Out with the old at EDS

In its latest move to right the corporate ship, Electronic Data Systems plans to offer early-retirement packages to thousands of workers 50 and older. But the program--like others designed to cut costs by casting off graying employees--has risks.

The technology services giant on Tuesday announced a voluntary early-retirement program for about 9,200 U.S. employees who are 50 or older and meet other requirements. EDS expects roughly 4,600 employees to take the offer, ultimately saving the company $150 million next year and $250 million annually after that.

But the plan is tackling the wrong problem at EDS and could backfire as the company pursues sales, said Bob Djurdjevic, president of consulting company Annex Research. He said EDS is already the low-cost provider among its competitors and that job cutting threatens morale and the company's overall skill level. "You don't get to choose who leaves," Djurdjevic said of the early-retirement program. "You may lose some valuable talent."

An EDS representative said the company is taking steps to prevent problems related to losing older workers. EDS has succession plans in place across the organization and the retirement offer excludes certain employees, such as some government account workers with high security clearances. Employees in the AT Kearney consulting wing and most workers on the General Motors account also are ineligible. In addition, the retirements will be staggered through Sept. 30, 2005, "to ensure service quality is maintained," EDS said in a statement Tuesday.

One EDS employee said the early-retirement plan could hurt her work group's technical strength. The employee, who asked to remain anonymous, said she was not reassured by the company's plans for a smooth transition. "We can't lose anyone else on my team, and over half the team is eligible for this early retirement," the employee said in an e-mail.

The retirement program is part of a broader effort to turn around the company, which is second to IBM in IT services revenue. For 2003, EDS posted a loss of $1.7 billion, versus 2002 earnings of $460 million.

The company has struggled with troubled contracts, including a massive deal to upgrade the U.S. Navy's computer and communications systems. Earlier this year, EDS wrote down $559 million related to the Navy contract, which has incurred about $2 billion in operating losses since it began in 2000. The company said Monday that it would delay its earnings report while it considers taking another charge related to the contract. EDS also has been the subject of a probe by the U.S. Securities and Exchange Commission.

CEO Mike Jordan, the former chief of CBS, replaced former CEO Dick Brown early last year and has focused in part on boosting EDS' presence in countries with lower labor costs. Last month, Jordan said the company planned to cut 15,000 to 20,000 jobs during the next two years--on top of some 5,000 employees released during the past year or so. EDS has 119,000 workers worldwide, with 53,000 in the United States.

As part of its "Work Force Management Initiative" announcement Tuesday, EDS said it is "re-skilling" more than 20,000 programmers in technologies such as Microsoft's .Net. At the same time, the company is looking to cut costs with the retirement program. It is open to most U.S. employees who will be at least 50 years old and fully vested in EDS' retirement plan by the end of 2004. The package includes contributions to the worker's pension plan and the accelerated vesting of stock options.

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EDS expects to hire some people to replace the retirees--but not nearly as many. The company said it "anticipates client needs will require filling less than 50 percent of the vacated positions."

Greg Pastino, a consultant and actuary with consulting company Hay Group, said most early-retirement programs end with a positive net result, especially when they result in fewer pink slips. Voluntary offers limit the risk of an age discrimination issue, he said. But companies offering such plans can't pressure employees to take it or face a layoff. "You can't make this a 'take this or else' situation," he said.

He said a potential pitfall in early-retirement programs is that sometimes more people than expected sign up. "It's not uncommon for employers to take back some of their employees on a contract basis," he said.

EDS workers could also take the package and then pursue jobs with competitors like IBM and BearingPoint, which are hiring in the United States.

Djurdjevic said EDS' main problem is leadership that doesn't know how to bring in sales. EDS' revenue last year was $21.5 billion, and it predicts revenue this year of $20 billion to $21 billion.

According to Djurdjevic, cutting jobs at EDS can hurt the ability of sales teams to make strong cases. Combined with the company's growing use of workers in lower-wage nations, esprit de corps is likely to suffer, he suggested. "Any kind of downsizing, any kind of trimming, will cause discontent," he said. "Especially because some of the jobs being cut in the U.S. keep popping up in India."