EDS Earnings Show Services Giant Struggling

Year-end results for EDS showed the technical services company struggling to cut costs and increase efficiency in the face of U.S. economic woes.  

While EDS and other outsourcing firms historically improve performance in times of economic downturn as companies search for lower-cost labor and increased operational efficiencies, Bill Martorelli, principal analyst at Forrester Research, said there's no indication that organizations will begin outsourcing en masse as they did earlier in the decade.

"This is a demand-side issue. There's not yet a signal that people are going to start outsourcing in the traditional ways and in large numbers," said Martorelli.

EDS CEO Ron Rittenmeyer said on the company's 2007 year-end and fourth quarter earnings call February 6 that he was not satisfied with the company's 2007 performance, but that a continued push toward offshoring and the early retirement of about 2,400 employees would increase revenues and profits in 2008.

EDS said revenues rose to $5.83 billion from $5.7 billion in 2007, but the growth was still shy of analysts' expectations of $5.86 billion revenue.  EDS said fourth-quarter net income fell to 36 cents per share or $189 million from 40 cents per share, or $217 million, from the same quarter a year ago. 

Rittenmeyer attributed some of EDS's performance issues to several deals that did not close in fiscal 2007 and were moved into fiscal 2008 instead.  He said that the deals were in the contracting phase, and that "December is a difficult month, and it's sometimes not possible" to get deals signed by the time the year ends.

Rittenmeyer also said that EDS's transition of the company's business to "bestshoring" locations had offset more aggressive growth.  He said that while in the short term the strategy might dampen growth expectations, EDS expected that the strategy of having 60,000 employees in "bestshoring locations" like India, Brazil and China "would pay off in the long run over the next two to three years."  

EDS' executive vice president and Chief Financial Officer Ron Vargo said that the early retirement plan accepted by about 2,400 employees would also significantly increase cost savings and efficiency.  He said that the company had plans to "backfill" about 25 percent of those jobs, saving the company an estimated $125 million annually.

Rittenmeyer said EDS would increase focus on costs and cost structure in 2008.  He said that the company would focus on quality of service and shy away from competing for its customers based on having the lowest price, "internally we have to think about every nickel we spend and how we spend it."