EDS: more than just the right place and the right time - EDS Corp., computer services company

The view that software and services would someday outgrow almost every other segment of the worldwide computer industry has been getting progressively more axiomatic since 1969. That was the year IBM officially announced a "new way of doing business," more familiarly known as software unbundling.

That announcement, and the growing success of small companies like EDS, led to further unbundling of service-based products at IBM (hardware maintenance, support services, professional services, consulting and systems integration, among others) and paved the way for the growth of major segments of today's information technology (IT) industry: third-party distributors, independent software vendors and service providers. Since then the industry has passed similar watersheds at an accelerated pace.

In 1981, independent hardware distributors received a huge boost with the release of the first IBM PC. In 1988, Lotus and Microsoft became half-billion-dollar companies, and Computer Associates' sales passed $900 million. In 1991, IBM formed ISSC, EDS's sales topped $7 billion, and software and services revenue in the U.S. was larger than all other types of revenue combined.

Growth in services and software does not seem likely to abate anytime soon. Consider the following:

* Interest in systems integration is strong: 25% of all U.S. IT sites are considering using a systems integrator as of December 1991.

* Outsourcing continues to gain attention: almost 20% of IBM 370 and 390 sites in the United States are considering outsourcing some of their operations.

* End-user spending on IT is gradually shifting from internal information system (IS) structures to external suppliers of IS services. The worldwide IT market was about $325 billion in 1991--revenue flowing from users to suppliers, "external" spending in IDC's parlance. Many more billions were spent by those same companies "internally" on IS staffing, training, operations and maintenance. Markets for services and software appear to grow as a portion of that internal spending is converted to external spending.

Service and software markets have reached a critical mass: the worldwide market for professional services was $67 billion in 1991, another $49 billion was spent on software. Worldwide services markets are expected to grow at almost 12% annually through 1995, and revenue derived from software will grow even higher, almost 15% annually.

Together these forces conspire to create a segment of the IT industry with seemingly unlimited potential. As a result, systems integration, network integration and professional services are eyed enviously by hardware manufacturers whose other revenue streams are showing slow growth or declines.

Today EDS continues to display a remarkable ability to exploit the opportunity of services markets. During 1991, its best year ever, the company grew revenue by 16% and net income by 13%. For the first time since its takeover by GM in 1984, revenue derived from outside its parent accounted for more than half of the company's total.

EDS feels $25 billion in revenue is within its reach. With a decentralized, entrepreneurial organization, a highly segmented marketing plan, and an irrefutable history of successful implementations, EDS is well positioned to continue to grow. Other successful companies -- Anderson Consulting, CA, CSC, IBM (software and services portions anyway) and Microsoft--are are also poised for growth. None, however, appear to be reaping the benefits of so many major industry trends right now as EDS is doing.

Nonetheless, EDS faces a host of serious challenges. It remains a largely U.S.-only company; only 20% of 1991 revenue was derived outside the U.S., far below that of other companies. EDS must also balance its investments in HDS, ASK and MDSI with the need for product impartiality.

In addition, EDS must learn to avoid the conflict-of-interest problems associated with pitching multiple clients in similar businesses. The company must somehow maintain relations with the very MIS staff it often seeks to replace. Finally, and perhaps most challenging of all, EDS may soon have to take a leadership position in determining market standards and behaviors.

Any one of these challenges is great enough to slow EDS. Together, they represent a formidable barrier. In the following pages we examine how and why EDS may be able to scale it.

Today's Services Markets

How big is the worldwide system integration, professional services, and system management market?

For purposes of measuring IT suppliers' performance, IDC places the worldwide IT market at roughly $325 billion in 1991. That figure is composed of a wide range of hardware and software, distribution and services revenue derived by an even broader range of suppliers.

