by up to 30 percent in the federal sector and use its commercial offerings, such as the Intelligent Network Foundation, seat management and Web hosting, to bring federal agencies up-to-date, he said.

The Intelligent Network Foundation provided EDS with a wide-area network solution for NMCI that it did not have to build from scratch, Rosenburg said.

In the midst of bidding for NMCI, EDS decided not to pursue the National Security Agency's "Project Groundbreaker," a potential 10-year, $5 billion deal to modernize NSA's IT infrastructure, Dvoranchik said.

And since EDS won NMCI, the company is more willing to invest in the federal space, he said. The company will continue to pursue similar outsourcing business in the military services and try to market similar packages to civilian agencies.

"The initial reaction from most of the federal government has been curiosity and interest," said Elizabeth Smith, senior vice president of sales in EDS' federal government unit. "We have communication and education plans to satisfy that enormous interest and at the same time deliver for the Navy what they have asked."


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