Turnaround at EDS

Costs outstripped revenues. Management had run amok. Bankruptcy rumors were circulating. In three years CEO Michael Jordan and COO Ron Rittenmeyer have lead the charge to right the ship. Here’s how they did it.

DYNAMIC DUO: EDS COO Ron Rittenmeyer (left) and CEO Michael Jordan (right) see bright skies ahead. photography by Tadd Myers

Electronic Data Systems sprawling corporate headquarters in Plano on a clear March 2003 morning to take the helm of the once-mighty giant that lay fallow. The retired chairman and CEO of CBS Corp.-Westinghouse Electric Corporation, CFO of PepsiCo, and Chairman of PepsiCo Worldwide Foods had surveyed the landscape, and his assessment cut straight to the bone.

“When I knew EDS in the 1970s and 1980s, it was the Marine Corps. When I came here it was the Cub Scouts,” Jordan says with measured and definitive delivery.

That was probably too kind. EDS, founded of course by Ross Perot, was the company that created the concept of information technology outsourcing. EDS provided in those nascent days of corporate computer systems the technology, manpower, and management that powered its clients throughout the ’60s, ’70s, and ’80s. Under Perot’s exacting leadership, the company was legendary for its disciplined delivery and its no-excuses culture. Spartan, focused, and formal, the EDS philosophy was more precise than a military barber.

That was then. After General Motors acquired the company in 1984, the market tableau began to change. International Business Machines charged hard into information technology services. A whole new universe of business technologies and applications exploded with the full arrival of the Computer Age. Custom solutions became the watchword of the day. The company, spun-off from GM in 1996, lost focus. Through the 1990s EDS devolved from a singular entity to hundreds of boutique shops, each pursuing its own means of customization.

Ironically, Fast Company magazine praised the sea change in a 2001 issue, giving kudos to then Chairman and CEO Dick Brown for bringing a hip, softer approach to the company’s culture. But what do magazine editors know? The problems in Plano mounted. EDS signed bad contracts it couldn’t deliver on. Costs overtook revenue. Third quarter 2002 stock-hedging activity and a severe earnings shortfall triggered an investigation by the U.S. Securities and Exchange Commission. Investors sued. The company went from losing cash to hemorrhaging it. No new business was evenn the radar, much less in the pipeline. Between September 2002 and March 2003, the company’s stock plunged 60 percent. When the board of directors showed Brown the door, Jordan was called to service. And you thought your first day on the job was rough.

Three and a half years after stepping into the breach, Jordan sits down in the simply furnished conference room in the executive suites wing of EDS’ massive headquarters building to talk about his tenure. He is a fairly ordinary looking man-the wise grandfather right out of central casting-who is in no hurry to fill silences with small talk. It’s as though he wants to ensure everything he utters has meaning and purpose.

 

BUILT TO LAST: The impressive EDS campus in Legacy consists of 165 acres and more than 2.3 million square feet of office space. photo courtesy of EDS

In this very conference room, he explains, in those early days of crisis control and corporate triage, he and his company’s leaders spent countless weeks locked away trying to plot EDS’ turnaround.

“When I came into this, I knew a number of the directors who knew they needed to make a change and the company didn’t have a strategy,” Jordan says. “I had known the company in the older days. … I thought this was a great company at one point. They were high flyers and doing well. Then they went into the tank.”

From top to bottom, all he saw was chaos and inefficiency. The management structure was fragmented and performance standards were not being adhered to. For Jordan, that was intolerable.

“Everyone was doing things their own way,” he says. “There was a lot of bureaucracy in the corporate headquarters creating burdensome processes. We had good people, but in general we didn’t have skilled executive leadership in the company. We had no strategy. EDS was run as a thousand separate silos. We didn’t have our best people running it right, and there was no clear view of what was required to make the thing whole.”

The primary task at hand, though, was obvious. As Jordan says, the first step is to stop the bleeding and do what it takes to stanch the cash drain. Jordan and his senior team targeted the company’s U.S. Navy contract as their first order of business. Originally signed in 2000 and worth $6.9 billion, the Navy wanted EDS to reengineer its aging, ad hoc computer systems. It became an expensive task that, despite the contract’s value, ended up costing EDS money. The job had been plagued by supply chain problems, inefficiencies, and network failure issues. 

