EDS: Getting Out Front in Outsourcing
Technology services firm Electronic Data Systems (EDS) is more accustomed to leading the pack than frantically playing catch up. Founded by Texas billionaire and two-time Presidential candidate Ross Perot more than 40 years ago, EDS all but invented the information outsourcing industry. In the mid-'60s, the company started processing insurance claims and payments for the Texas Medicare program. A decade later, it was winning outsourcing contracts in Saudi Arabia, Singapore, Iran, and Pakistan.
Yet the Plano (Tex.) company has been struggling in recent years. It has lost top clients in part because it moved with glacial slowness to establish low-cost offshore capabilities, particularly in India. In 2003, it posted a $1.7 billion loss, hired former CBS CEO Michael H. Jordan as its new boss, and launched a revival plan to sell off non-core assets and become far better-positioned in India, where rivals such as IBM (IBM), Accenture, and Hewlett-Packard (HPQ) have added thousands of workers.
IBM is a particularly competitive worry. In the Asia Pacific region excluding Japan—where local players such as Fujitsu (FJYSY) dominate—IBM finished considerably ahead of EDS in 2005 when it came to revenues, according to data compiled by research firm IDC Asia/Pacific.
IBM "has a great presence in India and China," says IDC senior analyst Eugene Wee. While EDS is strong in Australia, New Zealand, and Malaysia, in the critical mainland and India markets the company generally "doesn't appear at the top of the radar screen," says Wee.
The job of changing all that falls to Joe Eazor, the Shanghai-based president of EDS Asia and chairman of the company's China operations. There are signs of progress. On June 5, EDS closed a $380 million deal to buy a majority stake in Bangalore-based MphasiS BFL, a Bangalore-based outsourcing services company with about $210 million in annual revenues. With this acquisition, plus EDS's own expansion plans, the company's workforce in India is expected to vault from about 3,000 to 20,000-plus by the end of 2006.
The move in India, as well as ambitious plans to bulk up in China this year and next, is part of a drive by EDS to raise Asia's contribution to the company's $20 billion in global revenues to 10% by the end of the decade from about 7% now. The MphasiS deal is a big step in the right direction, says Eazor. "It represents a sizable jump in size of scale, and a few more arrows in our quiver" for EDS to serve multinational clients with accounting, financial service, IT, and other outsourcing services.
For the company's global clients, having contracts serviced in India will mean savings of more than 30% over doing similar deals with EDS from its facilities in Europe or the U.S.
There also could be more room for EDS to grow with acquisitions given the largely fragmented nature of India's outsourcing industry. ""Over the next two years, we should see some more M&A activity" in India, he predicts (see BusinessWeek.com, 4/17/06, "Open Season on Outsourcers").
That's probably true, but local Indian firms are also bulking up. Infosys (INFY), Tata Consultancy Services, and Wipro (WIT) are on hiring binges and making acquisitions in the West to better compete against multinationals. In June alone, Wipro announced plans to spend about $88 million to acquire Finland-based Saraware Oy, which provides design and engineering services to telecom companies, and the Portuguese retail consultant Enabler.
EDS certainly needs to tap into the huge opportunities in Asia. For one thing, some of its biggest U.S. clients are in dicey financial condition. They include General Motors (GM), the company's single biggest corporate account, and Delphi (DPHIQ), which filed for bankruptcy in October, 2005.
MAKING A SPLASH.
EDS's IT outsourcing business is also somewhat reliant on financially struggling airline carriers such as American Airlines (AMR), U.S. Airways, and United Airlines (UAUA). Under Jordan, EDS has done a good job of selling off non-critical assets and cutting costs, but it needs more growth out of Asia.
The company also has to find ways to counter far bigger rival IBM, which has about 43,000 employees in India. On June 6, IBM Chief Executive Sam Palmisano hosted a glitzy event on the Bangalore Palace grounds, attended by Indian President A.P.J. Abdul Kalam and local dignitaries.
That's where Palmisano announced Big Blue will invest $6 billion in India over the next three years, on everything from research to innovative delivery models, and education. It's the single largest investment by any multinational tech company in India—and triple the $2 billion IBM has spent in India in the past three years (see BusinessWeek.com, 06/06/06, "IBM's India Pep Rally").
Eazor says he respects IBM as a competitor, but insists that EDS, with MphasiS, now has the kind of scale it needs to hold its own. He also likes the company's prospects in China, where EDS has invested $50 million over the last three years and aims to increase staff from about 140 at the start of 2006 to 2,000 employees by the end of next year.
"We see China as a global delivery platform that will service global clients as well as local clients," he says. Eazor thinks the total demand for outsourcing services on the mainland will grow in the 30% range in the coming years.
EDS—and its rivals too—will certainly benefit from the trend of fast-growing Asia-based companies starting to turn over their IT networks and accounting systems to outside management. The size of the outsourcing market place in Asia, excluding Japan, is expected to top $10 billion in 2006 and could reach $16 billion by 2010, according to a forecast released on June 22 by IDC.
A sizable number of companies in India, China, and elsewhere in Asia are growing so fast that they "don't have the ability to scale-out and manage" their IT systems and customer service centers, points out IDC analyst Wee. That makes Asia a potentially fertile ground for EDS. It may lag significantly behind IBM now, but the folks back in Texas seem serious about living up to their historical legacy of being a leader, not a follower.