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EDS may cut 20,000 jobs over the next two years

EDS may cut 20,000 jobs over the next two years

Electronic Data Systems (EDS) plans to lay off between 15,000 and 20,000 employees over the next two years as part of an effort to slash US$3 billion in costs, the company's Chairman and Chief Executive Officer Michael Jordan said Thursday during a question-and-answer session at a conference.

These layoffs would come on top of about 5,000 jobs EDS has cut over the past year, Jordan said, speaking at the Smith Barney Citigroup 2004 Technology Conference in New York, where he took questions from a moderator and from audience members for about 30 minutes. A replay of Jordan's session at the conference is available online at http://www.veracast.com/webcasts/sbcitigroup/tech-2004/52312148.cfm

"As we re-engineer our whole delivery system by rationalizing service centers, building our own network to get greater utilization of data centers, etcetera, there's a whole host of things ... I think we've mentioned 15,000 to 20,000 incremental people will go out," he said. "Over the next two years there will be a lot of change at EDS. We said we're going to take 20 percent off our cost structure which is US$3 billion out, and that's the way you do it."

Clearly, EDS plans, at least in the short run, to be a smaller company, and the big question mark is whether this will erode the quality of its services, said Andrew Efstathiou, a Yankee Group analyst. Thus, clients must be very vigilant about service quality as EDS downsizes, he said.

"The question is whether EDS will cut into bone or into excess fat," he said. "EDS has an excellent service delivery capability in place and these layoffs, if done improperly, are going to adversely impact this delivery capability. If done effectively, they'll reduce costs but also limit somewhat the scope of services EDS can offer."

Compounding the matter is that EDS' performance at generating new business has been disappointing, so that, lacking a new-sales boost, the company is being forced to focus more on cutting costs to improve its financial condition, he said. This means carrying out a strategy that includes divestitures, such as the recent sale of its UGS PLM Solutions unit, moving operations offshore and, of course, trimming the payroll, Efstathiou said.

"Generating new sales hasn't been successful for them so far. That's not what's moving the company forward. They've generated some new sales, but most (revenue) has come from signing existing customers to renewals and signing extensions of existing business. But new-sales performance hasn't been strong. It certainly hasn't been what they would have hoped for."

When EDS announced in July that it had signed US$4 billion in contracts in the second quarter, up 25 percent from US$3.2 billion in last year's second quarter, it said in a statement that this reflected "sales growth from existing accounts and strong renewals."

The turmoil at EDS over the past two years or so has harmed employee morale, and it doesn't help to hear the company's chief executive say that significant layoffs are coming, Efstathiou said. "There continues to be a lot of turnover in the EDS employee base. I've had discussions with EDS employees recently and it's clear that the morale is extremely low there," he said.

Jordan's comments are in line with the company's overall efforts to reduce its costs over the next 24 months to 36 months, said Liz Bonet, an EDS spokeswoman. Regarding the projected job cuts, the numbers Jordan provided are an estimate, not a target, Bonet said. As such, this estimate could be modified and depends on how EDS' business transformation proceeds as it improves productivity and increases new-contract signings, Bonet said. EDS currently has about 120,000 employees, she said.

In addition to layoffs, EDS plans to lower costs through two other areas, Bonet said: first, by improving its supply chain and purchasing process, and second, by improving its capacity management, which involves the global consolidation of service-delivery facilities such as data centers and call centers.

EDS, based in Plano, Texas, is the world's second largest provider of IT services. Jordan came on board in March 2003 after EDS ran into difficulties, such as disappointing sales, problematic contracts and an ongoing U.S. Securities and Exchange Commission investigation. Jordan and a new management team have tackled these and other problems over the past 18 months, but difficulties linger, by Jordan's own admission. As recently as July of this year, he called EDS "a tale of two cities," in which new measures implemented by his team coexist with problems that predate his arrival.

EDS' stock (EDS) was trading at US$20.07, up almost 3 percent, in late afternoon trading Friday on the New York Stock Exchange.

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