But, admittedly, that figure is not a true representation of all of the money IT users spend on their systems. It is an estimate of what IT users spend externally on IT, but it does not include such huge expenses as internal staffing, training, operations, maintenance, and IS planning. In addition, it does not include a whole range of telecommunications services, which are integral to the IT system and are also potential candidates for substitution, replacement or augmentation by competitive alternatives. And neither figures include difficult-to-measure numbers such as the overhead associated with large internal staffs and internal IS operations. As a result, the actual size of the worldwide IT industry is probably nearly twice IDC's $325 billion figure.

Counting the external services portions of the worldwide IT industry is particularly difficult. IDC estimates worldwide systems integration revenue to have been $22.9 billion in 1991. Worldwide professional services revenue was $67.3 billion.

How fast are the services segments growing? Faster than other segments of the IT industry:

Systems integration, defined by IDC as a set of client-vendor relationships in which the system integrator vendor provides a comprehensive IT solution, is expected to grow by 20% annually through 1996.

Professional services, defined by IDC as the actual discrete IT services regardless of the type of client-vendor relationship, are expected to grow by 16% annually for the same period. The next fastest growing segment of the worldwide IT market, software, is also expanding by approximately 16% annually.

EDS's Target Market

EDS takes an understandably rosy view of the size of its potential market. The company has targeted the billions of dollars spent internally by IT users in addition to the $325 billion in external spending.

The net result (according to EDS) is huge growth for two reasons. Even if the IT industry manages only single-digit growth, services will grow faster, probably in the 13% range annually, according to IDC.

However, importantly, that's just the beginning. As companies shift the allocation of their IS money from internal resources to external suppliers, the market will appear to grow even more. If services grow only by 13% annually, the internal to external shift will create the illusion that the market is actually growing faster, perhaps as much as 20% annually. In fact, it's not really growing ... just shifting.

EDS as Change Manager

Since the GM takeover in 1984, EDS has undergone significant change. Its first challenge was to assimilate all of GM's computer and telecommunications activities. Its second challenge has been to redefine itself as a GM subsidiary and to communicate the change in its relations with customers, as well as with the industry at large. This has been completed, as evidenced by significant recent contracts with the U.S. Air Force and GE. The company has successfully managed to swallow one huge chunk of business, and is now eargerly stalking more.

EDS's goal is to become the "absolute best at managing technology risk." EDS defines that to mean providing a full range of services, coordinated by centrally controlled communications, with core and applications software expertise. The company's industry-customer knowledge is central to making technology come alive for EDS's customers.

How EDS Does It: Organization

Customers are the basic element of EDS's profit centers. EDS is organized around its customers in strategic business units (SBU) that focus on specific vertical markets: transportation, manufacturing, and energy/chemical among others. SBU managers negotiate with company management for development resources through a "leadership council" -- a group of executives with oversight responsibility for EDS.

By organizing the company in vertical groups, EDS feels it is best able to focus on understanding its customers' businesses and IT needs. In addition to a better understanding of what customers want, the vertical groups create a degree of synergy. Successful installations of technology in a vertical market application -- ranging on the small side from portions of code to, on the larger side, network configurations, can create scale efficiencies. If it worked once, it might work again in a similar application. And, if it does, EDS can save money and still deliver custom solutions.

EDS's competitors, on the other hand, are still organized in ways that do not place emphasis on individual customers. IBM, for all it has revolutionized and modernized its structure, is still organized around products. Andersen Consulting is organized around its branch offices. In each case, customers are not the strategic and tactical focus of decision making because the structures divert attention elsewhere.

Other SBUs manage technical resources and services across specific geographies. Unless otherwise directed, these SBUs are free to determine the best hardware solution for specific problems. Typically, EDS will build solutions from other EDS-developed applications and hardware/software configurations.

Selling: the "Value Proposition"

Selling at EDS used to mean telling customers what was wrong with them, then telling customers how and when EDS would change things. Carrying out the promise involved a blitzkrieg takeover of the customer's IS equipment and staff: the veritable bull in a china shop -- nothing was spared.

Today EDS's sales message is built around a method for selling solutions, the "value proposition." EDS has effectively broadened its product line from its core strengths at the back end running customers' data centers. EDS now boasts a full range of consulting services that focus on customers' business processes, and provides a blueprint for managing the change to newer, more efficient business processes.