BIG DEALS    EDS’ turnaround has been pushed along by these key contract signings in 2006.

NMCI (Navy Marine
Corps Intranet)

Contract Date: March 2006
Value: $3.9 billion, three-year extension to the contract initially signed in 2000
Details: NMCI serves 500,000 sailors and Marines, making it the largest secure, private network platform in the world. The Department of the Navy exercised its option in March 2006 to extend the service contract by three years. The turnaround of the Navy project was the template by which EDS set about fixing its other accounts.

Bank of America
Contract Date:
June 2006
Value: $700 million
Details: With Bank of America’s acquisition of MBNA Corp., the challenge became integrating the two banks’ voice and data networks, connecting more than 200,000 associates in 5,800 retail banking centers and 50 contact centers. The network covers 30 states and the District of Columbia, linking 16,700 ATMs, as well as Internet and telephone banking services. EDS got the call.

General Motors
Contract Date:
February 2006
Value: $3.8 billion
Details: EDS won the majority share of the five-year General Motors systems integration contract for information technology services.

 

The new agreement includes systems in GM’s global product development, manufacturing, purchasing and supply chain operations, as well as business services, mainframe operations, desktops, local area networks, GMAC, and OnStar.

Visanet
Contract Date:
September 2006
Value: $209 million
Details: The contract was an expansion of EDS’ existing decade-long relationship with Visanet, providing IT and business process outsourcing services that support Visanet’s merchant processing in Brazil—that’s more than one million merchants processing more than two billion Visa transactions per year.

Kraft Foods Inc.
Contract Date:
April 2006
Value: $1.7 billion
Details: EDS secured a seven-year, $1.7 billion global IT services agreement with Kraft Foods to support Kraft’s global operations. The IT service load includes data centers, hosting, telecommunications, and workplace support services. EDS will manage desktop workstations and servers for more than 60,000 employees worldwide.

“Our effort was really a back-to-basics phenomenon. First we put in experienced people. We sat in this room for a couple of days and said, Who are the best quality managers we can find, network engineers, security people? Because we had to roll out on 1,000 bases. We put in a whole new management team,” he says. “Because they were smart, credible people the Navy responded. It wasn’t rocket science. It was just plain old attention to detail and capable people. We went through all of the technical criteria and fixed it. [The focus was] getting the machines installed on the network and getting paid for it.”

It may have been simple, but it was still costly. Between righting the Navy contract and previous expenses, EDS accrued some $2 billion in costs. And while the bleeding stopped after about 18 months, it wasn’t until 2005 that the Navy account actually turned a profit. However, a new series of client evaluations and internal auditing showed that the Navy was very pleased with EDS’ performance. And as testimony to the network’s efficiency, EDS in 2005 was awarded an approximately $4 billion contract by the United Kingdom’s Ministry of Defence for similar work. More, the company had a template.

“The Navy was a prototype for fixing our other accounts,” Jordan says.

But fixing accounts would not, alone, fix what was wrong at EDS. In fact it was just the first measure”more tactical than strategic. Fixing accounts fixed the business they were doing. The big focus had to be on fixing how they did business. They had to go from striving to be all things to all people to building a core system all people could use.

“We realized EDS had up to 1,000 accounts that did everything differently. We had no consistent technology platform, no consistent methodologies. Everything we did was a custom solution, paying an enormously high cost for complexity,” Jordan says.

So at the end of 2003, EDS embarked on what they call the “agile enterprise strategy,” creating a pre-engineered platform that could run IT operations across a large corporation, be it a carmaker, a consultancy, or a division of a country’s military. EDS worked with alliance partners Sun Microsystems, Microsoft, EMC Corp., Dell, and Cisco Systems among others to build just that. The platform they created became the basis for taking EDS from what was thought to be a “technology agnostic” company that would run any system a client had, to a company with its own systems with the economies of scale that standardization brings.  

“The industry was going to standardization and leveraging through factories which needs consistent processes. It changed our whole approach to how we brand services for clients. We began to apply industrial engineering techniques and manning standards”if you have 5,000 servers, how many people do you need? Which we didn’t have,” Jordan says. “We developed a very strong technical point of view, which helped us win business and to compete at the price points the marketplace has. We could see through this technology investment that our cost would come down. It helped convince people we have a great technical solution. That helped us win a lot of business beginning in 2005.”

