Gearing Up At Perot Systems

After years of startup pain, a shot at the big time

Rick H. Gough, director of operations for Cadillac Plastic Group Inc., doesn't have fond memories of his early experience with Perot Systems Corp. Hired in 1993 to take over data processing at the plastics distributor, Perot promised more than it could deliver, given Cadillac's antiquated computers. "There was a lot of dissatisfaction," recalls Gough. But today, Gough has a far different view of the Dallas-based computer services company. Starting in late 1994, he says, Perot began taking "a totally different approach. We just really started taking off and creating a true partnership."

Perot Systems, once recognized more for its famous founder, Presidential candidate Ross Perot, than for its technological prowess, is hoping that Gough isn't the only one who notices the changes. After years of growing pains, the eight-year-old company finally has a shot at its industry's major league--alongside such companies as IBM's Integrated Systems Solutions Corp. and Electronic Data Systems Corp., Ross Perot's first startup. In the past year, Perot Chairman Morton H. Meyerson has recruited brand-name managers, including former IBM strategist James A. Cannavino and James A. Champy, the influential consultant who helped kick off the reengineering wave. The company has narrowed its focus to five key markets and beefed up technical expertise by investing in software and consulting companies (table). "We see Perot as starting to be more visible and aggressive," says one major competitor.

To say the least. Perot's revenues are expected to hit $688 million this year, more than twice last year's $342 million. Perot says net profit, too, should more than double, from last year's $10.8 million, on pretax margins surpassing the 11% expected for EDS this year. With a growing record of consistent profit, Meyerson plans to take the company public sometime in 1997. Analyst Stephen T. McClellan of Merrill Lynch & Co. figures the company could be worth about $2 billion.

Employees such as Champy and Cannavino, who signed on with the promise of IPO riches, can't consider their Perot stock money in the bank yet, however. Much of the company's recent growth spurt--after a slowdown in 1994--comes from a single megadeal that Perot signed with Swiss Bank Corp. in 1995. In an unusual alliance, Swiss Bank is taking a stake in Perot that could total nearly 25% over 15 years. Perot, in turn, will manage the majority of Swiss Bank's computer operations, worth an estimated $250 million a year for 25 years. Perot, in addition, took a 40% holding in Systor, a unit that develops software for Swiss Bank and other financial institutions.

THE CATCH. Sounds great, but there's a catch. The Swiss Bank deal, and similar ones that Perot is pursuing with Swiss-air and another undisclosed large financial institution, carry a risk: Instead of being paid straight fees for consulting, programming, and outsourcing work, part of Perot's compensation will be tied to specific business results--higher productivity or market-share gains, for example. Swiss Bank preferred a midsize partner like Perot because "the success of this company (Perot) would obviously depend on being successful with us," says Swiss Bank Chief Financial Officer Peter A. Wuffli.

Perot isn't the only high-tech consulting firm to cut such "risk-sharing" deals; EDS and IBM offer them, too. But Perot is far more aggressive. "Perot seems to be more flexible in being willing to come up with a specific contract that really meets the client's needs," says Bonnie A. Digrius of Gartner Group Inc., a technology consulting and research firm. Meyerson says such deals will make up only 10% to 20% of Perot's clients in the near term, but when the company gets bigger, he crows, "I would take 100% risk."

The megadeals are important to the short-term growth plan. Meyerson says the company can grow at least 25% a year, vs. 15% to 20% for the industry overall. He hopes to exceed that rate by cutting new megadeals every year or two. "This time, we're going to try to not flatten out as much and see if we can accommodate a much faster rate of growth," he says.

Even small customers are getting in on the risk-sharing deals. Take Tulsa-based SportsTrac Inc. The company selected Perot in July to create an Internet service that allows college sports recruiters to search a database of high-school athletes in more than 20 sports. SportsTrac considered several other services firms, including EDS, for the three-year deal. "From the moment we began discussing the project with (Perot), I felt I had a partner," says Gene T. Martin, chief financial officer. "The others seemed to be vendors selling their services." Perot's compensation is tied in part to the new service's revenue growth. "They are at risk of not covering their costs," says Martin. But if the service does well, Perot could make $5 million, Martin figures.

With his new strategy and new management team in place, Meyerson, 58, is stepping back from day-to-day control. In September, he handed off much of his work to Cannavino, 52, who joined a year ago as president. Meyerson, who has been in computer services since he joined Perot at EDS in 1966, is concentrating on working with clients.

Cannavino, once head of IBM's PC operations and Big Blue's top strategist before he left in March 1995, continues to sharpen Perot's strategic focus. "The company was emerging and just finding business. It didn't collect itself and say: `Which business, in which places?"' he says. Now, Cannavino is zeroing in on key industries, such as financial services, health care, and energy, and developing functional expertise in areas that cross industry boundaries, such as logistics management. At the same time, Cannavino has made sure that Perot is up to speed in all the new software technologies, including those used for Internet and intranet setups. Perot is now investing in software startups to get new technology early.

The company's other high-profile recruit, Champy, is there to turn Perot into a high-level strategic consultant like Andersen Consulting--an area that EDS jumped into with the $300 million purchase of A.T. Kearney Inc. Formerly a partner with Andersen rival CSC Index Inc., Champy won't create a separate consulting unit, however, because he wants consultants to work closely with Perot analysts and programmers. He says that didn't happen easily at Cambridge (Mass.)-based Index, which Champy co-founded, after it was bought by El Segundo (Calif.)-based Computer Sciences Corp. "You can't separate issues of technology today from issues of strategy," he says.

STRUGGLING. Even with Champy opening doors, Perot has a long way to go before it breaks into the highest ranks of computer services companies. "They're still struggling to get out of the second tier" in technology services, says Howard Anderson, managing director of Yankee Group Inc., a technology consulting firm. Perot is not yet making the short list of possible vendors for many Yankee Group clients, he adds.

Meyerson insists that the company and its 4,300 employees are ready for the big time. Gough at Cadillac Plastic agrees. Perot employees, he says, have had a huge effect on the Troy (Mich.) company. They have joined teams to re-engineer processes such as order fulfillment and sales-lead generation. And Perot recently reworked its 10-year contract to bring in new client-server technology, with no additional spending by Cadillac. Gough credits Perot for helping the company double profits since 1992, slash working capital and outpace peers. With testimonials like that, the name Perot may become more famous in computer services than in politics.

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