EDS US money woes trigger contract warning

In the face of EDS' expected international turnover and profit shortfall, US analysts are warning customers to watch for subtly declining standards of service and to reread their contracts carefully.

In the face of EDS’ expected international turnover and profit shortfall, US analysts are warning customers to watch for subtly declining standards of service and to reread their contracts carefully.

EDS Australia spokesman Brian Finn predicts no great effect in this part of the world, and Auckland-based IDC analyst Mark Cribbens agrees.

“In New Zealand EDS has the unusual buffer of a huge contract with Telecom,” Cribbens says. “With such a large amount of business in a small country, they will be more secure [than they are overseas].”

In reply to Computerworld’s inquiries, Finn issued a statement by email last week. “EDS business operations in Australia are unaffected by our recent revision of earnings guidance. The economic downturn has had a severe impact on us and our industry, but EDS remains a strong, profitable enterprise and our financial foundation is solid.”

He says the firm will continue to serve its clients and win new business. It expects to have more details on its prospects and growth plans when it announces full third-quarter results on October 30.

EDS, the second-largest provider of IT services worldwide behind IBM, warned last month that earnings and revenue will fall short of expectations in its third and fourth fiscal quarters. The announcement surprised investors and sent the company’s stock plummeting.

US-based Gartner analyst Lorrie Scardino, commenting on likely fallout from EDS’ results, says service companies under financial pressure tend to “review their portfolio of contracts, with a special focus on those contracts which aren’t generating the expected revenue and profits”, and to make those under-performing contracts more profitable by seeing if they can meet their service-level obligations with less resource.

A way to do this, she says, is to reduce the staff and physical assets the service provider has assigned to a project.

This will not mean defaulting on contractual obligations, she suggests, but if, for example, the agreed standard of response time to a certain type of problem is one hour and the company has been responding in 15 minutes, the time may get a little longer while still adhering to the agreement.

Finn was unable to get a specific response from EDS Australia/NZ executives to Scardino’s suggestions by deadline.

Cribbens suggests that EDS’ strategy locally will rather be to look for new markets, seeking contracts of a smaller scale than the major work it has been pursuing to date.

New Zealand managing director Rick Ellis indicated as such in a Computerworld interview last month (see EDS' Ellis sees gold in undergrowth). EDS’ competitors, such as Unisys, will adopt a similar tactic, Cribbens foresees, and some of them are likely to be more flexible than EDS.

“Its business model is oriented to big contracts, and I’m not sure if it will be able to turn that around quickly.”

Ellis was unavailable for comment last week.

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