No. 10: EDS, Hard-learned lesson

Biting off more than one can chew can lead to indigestion. For EDS Corp., a stomachache came in the form of the Navy Marine Corps Intranet project, a fixed-price contract pegged at nearly $7 billion when it was awarded in 2000. But the real-world challenge of creating a single, enterprisewide intranet with secure access for integrated voice, video and data communications required unanticipated billions in upfront costs for the company.EDS' ability to negotiate a $3.1 billion program extension through 2011 covering computer hardware, software and labor attests to its savvy as one of the country's major information technology players, said Kevin DeSanto, vice president of Houlihan Lokey Howard and Zukin's Aerospace-Defense-Government Group."The NMCI contract was a major drain on revenue and cash flow," DeSanto said. "Implementation and rollout [were] very difficult. Over the last couple of years, they have really made headway in getting it to where it's supposed to be. They've definitely learned from that experience."EDS' achievement is even more significant given that the company's public-sector revenues amount to only a third of its overall income, or about $7 billion. Of that figure, federal contracts account for 12 percent, with the rest coming from state and local projects, said James Duffey, general manager of EDS' Public Sector unit.The company's federal work landed it at No. 10 on the Top 100 with about $2.4 billion in prime government services revenue."We're focused on fiscal consolidation and cost savings, taking on shared services across agency lines and stovepipes," Duffey said. "All state, local and federal government units are dealing with legacy systems. Everyone needs to find a way to transition to a more flexible, less rigid structure. But it has to be done in phases, not in one big bang."One such example is the Veterans Affairs Department's VistA Contractor Services program. Last December, EDS was one of eight companies selected to provide applications maintenance and sustainment services while transitioning VA software to an open architecture. The deal, with options, is worth an estimated $1 billion over a potential 10-year term.Consolidation is also the focus of a task order the Centers for Medicare and Medicaid Services awarded EDS in February. EDS will host applications that process roughly 180 million Medicare claims at doctors' offices and hospitals in 12 states. The agreement is the third CMS-related task order awarded to EDS under the terms of the deal. The most recent order contains a one-year base period with five additional one-year options for a potential value of $92 million.EDS is one of three companies competing for task orders under the 10-year, $1.9 billion Enterprise Data Center contract awarded in March 2006. CMS is using the contract to consolidate data-center operations supporting mainframe and client/server applications. The 20 facilities that are currently performing the work will be reduced to just four.Like its competitors, EDS expects to benefit from the government's implementation of Homeland Security Presidential Directive 12, which calls for a standard biometric identification card for all federal workers. HSPD-12 requires agencies to use a standard process to establish and manage an individual's identity and issue an interoperable smart card for physical and logical access to federal facilities and information systems.In late April, the General Services Administration tapped EDS to issue identity credentials to about 420,000 employees at 42 civilian agencies. The task order is worth $66 million and will run through September 2011 if all options are exercised."There's no question identity management will be an important part of where government is moving," Duffey said. "We're at the right place at the right time with a shared-identity solution. [But] this is a very competitive marketplace with a lot of good, solid contractors. In that environment, you can't win everything."Winning is uppermost in the minds of several of EDS' competitors, which think a recent award may not be fair or appropriate. In late January, EDS was one of six firms to win a spot on the Defense Information Systems Agency's 10-year, $12.2 billion Encore II large-business contract. The goal is to create a departmentwide Web portal for accessing knowledge databases and collaboration tools. Three companies that were part of Encore I but were passed over for Encore II ? Computer Sciences Corp., Unisys Corp. and Northrop Grumman Corp. ? are disputing the award.More fierce contests for government dollars appear in the offing. As IT companies succeed in their quest to bring efficiencies of scale and cost to e-government, the largest contracts will likely be scaled back."When you're as large a company as EDS, it's a challenge to grow as aggressively as everyone expects you to," DeSanto said. "You just have to win that many more contracts. The IT outsourcing space is extremely competitive."