Positive

EDS remains a strong contender for IT outsourcing work because of its expertise across infrastructure, applications and business process outsourcing (BPO). EDS customers and prospects should keep several things in mind:

• EDS has breadth and depth of IT and business process service capabilities and has become more flexible in its approach to the market.
• As EDS becomes more aggressive at moving up the technology stack, customers and prospects must focus on the specific value they seek, the results that can be enabled through an EDS relationship, and the timelines associated with achievement of those specific results.
• EDS continues investing in service delivery automation, business management transformation and customer-focused account management systems. Customers must understand where they rank in EDS's priorities, and while these take time to permeate the EDS organization, customers should be made aware of time and impact of these efforts on their environments.

EDS continues to emphasize service delivery effectiveness and efficiency, but it must continue to demonstrate consistency throughout its vast customer base and clearly articulate this benefit to prospective buyers.

In the Americas, EDS appears often on shortlists for infrastructure-centric outsourcing. It has expanded its Latin American presence and maintained its presence in Canada. The company has made progress developing offerings that address the application layer of its multiyear plan, but it must revisit its BPO strategy, which has faltered in the past year. It also must become more aggressive about building new utility offerings.

Traditionally focused on government, financial services and manufacturing, EDS maintains a pervasive presence in Europe, the Middle East and Africa (EMEA). Recent new business has increased the presence in several other industries, most notably retail and communications. EDS’s strategy here is to nurture existing accounts in its key verticals, promoting its reputation for technical excellence and delivery of infrastructure services, and simultaneously exploiting growth areas for its application services and expanding its BPO offerings.

EDS has shown its willingness to accept the multisourcing trend by developing its own methodology that enables it to act as integrator and manager of multiple suppliers. This may help EDS in EMEA, a market that has embraced the trend toward multiple providers.

Finally, while EDS has maintained a strong commitment to the Agility Alliance, it has not yet gained a lead in deploying utility solutions through the alliance.

In Australia and New Zealand, EDS continues to lead the market in revenue — it is ranked No. 1 in New Zealand and No. 2 in Australia for IT services. The company has been marginally affected by the breakup of some renewal deals in Australia. During the renewal phase of key deals, such as the Australian Tax Office and the Commonwealth Bank of Australia (CBA), EDS refocused service delivery efforts on efficiency, improving working relationships and becoming more closely aligned to the customer's business requirements.

EDS assigned new leadership to Asia in 2006 and again in 2007, and the company is acting on its Asian strategy. Its priorities in Asia are to grow its business in Japan, expand its Best Shore capabilities in China, and pursue business in the rest of Asia with multinationals and local companies. Although EDS’s heritage is infrastructure outsourcing, it is leveraging its application skills, which are in high demand in Asia, and also leveraging "beachhead" BPO and business process utility deals with Coles Group and CBA. Although EDS still has work to do in executing this strategy, we believe that the plan is workable and will give customers a much-clearer picture of what EDS wants to accomplish in the Asia/Pacific region.

For technology users that require industry-specific competencies, EDS can provide significant value to technology management engagements in selected vertical markets. EDS continues to make strides and has increased its industry presence over 2006. While EDS has numerous vertical market strengths, its primary focus in 2007 and moving into 2008 is on the financial services, government, and healthcare industries. EDS has made significant investments in these markets in 2007 and in the other industries it supports (for example, retail and communications). EDS continues to leverage, strengthen and expand its industry-specific knowledge and frameworks.

To continue momentum, EDS must capture high-profile contracts in these targeted vertical markets that help provide competitive differentiation, thought leadership and top-of-mind recognition.

EDS has made major strides in its capacity and resource planning for global delivery of IT services. In the past year, it increased its head count each quarter in low-cost-delivery geographies. Currently, it has approximately 15,000 full-time equivalents (FTEs) dedicated specifically to applications and over 40,000 total resources within its low-cost locations, of which over 25,000 are currently located in India (constituting EDS’s second-largest country by workforce). This focus of executive management continues to confirm EDS’s commitment to ensure that global delivery is an integral part of the overall enterprise strategy. This includes its additional commitment to China with 200 FTEs in Shanghai and 500 in Wuhan.

Global delivery is now embedded in a significant number of EDS’s deals, highlighting the use of offshore resources in EDS’s portfolio. Greater clarity on the global delivery process and methodology, however, is needed to differentiate its Best Shore model vis-a-vis the competition, particularly as the application and industry focus moves forward and EDS faces more head-to-head competition with offshore pure-play providers. EDS has not yet achieved competitive parity with some of its peers in terms of market awareness, full integration and seamlessness in workflow maturity. However, as with other operational and process-oriented initiatives, EDS continues to improve as it expands.

The Agility Alliance is the foundation of EDS’s partnering strategy and has become a key element of the EDS service portfolio. Followers and users of the Agility Alliance know that Cisco, EMC, Microsoft, Oracle, SAP, Sun Microsystems and Xerox are all working collaboratively to develop robust, standardized, pre-integrated solutions and platforms that are less expensive to operate and maintain. The alliance is unique because each member supplies technology products, services, and R&D. The alliance itself continues to gain attention as customers increasingly cite the alliance as a differentiator for EDS, demonstrating the ability to operate and lead a sophisticated network of partnerships.