Chief Operating Officer Ron Rittenmeyer said the company treads the fine line between standardization and custom solutions.

“You don’t want to lose individual account identity. We want the account to be a part of the customer. And I want our team to be viewed as part of the customer’s team,” Rittenmeyer says. “Having said that, we believe going to a customer and solutioning what they want may be the best answer if we have the expertise we think we have. At minimum we need to have a point of view, and give the customer that point of view. I can give you a totally separate, isolated, tailored solution as you’ve asked for. Or I can give you the same utility and functionality in this solution, which will cost less.”

Rittenmeyer says standardization is an overplayed term. A company should standardize certain aspects of its operations, yes. But it should allow for tailoring, and the company always has to have a point of view. That expert perspective is what a company should bring to a client. Otherwise, they’re just order-takers.

“My view of the company is: We’ll do what the customer asks, which is good. But it’s bad if you don’t have a point of view,” Rittenmeyer says.

Standardization in operations provided EDS significant savings. The main savings came in the manpower arena. If an account were running 50,000 desktops, the hardware and software costs are less than 20 percent. The rest is labor.

“And by building systems that do this automatically”we upgrade 50,000 desktops and never touch one of them physically,” Jordan says. “Those began to drive our core business and infrastructure forward.”

With accounts being reworked and a new platform changing the company’s heading, EDS’ leadership turned its eye toward the bottom line in 2004. Telling the world that your company is changing direction isn’t going to change market perception when you’re operating in the red. It doesn’t help you with creditors, and it doesn’t help you on Wall Street.

Jordan says that because of the company’s well-publicized financial problems, “there were rumors in the market that EDS would go bankrupt, and that you can’t sign an eight-year contract [with us] because we wouldn’t be around. Most of which was bulls” and probably emanated out of Armonk, New York [headquarters of IBM”ed.]. We lost a lot of competitive position in 2003 and 2004, culminating in being downgraded to low investment grade. That caused a lot of instability in the market.”

Under Jordan’s leadership in 2004, EDS embarked on a number of asset sales, including the sale of the company’s UGS Software subsidiary, which fetched a price of $2.05 billion, adding to significant cash already on hand. Selling off assets and real estate may not be a way of developing ongoing operating income, but the market takes notice. 

Jordan says the UGS sale was a particularly hard decision, but it was the right decision. And he smiles knowingly when he recalls the effect. “Our sales force would go out and say, ’Financial problems? What’s the big deal? We have $3.5 billion worth of cash, which was equal to our debt, and we paid down $2 billion.’”

While the company’s future wasn’t assured, questions about EDS’ financial viability disappeared.

If Jordan’s first two years of leadership were about stopping the bleeding, restructuring the company’s service base, and fixing the financials, the third year”2005″was about getting competitive in the marketplace. What that took, in Jordan’s view, was reducing costs and ratcheting up margins, even as the company invested in new technologies. It would take more than just an operational change: EDS needed a culture change. It was an outgrowth of changing how the company did business.

“Now we’re into, How do we accelerate our growth engine,” Jordan says. “How do we become more effective in high-end application development, supply chain”these are areas we’re investing in now. Phase four is to establish a more broad-based growth footprint for the company.”

To that end, Rittenmeyer was brought into the company in July 2005. Before joining EDS as chief operating officer, Rittenmeyer served as managing director of The Cypress Group, a private-equity firm based in New York with a $3.5 billion investment portfolio, and as chairman and CEO of Safety-Kleen, Inc., a $1.5 billion hazardous and industrial waste management company.

“My view when I came in, having been a customer, [EDS was] clearly a company with highly qualified people focused on the customer,” Rittenmeyer says. “But my sense was it was trying to be all things to all people, you know? Not the best way to run a business.” 

Gregarious, quick-witted, and fast-talking, Rittenmeyer comes across as the kind of guy you want to plant yourself next to at a party. He’s going to have the best jokes”and probably the most risqué ones. There’s a twinkle in his eye when he says a good number of his business maxims wouldn’t be appropriate in print.

When Rittenmeyer took the office of COO for EDS, he took on the mission of cutting layers of bureaucracy and restoring the concept of personal accountability”not easy tasks in a company with more than 120,000 employees in 60 countries worldwide.

