When Electronic Data Systems Corp. acquired Enron Corp.`s extensive computing staff and equipment in 1989, it essentially guaranteed that it could handle the operations better. It also promised Enron a savings of $200 million over the 10-year life of the contract. The daring pledge underscored EDS`
cocksureness about its ability to squeeze computing costs.
But its confidence was well-placed. The Houston-based natural gas company thinks it is on its way to saving at least that much, equal to 20 percent of its computing expenses, by 1999.
”We`re out of the how-to-do-it part of the computing business,” said Jack I. Tompkins, the Enron senior vice president who bargained with EDS on the deal. ”We consider EDS the technology experts.”
By capitalizing on corporate America`s drive to downsize, save money and improve efficiencies, EDS has been climbing like a rocket. Despite the departure of its legendary founder, H. Ross Perot, after a squabble with its corporate parent, General Motors Corp., the company`s sales have increased sevenfold since 1984, when it was taken over.
To be sure, much of this revenue is provided by GM, but EDS` sales are expected by the company and some analysts to more than triple, to $25 billion, by the end of the decade.
This growth is expected despite the increase in the number of companies in the business. The key is an explosion in demand. One recent survey showed that 40 percent of all corporations are seriously considering hiring computer services companies to manage all or part of their data processing operations. Overall, worldwide spending on computer services, which range from a narrow task such as managing automated teller accounts for banks to taking full control of a company`s computing operations and staff, are expected to hit $1.3 trillion in 1995, researchers say.
”There`s plenty of business for any company that can do a fine job at this point,” said Perot, who as head of the three-year-old Perot Systems Corp. is one of the new competitors.
EDS and the other big computer service companies have gained leverage in demanding price breaks when buying computers for their customers. With pressure on their profit margins, the big computer-makers have started to look at the computer services business with envy. In May, International Business Machines Corp., for one, entered the business, and it is expected to give EDS a stiff challenge.
”Customers have had so much hardware jammed down their throats for so long that they are now going outside for help,” said Stephen T. McClellan, a data processing analyst at Merrill Lynch & Co. in New York. ”The service companies are squarely positioned between the computer hardware companies and the end users. That is starting to change the landscape of the industry.”
Bolstered by the urgency of some customers to raise money to ride out the recession, the computer services business did more managing of existing systems and offering advice and purchasing equipment under ”outsourcing”
contracts with corporations.
Now, EDS and a few of its well-heeled competitors have the cash to buy the computing operations of large companies as well as hire their employees.
To help sustain healthy growth, EDS also has been prospecting for business abroad. Last summer Lester M. Alberthal Jr., the scholarly looking chairman and chief executive at EDS since late 1986, flexed EDS` financial muscle in Europe, where it has been a laggard.
In the company`s first hostile takeover, he put up more than $250 million and came away with control of a British-based computer services firm, SD-Scicon PLC.
Turning over a corporate computing department to a service company, however well-known, is not easy. Traditionalists argue that no team of outside experts can know the details of their businesses as intimately as their own staffs.
Sometimes they are correct. EDS manages computer systems for several savings institutions in Texas controlled by the Resolution Trust Corp. A few months ago, having misinterpreted data from those sources, it sent inaccurate reports to credit agencies that 1,800 homeowners were delinquent in their mortgage payments. EDS eventually caught the error.
And for reasons that sometimes have as much to do with office politics as economics, many executives in charge of management information system departments resist yielding control to outsiders.
”A (management information system) director would rather see the angel of death at the door than someone from EDS,” said Darwin Deason, head of Affiliated Computer Systems, a three-year-old systems integrator in Dallas.
Still, aversion to outsourcing is breaking down. ”We are moving away from the end of the scale that says `build everything yourself,` ” said Bill T. Houghton, president of the information systems subsidiary at Chevron Corp. in San Ramon, Calif. ”If we aren`t cost-effective in some area, we try to improve it. If we can`t, then using outside suppliers is an alternative.”
Like Enron, Continental Bank Corp. and Eastman Kodak Co. have turned their computing problems and their computing employees over to service companies in the last few years and signed long-term contracts with those companies to operate their information systems.