In EDS's earnings report for the third quarter of 2007, the company provided the following information:

• EDS continues its transition through 2007 and into 2008 by making further improvements to its Best Shore and onshore workforce mix, shifting its revenue mix toward higher-margin business in application services; deploying additional automation and standards to drive productivity; and planning selective acquisitions for capability enhancement and industry solutions.
• The company is continuing to invest to improve shareholder value for the longer term. EDS improved year-to-date 2007 results over 2006 for earnings per share, operating margin, revenue, and free cash flow. EDS expects full-year results for 2007 to be improved over 2006 in these key metrics.

Looking forward to 2008, EDS has a robust pipeline with particular strength in the government and financial services industry segments and a balanced split between infrastructure and application services.  EDS expects 2008 revenue growth of approximately 2% and expects to reap benefits in 2009 from its 2008 improvement initiatives and investments, resulting in higher revenue growth, operating margin and free cash flow.

External marketing has never been an EDS strength. It has had a revolving door of marketing executives; some with the chief marketing officer title, while others combined marketing with other responsibilities. This has resulted in a lack of vision and attention to market trends, frequently leading to reactive marketing and a lack of clarity surrounding EDS’s value proposition. With a heavily “siloed” service portfolio management team, the complexity of the individuality has made it challenging for EDS to fully align independent services to an overarching message and promise to the market. As the rigor of the approach has helped in defining EDS services themselves, it has done nothing to change market perceptions of the company. As the No. 2 worldwide market share leader in IT services, EDS needs a comparably strong marketing commitment to be consistently recognized as a leader in the IT services marketplace. With the desire to move up the value and technology stack, a larger investment in marketing and a more prominent voice in the market are needed. Otherwise, EDS's second spot in terms of revenue may be in jeopardy.

As a top 10 market share leader with a data processing and outsourcing heritage, EDS has for many years made operational excellence its value proposition and still mainly targets CIOs. The lack of visibility among other C-level officers has inhibited its nonoutsourcing business and challenges its planned efforts to pursue higher-value professional services in key accounts. Furthermore, EDS hasn't entirely shaken off a reputation for inflexibility. It is attempting to change its focus from outsourcing to business solutions, with a brand campaign that focuses on client successes. However, EDS still has work to do in proving it can continue to successfully change buyer perceptions of the company.

EDS's 2006 reorganization of its sales model to orient it toward a regional focus, supplemented by a vertical focus, remains in effect, increasing visibility and accountability for EDS itself and intensifying focus on the customer. EDS still goes to market as an IT outsourcer, and now it is making its move "up stack" with an intensified push in the application arena, specifically oriented on application management and modernization. While EDS provides consulting and integration services, it typically does so when the opportunity for broader outsourcing work is present. However, EDS is preparing a more aggressive push into the consulting and system integration market in 2008 and recently announced an initiative to intensify its global SAP consulting practice.

Continuing its 2006 effort, EDS has oriented its organizational focus more on service delivery, improving operational effectiveness and boosting the bottom line. During its recovery and internal transformation (from 2004 through 2006), EDS was focused on improving customer relations and increasing sales. In 2007, with the financial turnaround of the company complete, CEO Michael Jordan made way for COO Ron Rittenmeyer to take the CEO helm and continue the work that Rittenmeyer began as COO in driving operational effectiveness, pursuit of "good business," service delivery automation and business management transformation for EDS. Rittenmeyer also instituted an early retirement program targeted at reducing the U.S. workforce by 12,000, of which approximately 20% have accepted. More workforce capacity management activities are anticipated in 2008 as EDS seeks to grow and further integrate its’ Best Shore capabilities.

During the last fiscal year, EDS showed revenue growth of 7.3% for server- and desktop-based services, higher than the top 10 average of 4.1%. In terms of worldwide market share, EDS is the top provider of desktop outsourcing services and ranks second for data center outsourcing services.

EDS is well-positioned to satisfy the emerging demand for offshore remote monitoring and support services, and like other large traditional providers, is moving aggressively to ensure it doesn’t lose ground to offshore providers. EDS is known for matching the global "footprint" of its customers and now must convert that global presence into delivery capabilities from offshore back into North America and Western Europe. EDS remains a strong contender for multiservice outsourcing contracts that provide customers with end-to-end and business outcomes, and it generally avoids smaller stand-alone service deals.

As EDS has solidified its offerings/operations for infrastructure and networks, it has identified application services as a growth platform. A key focus in applications is working with clients in application modernization — a strategy that also complements its goal to have more-strategic, value-based relationships with clients. An important step supporting EDS's application service initiatives is the 2005 MphasiS acquisition, which gave EDS additional resources in India. When EDS acquired a majority interest in MphasiS in 2005, it was unclear how EDS would leverage MphasiS’ capabilities to improve EDS's competitive position in application outsourcing. EDS's pre- and post-MphasiS offerings are improved. It has morphed from a traditional order-taking mode in a time and material environment to a change-enablement mode in a service-level environment. EDS had a substantial win in application-centric outsourcing deals with Vodafone and Arcandor, and it has launched some new application services, such as testing, and revamped some other offerings, like application modernization. EDS's plans for industry frameworks, which are intended to industrialize applications for specific verticals, are still somewhat a work in progress.