While such front-end business services constitute a small portion of EDS's overall revenue, it as a component that is of increasing strategic importance to EDS. By allying with customers at the front end, EDS has found that it can provide a much more useful service to the customer than simply reducing IS expenses.

As a result of the "value proposition," EDS indicates it is able to provide better solutions less expensively. It points to customers' specific improvements in manufacturing quality, time-to-market, client-service-representative response time, among other quantum improvements.

EDS's Challenge: Become Truly Global

Despite EDS's notable success and bright future, the company has several serious challenges ahead.

For all its global posturing, EDS is behind many companies in the industry when it comes to globalization and global presence. In 1990, 18% of the company's revenue was derived from operations outside the United States; in 1991, 20% was. By contrast, the United States only constitutes approximately 35% of the total worldwide IT market, and 34% of worldwide services markets.

Whether this heavy dependence on the U.S. should be viewed as opportunity or liability remains to be seen. The judgment depends upon EDS's ability to execute strategy on a global basis.

Several scenarios might explain why EDS has yet to become a global company. One involves the difficulty overcoming standards and language barriers across many cultures -- particularly difficult when selling systems integration and outsourcing. However, EDS international employees are predominantly native.

Another explanation involves differences between how geographic regions rely on mainframes, and how they are actively downsizing. For example, in the United States downsizing is occurring and has occurred rapidly, forcefully and, in some cases, frantically. That is not true in Japan, where mainframes comprise 13% of total IT spending (compared to 8% in the U.S.). EDS may have been capitalizing on the movement away from mainframe-centric information systems in the U.S. to infiltrate the weakening glass house. That opportunity has not yet presented itself to EDS in Japan.

Challenge: Balance Technology Investments

Over the past three years EDS has embarked on a fairly aggressive acquisitions campaign. It has acquired (or acquired parts of) Hitachi Data Systems, ASK, and MDSI. Most recently it has acquired Japan Systems.

The acquisitions raise a potential problem: the questioning of EDS's objectivity. EDS's customers trust EDS to provide objective recommendations. Should any of the acquisitions begin to falter, EDS may feel the need to bail them out by recommending their products to EDS's customers.

The issue gets stickier when it's considered in light of GM's current financial troubles. Should GM continue to feel severe financial strain, will it look to EDS for capital? Could financial pressure from GM management become so great that EDS might be pressured to buy home-made hardware and software, rather than be allowed to seek the best the industry has to offer? Might (a pessimist could ask) EDS be prevented from buying IBM ES/9000s, instructed instead to patronize HDS? What could spur such an event: another five-point drop in GM's market share and another $7 billion loss? How low must it go?

Challenge: Avoid Conflict of Interest

As EDS generates more and more revenue from front-end types of business consulting (the value proposition) its business model may change. Although these services will ultimately tie into EDS's core lines of business, EDS--and its customers--may need to reexamine their expectations of the service provider-client relationship.

Consider a major public accounting or corporate law firm. Once it acquires a client in a specific industry, it generally closes its doors to other potential clients in the same business. It doesn't, after all, want to project even the slightest image that a conflict of interest between the two clients might arise.

An IS supplier like EDS manages information that its customers use to drive great competitive advantage. The possibility that a direct competitor might somehow gain access to such information might be enough to cause potential EDS customers to reconsider. EDS may find its customers demanding vertical industry exclusivity in order to eliminate the potential loss of sensitive data. Or, customers may request some guarantee of noncompetition.

For years EDS has staked the company's reputation on its ability to insure the integrity of its management of customer data and records. While that may become a more difficult task in the future, EDS builds on a very strong record.

Challenge: Maintain Relations with MIS

Another difficult area for EDS will be the process of changing its image with MIS shops. EDS discarded its austere, demanding demeanor years ago (despite the warnings of its competitors). Nonetheless, some potential problems remain.

