Is Dick Brown EDS's answer?

Financial analysts give the EDS's new leader fairly high marks for taking tough steps to put EDS back on a leadership track, including cutting 5,200 jobs from a 120,000 worldwide workforce.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
3 min read
New EDS leader Dick Brown is starting to prove he can wield an ax as well as he used to make acquisitions.

Financial analysts gave the no-nonsense, charismatic Brown--known for making deals as former head of Cable & Wireless--fairly high marks for taking tough steps to put EDS back on a leadership track, including cutting 5,200 jobs from a 120,000 worldwide workforce. Another $1 billion in unspecified cost cuts are to come.

"We have not performed to our potential," Brown told Wall Street analysts who gathered for their first face-to-face meeting yesterday, as previously reported. "We can do better and we will for our clients, our stockholders."

Analysts likened Brown's speech to a coach's pep talk--peppered with promises for change at the Plano, Texas-based systems integrator and outsourcer.

"I think [Brown] did reasonably well--a better-than-average presentation," said Gregory Gieber, analyst at Brown Brothers Harriman. "He's indicated he's aware of the problems at EDS." Gieber called EDS's first-quarter U.S. sales growth for the quarter of 3 percent "dreadful." Profit for the first quarter also fell 14 percent to $181.8 million, down from $211.3 million a year earlier.

"The message I took away is that things are going to change and that change has started and will probably happen faster than we think," added Thomas Browne Jr., analyst with Prudential Securities. The challenge, he said, is moving a firm the size of EDS, which loses an average of 1,000 people a month in attrition alone, in a new direction.

Unlike hardware and software makers, which can rely on new products and upgrades to drive revenues, an outsourcing firm's success directly depends on changing the performance of the people who sell and provide services, analysts said. EDS has already weeded out the bottom performing 20 percent of its sales force, Brown said.

But Julie Giera, an analyst who follows outsourcing at Giga Information Group, questioned whether Brown is cutting too deeply to please Wall Street at the risk of losing valued employees and comprising customer service.

"In the long term they will be a leaner, meaner organization," she said. "The downside is the short-term. While all of this is going on they risk losing very talented folks."

Short-term earnings pressure could also cause short-sighted divestitures of business units, she added.

"They're looking at pruning off limbs of the tree and you just have to make sure you don't prune all the way to the marrow," she said.

Cutting costs at EDS is only half the equation, Brown said, noting "our goal is to make EDS a growth company again by reigniting our growth engines," a plan that includes a new e-commerce unit with $2 billion in revenues and a staff of 20,000 people.

But EDS is late to the e-commerce services game, trailing market leader IBM. The company also faces a tough uphill climb launching a new initiative at the same time it's cutting jobs and costs, Giera said.

Prudential's Browne and others who attended yesterday's event said they would have liked more clarity on how the company plans to cut $1 billion over an unspecified timeframe through "productivity gains and cost cutting."

"A billion dollars is a lot of money," Browne said. The question, he said, is "what are you going to do to get there?"

But considering new CFO James Daley has been on the job just two months and Brown just four months, Gieber said "it's going to take awhile to figure out where they can swing an ax."

The company did not rule out more layoffs.

Despite about $16.9 billion in revenues, EDS has been an underachiever in the eyes of investors and shareholders over the past several years.

In an IT services and consulting market that's growing about 14 percent a year, EDS's growth lags behind at about 9 percent. In contrast, market-leading outsourcer IBM Global Services is growing at 20 percent. For the quarter, EDS reported operating margins of about 6.3 percent, which Brown vowed to push up to 10 percent by the end of next year.

Geiber said to rebound the company needs to truly embrace a sense of urgency and accountability that Brown spoke of yesterday. But there's no reason why that can't happen, he said.

"There's a lot of good raw talent at EDS," he said. "There's no reason why they shouldn't be doing well."