EDS sees job cuts, changes with Brown as chief

Over the past nine months, EDS chief executive Richard Brown has been moving quickly to make the services giant a leaner machine, but it's unclear if he'll be able to prune a whopping billion dollars from his budget by year's end.

Shortly after leaving Cable & Wireless to join EDS, Brown in April trimmed 5,200 jobs from the company's 120,000 worldwide workforce. He promised another $1 billion in unspecified cost cuts by the end of the year. Wall Street analysts--advocating a leaner, meaner EDS--welcomed the decision.

Another round of job cuts at the $16.9 billion company is expected toward the end of the fourth quarter. By some estimates, up to 12,000 more jobs may be trimmed through attrition, early retirement, consolidation, and layoffs at EDS, which installs and manages complex computer systems and provides consulting to large corporations.

The cuts will be painful in the short term, analysts say, but will help EDS better compete in a market where it and its rivals, including Andersen Consulting and IBM Global Services, are striving to reinvent themselves for e-business.

"They're all going through this soul searching," said Julie Giera, analyst at Giga Information Group. "The Internet has changed the way their customers do business. It's no longer developing an application in a stove pipe. You need to understand marketing, advertising, and design in addition to technology."

Brown is expected to shed more light on the ongoing reorganization soon, along with an update on the impact of EDS's $50 million advertising campaign, which kicked off last month. The television ads are the company's first in almost a decade. They come long after EDS arch rival IBM Global Systems launched its own stylish e-business advertising campaign.

EDS spokesman Reed Byrum said despite speculation from some analysts that more job cuts will be announced this month, EDS has no surprises in store.

Byrum said EDS will "continue a reduction of the workforce during the end of the year," and expects about 4,000 employees to take advantage of the early retirement plan, which was offered to about 8,000 staffers. Only about 1,500 employees have signed up so far, analysts said.

"I think the jury's still out on whether he can cut a billion," Giera said. "I think he can get there, but if he hasn't had much success with retirement program he's got to look at other alternatives."

Plenty of fat to trim
Dean Davison, outsourcing analyst at Meta Group, said a total job reduction for the year of as much as 20,000 people wouldn't hurt the company much. The organization is comprised of thousands of subcontractors and dispersed business units that do everything from maintain ATM networks to provide high-level management consulting. With that in mind, EDS has a lot of "fat" it can cut through before it hits bone, he said.

Davison said the sales force could be leaner, middle management could be trimmed, and some of the company's vertical operations could be scaled back or spun off.

In a research note, Morgan Stanley Dean Witter analyst David Togut said EDS is "making progress in improving its cost structure" and is on target to report a cost savings of $350 million in the third quarter. The company is expected to announce its third-quarter results October 28.

Togut, who rates the stock a "strong buy," said continued restructuring over the next year should provide solid earnings, with contract signings reaching $3 billion for the quarter, up from about $2.8 billion a year ago. Last month, EDS also said it would consolidate its 35 business units into four global services lines, which could save the company $1 billion next year, Togut said.

Meanwhile, the fate of EDS's mega-outsourcing deal with MCI--a potentially huge contract for the company--is reportedly on the rocks.

Under the deal, announced in April, EDS bought MCI Systemhouse, the company's technology services arm, for $1.65 billion. Additionally, MCI WorldCom was to farm out major portions of its computer applications development and maintenance services and virtually all of its hardware to EDS in a ten-year agreement valued at between $5 billion and $7 billion.

In turn, EDS was to outsource the bulk of its voice and data communications services to MCI WorldCom in a $6 billion to $8.5 billion, ten-year deal. The negotiations could only get murkier if a rumored MCI WorldCom/Sprint merger moves forward.

Fifty-fifty chances
"Brown has only given the MCI deal a 50 percent chance," Giera said. "It's dead."

EDS spokeswoman Diane Coffman said the company still expects to iron out the deal by the end of the year.

"It's huge and involves so many parts of the company," Davison said. The companies have to hammer out service levels, response times, and other criteria that are difficult to negotiate--particularly when dealing with the nation's second-largest telecommunications carrier and second-largest systems integrator.

"It's difficult in one fell swoop to get all the "i's" dotted and "t's" crossed," Davison said.