EDS announces company-wide overhead cost cuts

Electronic Data Systems Corp. (EDS) plans to reduce overhead costs company-wide in response to a market that the company predicts will remain soft well into next year.

Dick Brown, the company’s chair and CEO, made this announcement in a letter to company shareholders on Monday as he tried to reassure them of EDS’ solid financial position.

In the letter, Brown tells shareholders that the Plano, Tex.-based global services company “remains a solid enterprise, with a strong business plan.”

The letter states that, in addition to cutting overhead costs, EDS will:

– rein in expenses related to its sales operations, where overspending contributed to the third-quarter shortfall;

– try to generate revenue in the near term and improve its weakened cash flow by “cross-selling” additional services to existing clients;

– review its services portfolio “to ensure it provides maximum financial value”;

– review its revenue forecasting methodology, which failed during the third quarter, ended Sept. 30;

– and review underperforming contracts to improve their bottom line, particularly in Europe.

Although the letter stresses that clients will not be affected by EDS’ measures, an analyst cautions that IT managers and chief information officers (CIOs) should be proactive and reacquaint themselves soon with their companies’ contracts with EDS.

“EDS will be going through every single contract it has to see if it’s performing well, and if it’s not, they’ll look to make improvements,” said Lorrie Scardino, a Gartner Inc. analyst.

For example, service providers such as EDS sometimes make concessions and go beyond what’s required of them in a contract in order to prompt a specific client to spend more, she said. But if the extra effort on EDS’ part isn’t yielding increased spending, then EDS will likely reduce the resources it’s devoting to that contract, she said.

“If you’re getting services and top-end resources from EDS that you’re not paying for because you promised additional growth in your spending and a further extension into your enterprise, and you haven’t delivered, those top-end resources will be removed. EDS is going to be saying: ‘What have you done for me lately?’,” she said.

But EDS’ predictions for the IT outsourcing services market is contrary to the findings of IDC Canada Ltd., said Dan McLean, Toronto-based director of enterprise network services research with IDC Canada.

“In terms of how we track the growth, we look at the contracts that are out there and signed, and based on what we saw in the funnel a few months back we weren’t anticipating any significant downturn in terms of growth in outsourcing services,” McLean said. “It seems there was some slowing (in the market), but things certainly hadn’t dried up.”

McLean added that he would be surprised if EDS announced any job layoffs in the future.

“They have some work ahead of them in terms of refocusing as a company in areas that provide the best opportunities, and maybe (in) taking a good, hard look at areas of their business that aren’t achieving growth,” he said. “(This) in fact may be responsible for the downturn in business they’ve experienced,” he said.

EDS can be found at http://www.eds.com.

– With files from IDG News Service