EDS ranked fifth in core BPO market share for 2006 and is among the top 10 in comprehensive finance and accounting, CRM, and HR BPO. EDS's HR BPO (ExcellerateHRO) rated “promising” in the Gartner HR outsourcing MarketScope. Although other areas of EDS's business grew in 2006, its BPO operations revenue remained flat at $3 billion. As a result, EDS has gone through the second major restructuring of its BPO portfolio since 2005. BPO offerings are now sold through EDS's industry groups, as well as stand-alone practices. This approach offers integrated services tailored to meet specific industry needs and is a potentially powerful offering.

ExcellerateHRO, which remains a stand-alone business unit, has been slow to add new contracts since its inception in 2005, thus demonstrating little return on investment. Likewise, EDS's notable investment to develop an integrated, scalable, turnkey CRM BPO solution has yet to see notable adoption. With a strong global presence and brand, high-level customer relationships, and continuous efforts to innovate, EDS’s potential for growth is challenged by its effectiveness in delivery and solution development.

EDS typically focuses on very large outsourcing deals and applies structured business management, as well as cost and portfolio optimization, to show performance and financial value to customers. As EDS continues to view network outsourcing services as a key innovation and growth segment, it must continue to improve service delivery for consistent customer satisfaction. While conversations with EDS customers suggest it can still improve customer support systems and delivery processes, through the third quarter of 2007, EDS reports that 98% of its network service clients rate its performance as "positive."

There has been no substantial change in offerings in this category; however, EDS has announced that it has revisited this part of the portfolio and is placing more emphasis on its consulting, development and integration services in the next year, starting with an expansion of its global SAP consulting practice. While this is promising for EDS, existing clients and prospective customers, it will take time for the full realization of the build-out of this practice with formalized tools, methodologies and accelerators.

As EDS tries to industrialize IT, it is creating methodologies that foster repeatability and consistency. The technology and methodology continue to focus on delivering outsourced solutions vs. customer-managed solutions. EDS's BATOG framework (whose name is an acronym of "business, applications, technology, organization and governance") remains the foundation for more-specific methodologies, including Enterprise Service Management and Automated Delivery of Applications Processes and Tools. Recently, EDS has become more vocal regarding these methodologies in articulating the process-centricity and benefits of the discipline. As well, EDS is actively promoting and engaging with clients in leveraging the Enterprise Service Management methodology to serve as the integrator of integrators. In these instances, EDS takes on the formal role of integrator of multiple providers in a multiprovider outsourcing environment.

As EDS hones joint operations with MphasiS, we expect it will continue to refine and standardize methodologies to increase the level of world-class service delivery, specifically for application services and BPO. EDS has realistic, incremental plans to deal with the complexities and challenges of achieving global consistency across all layers of service.

EDS remains competitive on price in large, multiyear deals, and it appears to be consistent in assessing, taking and managing risk in these deals. It is improving its price competitiveness in application outsourcing and is continuing to leverage the MphasiS acquisition to enhance its competitiveness in BPO deals. EDS is building experience in utility pricing; if it continues to learn and refine its practices, it is in a good position to be a leader in this area, but it must seize the opportunity to lead.

Customers should continue to encourage EDS to be more proactive on pricing and on developing pricing based on virtual infrastructure utility services instead of its present pricing system, based on physical assets or units of work.

EDS's continued investment in increasing its sales force in 2007 has reaped a solid payoff in this hypercompetitive market. While perhaps not as impressive as the long list of major deals that EDS announced in the first half of 2006, EDS has had notable successes in 2007. Some of the wins (both new and renewals/extensions) that EDS compiled in 2007 include Arcandor, the U.K. Ministry of Defence, KLA-Tencor, Gamestop, the South Australian Government, Coca-Cola FEMSA, the World Bank, the Bank of Canada, First Midwest Financing, GSA Networx (as a subcontractor to AT&T), Arvin Meritor, Sabre, the Australian Tax Office, the State of Ohio, ATF, 7-Eleven, Delphi, the Commonwealth of Kentucky, Olympic Air, and Continental Airlines.

Customers and prospects should ask EDS to specify where, when and why it will pursue specific business with them, and what outcomes it will enable.

EDS started a formal account planning program in 2006 that continues today. This year, EDS also re-initiated its executive sponsor and training program to develop and assess the account executive as the single point of accountability to customers. More than 300 leaders have completed this program with an addition 400 to 500 others scheduled to complete it in 2008. As EDS increases its focus on being an operationally oriented service provider and refining these initiatives, customers will begin to see that it is becoming more than just a strong IT outsourcing provider. At this point, many customers engaged in this effort are generally pleased with its progress; however, this program is still being institutionalized throughout the EDS account base. Customers should ask where they stand in EDS's priorities and how account management changes might affect them. New customers should ask if the new practices will be part of initial transition and transfer activities, as well as ongoing "road mapping" of the emerging relationship.