As EDS employs the "value proposition," it will enter more symbiotic relationships with MIS staff and management. Still, the by-product of a significant portion of EDS's business can be lost jobs -- MIS jobs at customers' sites. If so, building working relations may be difficult. To date however, EDS maintains, almost every MIS staffperson at customers' sites has been offered a position within EDS.

At its worst, these types of problems may threaten to dilute the ultimate efficacy of the solutions that EDS implements. If EDS is sabotaged by unwilling customer MIS staff pining for their former mates, EDS may find itself unable to deliver on its promises.

In Summary

Despite these potential problem areas, EDS is well positioned for future growth. Its greatest resource, personnel, is as capable as any in the industry. Its segmentation and understanding of its customers is thorough. It has a strong technological infrastructure and yet is unencumbered by older technology. We anticipate continued growth from EDS as it continues to exploit industry dis-integration.

EDS Still Faces Significant Challenges

EDS has emerged as one of the healthiest companies in the worldwide IT industry, almost quietly. Revenue and profits are climbing steadily. It is gaining market share of an expanding market. It has a presence overseas, but geographic expansion seems to suggest even greater opportunity. All indicators are pointing in the right direction.

How has EDS done it? At first glance, it appears that tight management and careful planning are the reasons for the company's success. EDS is well managed. But so are plenty of other companies...service companies as well as hardware and software suppliers. More significant forces are at work fueling EDS's rise.

In fact, EDS has squeezed its way into an exceptionally rare position. Nearly every major trend affecting the worldwide computer industry is working to EDS's benefit. Only the perception that EDS is still highly dependent upon mainframe technology seems to be working against it -- a perception that EDS is rapidly changing by demonstrating expertise in managing PC, LAN and distributed-computing installations. As the worldwide market leader, EDS stands to benefit from the major trends more than its many competitors.

How rare is this scenario? Very. Many companies with household names have never enjoyed such an auspicious outlook. Only a few examples come to mind as having benefited from nearly every change surrounding them. In its heyday, GM and its forbears benefited from dirt-cheap gasoline prices, booming post-WWII consumer confidence, bulging discretionary income and massive federally funded highway programs. Likewise, William Paley's CBS rode the concurrent waves of technologic advances, advertisers' desires to reach national audiences and consumers' yawning leisure time to build the first broadcast television network.

EDS now finds itself in a similar position. The industry's major trends are pushing customers with billions of dollars worth of contracts into the company's hands.

Concomitant with the huge opportunity, however, comes challenge: the industry will accept only a limited period of such flux. Excess profits attract competition. Something's gotta give. EDS will need to do more than it's currently doing to stay ahead of the competition.

EDS faces a remarkable opportunity to bear the standard for a new chapter in the computer industry. Just as IBM defined the multiuser commercial processor, Apple defined the personal computer, and Lotus defined the personal productivity application, EDS too stands at the edge. At stake is the very definition of the future of the industry.

What kinds of things are we talking about? EDS has a remarkable opportunity to help define and promote technical standards; to outline customers' expectations; to articulate just what "open systems," "downsizing," and "client/server" really mean to customers; and to blueprint the nature of future relationships between computer services providers and customers.

This is hardly an easy assignment. Planting a stake in the ground -- an innovative stake in rapidly changing terrain -- requires great leadership. EDS management has displayed outstanding ability to lead and nurture a very capable organization. And few would question the company's technical proficiency.

But leading a company and defining an industry are vastly different challenges. The former demands a detail orientation and single-minded focus. The latter, broad-minded overview, charisma, and vision. Should the company accept the challenge, we may witness the unfolding of a huge industrial mega-force. If the challenge proves too great for the company, EDS will "only" continue to outgrow the computer industry.

Of perhaps greatest interest will be the implications for the rest of the industry, particularly suppliers of technology. How the upstream companies such as HP, IBM, Intel, Microsoft, Sun and Tandem respond may indicate the breadth of EDS's influence: will the tail (a dominant solutions integrator) wag the dogs (technology providers)?

COPYRIGHT 1992 International Data Corporation
COPYRIGHT 2004 Gale Group