“I wanted to get underneath both the operational aspects in terms of where the opportunities were, try to determine the level of discipline in terms of execution”in terms of how flawless that execution was,” Rittenmeyer says. “Culture underpins all those things, right? In terms of accountability and ownership, there were clearly some opportunities. That’s why I was brought in, and that’s what I found.”

Rittenmeyer focused on streamlining the organizational structure to take out as many layers as possible between senior management and the person down at the lowest possible level.

“I’ve probably reduced that 40 percent – almost cut it in half. We took out various touch points that made the process more complex than it had to be,” he says. “We really tried to look for where were the key handoffs and how do you make them more efficient. That’s how you affect client quality. The more times you touch something, the more opportunities there are for problems.”

In these softer science areas where performance isn’t as readily quantifiable as financial performance”Rittenmeyer says there are some hard measures of success and failure.

“There are indicators, but a lot of times it’s common sense. But it’s not so common. For the number of people we have, from me to the bottom person, if there are more than six layers of management you have to wonder what they’re doing all day. That’s an arbitrary number that I feel comfortable with. Hopefully that’s thoughtful but it’s not scientific,” he says.

“We’ve tried to rally the organization around a few key attributes: working on growth, profitability, quality, and how do we really empower the people to make these decisions at the frontline level,” Rittenmeyer adds. “One of the things layers presents to you sometimes is unnecessary intervention by what we call ’management.’ Great leadership takes the average and tries to make it exceptional. You need to spend your time figuring out where intervention needs to occur. Most employees can figure out intervention on their own.”

Of course, part of the cost reduction Jordan has pursued was the company’s much publicized”some would say controversial”decision to outsource jobs to places like India, China, Eastern Europe, and Latin America.

“We had to respond to competitive pressures to move jobs offshore to compete with the Indian companies that are very aggressive. That’s been one of the steps in the margin improvement,” Jordan says. “We are pursuing a large number of opportunities, expanding in India, expanding in China, building software centers in China.”

But again, like selling assets, reducing costs alone doesn’t grow business. Jordan is banking much of the company’s growth strategy going forward on new services like human resources outsourcing for major corporations, which now make up more than 12 percent of EDS’ revenue. The company is also strengthening its position in businesses like credit card processing.

“We got in trouble before because we signed contracts we couldn’t deliver. We created massive problems for the company we had to dig our way out of. We really tightened the controls over the contract process in terms of technical reviews and costing”we’re confident we’ve tightened reviews of what we contract for,” Jordan says.

Rittenmeyer, too, sees growth potential in the company’s core business. For one thing, EDS can look at a company’s system and eliminate “dead code” and increase efficiency.

“More importantly,” he says, “we can talk about how we can develop new applications with you that will enhance your business without getting rid of old applications. That’s significantly different than going into a company and telling them to throw out everything they got and let’s start over. You can imagine how frightening that is.”

In early 2006, even the street began to recognize the changes Jordan and Rittenmeyer had implemented at EDS. Jordan himself declared that the company had officially turned around. Moors & Cabot analyst Cindy Shaw said in a written report at the time that EDS had, indeed, fixed its problems, but now the company had to bring in new business if it was going to be a good investment. And the reality was, while the company was in a far better position than anyone could have hoped given the state of affairs back in March 2003, it’s not running strong as it should. Yet. Margins at about 4 percent on a $19 billion company could be better, but Jordan and Rittenmeyer expect to raise that to 7 percent in 2007.

“Our goals operationally for 2007 are to continue the transformation,” Rittenmeyer says. “Furthering standardization. Furthering up the stack such as getting into higher value-added things like application transformation, application modernization. This is something we’ve been doing for the last year. And we see this as a year of explosive growth for us in that area. We will spend a lot of effort and energy behind that to really enhance that and continue to grow our business processing and outsource business, where we do human resource outsourcing.”

Jordan, in closing, says ultimately the future of the company lies in harnessing its legacy.

“We talk about running a highly disciplined, highly consistent organization. We talk about zero outages, zero defects. We talk about how we should execute flawlessly. This is what EDS used to be about in the 1970s and 1980s,” Jordan says. “If there’s a theme here, [it’s to] restore in a more complex environment the same kind of discipline and drive and accountability that made this a great company.” 

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