Financially weakened companies such as Cummins Engine Co., Greyhound Lines and Southland Corp. also have gone to service companies to cut their computing costs.
In the biggest deal, General Dynamics Corp., which has scaled back its arms business since the collapse of communism, agreed to pay Computer Sciences Corp. of El Segundo, Calif., about $3 billion in the next 10 years to manage all its computing operations.
In turn, Computer Sciences agreed to pay $200 million for all of General Dynamics` computer equipment, and it will hire all its computing employees. EDS may soon sign a bigger deal with McDonnell Douglas Corp.
In this atmosphere, EDS has flourished. Its 1990 revenue rose to $6.1 billion from less than $800 million when GM bought it for $2.55 billion in cash and stock in 1984. The company earned $496.9 million last year, up 14 percent from 1989. Profits were up another 12 percent in the first half of 1991, to $139.8 million, and 13.3 percent, to $145.5 million, in the third quarter.
GM, which accounted for more than 80 percent of EDS revenue in the first years after the marriage, should account for less than half this year. Analysts expect that orders booked by GM for manufacturing software, car-order systems for dealers, health-care administration and other services will be fairly flat as the automaker struggles with weak sales in the next few years. But orders from a growing list of 7,200 other customers in 28 countries should rise at annual rates of nearly 20 percent, analysts said. The company posted an 11 percent sales increase for the first half of the year and will approach $7 billion in revenue for the year.
The Yankee Group, a research firm in Boston, projects that EDS revenue will reach $13.3 billion in 1995, with more than $10 billion coming from customers other than GM.
EDS accounts for 4.9 percent of GM sales, up from 3.5 percent six years ago. Along with EDS` healthy increase in earnings, that provides at least a small measure of help for a company whose core business has stagnated.
Alberthal, 47, wants his executives reaching toward a yearly sales target of $25 billion, which some analysts think is possible by the end of the decade.
EDS, founded in 1962, has lower costs and the best profit margins in the industry, which includes other systems integrators such as IBM, Andersen Consulting and Computer Sciences.
This advantage stems in part from its position as one of the nation`s largest buyers of computers, software and telecommunications services for the insurers, credit unions and health plans that are its non-GM customers.
And because it is one of the world`s largest private operators of data processing centers, capable of handling 6 billion computer instructions a second, EDS uses dozens of mainframes at 110 sites in the U.S., Europe and Asia.
EDS has put pressure on profit margins at IBM. It is Big Blue`s biggest customer for mainframes, buying more than 50 a year, and it can command bargain prices in small computers as well. If EDS thinks IBM`s price for an order of thousands of personal computers is too steep, it will turn to Dell, Compaq, Apple and dozens of other suppliers.
To counter inroads made by EDS and other systems companies, IBM in May formed Integrated Systems Solutions Corp., though some rivals contend that the step violated a 1956 consent decree by the computer giant to stay out of the services business. The Justice Department is investigating, but it could be years before action is taken.
IBM executives are telling Wall Street that computer services eventually will become a significant profit producer in a company that derives 70 percent of its sales from the slowing hardware business.
EDS has other challenges. Its payroll has ballooned to more than 60,000 employees and it has a bureaucracy that customers said has slowed the company`s response time and made it rigid in its problem-solving.
In response, Alberthal last year organized the company into 38 business units, each dealing with a different industry. The idea was to speed decisions and push them closer to customers.
Earlier, Alberthal had softened the rigid edges of the military-style culture created by Perot by, among other things, easing dress codes that banned facial hair and striped shirts.
Flush with more than $700 million in cash, little debt and a yearly revenue stream of more than $3 billion from GM, Alberthal is chasing growth in different ways to extend EDS` dominance in economies of scale in computing power, telecommunications networks and other technology.
As for how it all works, executives at Enron, whose former staff of 550 computing specialists now are EDS employees, have some insight.
”It`s almost three years and we`re satisfied,” said Tompkins. ”I don`t think we`ve lost control of anything.”
Therein is a question. ”I would not want anyone to think that by outsourcing your information system that it`s suddenly a life of ease,”
Tompkins said. ”You can delegate, but you can`t abrogate.”
