US Navy contract under control, EDS chief insists

Electronic Data Systems chairman and chief executive officer Michael Jordan says his company had the multiyear,...

Electronic Data Systems chairman and chief executive officer Michael Jordan says his company had the multiyear, multibillion-dollar US Navy Marine Corps Intranet (NMCI) contract under control.

The contract, signed in October 2000, has been a recurring financial and logistics problem for EDS. It has been marked by delays and has drained significant amounts of cash from the IT services provider.

EDS wrote down $559m in deferred costs related to the NMCI contract for its fourth quarter of 2003, ended 31 December, which it closed with a net loss of $354m.

However, Gartner analyst Lorrie Scardino was unconvinced.

"EDS has, on a regular basis, made statements that it understands the NMCI problems and that it has corrected those issues that impeded its performance on that contract," Scardino said.

"Until we actually see the results of those fixes, this is just a recurring message. What they said yesterday doesn't sound too different from what they've said in the past."

Jordan, who became chairman and CEO in March 2003, said that responsibilities in the NMCI engagement were vaguely specified. In particular, the agreements EDS reached with subcontractors were faulty because they did not make the subcontractors sufficiently accountable, Jordan said.

Moreover, he added, the NMCI project suffered from a lack of leadership on EDS' part, operating in isolation from the rest of the company, and from a lack of commitment on the part of the Navy, he said. This lead to delays as personnel at local navy bases failed to co-operate or as EDS employees faced thorny technical roadblocks. Meanwhile, he added, EDS made the mistake of committing capital too early and assuming costs not contemplated in the contract to avoid further delays.

Now, Jordan and the new management team he has put in place over the past year have established a "firm" implementation schedule and developed a more efficient rollout plan in conjunction with Navy officials, he said. Jordan expected EDS to begin recovering its NMCI investment in 2005.

When it was signed in 2000, the NMCI contract was valued at more than $4.1bn for five years, with an additional three-year option that could put its value at more than $6.9bn. It was extended in 2002 to seven years with a three-year option and its value rose to $8.8bn, a navy official said yesterday.

Speaking about EDS as a whole, Jordan contested the notion that EDS is in financial trouble. "This is far from the case. I've been in a financial turnaround and this is very different. This is a managerial turnaround," he said. "We're very confident in our ability to turn around this ship very quickly."

In 2003, Jordan and his team focused on stabilising EDS, which had been rocked by disappointing sales, loss of confidence in its top managers, problematic contracts and government scrutiny, such as an investigation by the US Securities and Exchange Commission.

"Instead of operating as a $21bn business, we were operating like 200 smaller businesses," Jordan said. "As a result we had a wide disparity in execution across our businesses."

Now, the central management group has been strengthened in key areas such as account management, contracting and procurement, and the company realigned to function more organically as a whole. The company is executing on its strategy to strengthen its core IT outsourcing business and to expand into growth areas, such as business process outsourcing, he said.

In 2004, EDS top management will focus on fixing outstanding problems, and Jordan expected EDS to move to a growth strategy in 2005 and beyond.

Gartner's Scardino did not think the plans were particularly ground-breaking.

"It's positive that they're upbeat about what they've done and what they want to achieve in the next couple of years," she said. "But the things they talked about aren't earth-shattering.

"Theirs is a very similar strategy to the one other service providers have adopted long before them. I didn't hear anything that is a real breakthrough or something the competition isn't already engaged in."

Juan Carlos Perez writes for IDG News Service

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