EDS Starts a New Chapter

The company's split from GM triggers an appetite for telecom, entertainment and media partners

A steady stream of joint ventures and strategic alliances are expected to begin dotting the global marketplace as the newly emancipated Electronic Data Systems Corp. begins actively recruiting strategic partners in many markets and industries.

Plano, Texas-based EDS last week became the industry's largest independent systems integrator after collecting the necessary shareholder votes to finalize its split from the General Motors Corp.

To celebrate the reissuing of the integrator's stock, EDS Chairman Les Alberthal supplied some well-tailored imagery when he clanged the New York Stock Exchange trading bell on Monday. EDS' stock would close its first day of trading at $57 a share.

The $12.4 billion integrator now plans to leverage its newfound independence to negotiate a string of joint ventures and alliances in different industries including telecom, entertainment and media.

"The decisions relative to alliances and joint ventures will be [easier] to make now, allowing us to be more responsive," said EDS Executive Vice President Stuart Reeves. Due to restrictions placed on EDS stock up to two years after the split, the integrator's new partnerships will not involve stock equity deals, EDS management said.

"We think the world going forward will be composed of less exclusive partnerships and focus more on the specific strengths of a potential partner," said Reeves, indicating a departure from the exclusive nature of earlier negotiations with telecom partners.

To date, the integrator's telecom strategy has suffered from several false starts. A merger plan with Sprint last year fell apart, as well as earlier deals with AT&T and British Telecom. While the integrator's deal-making soured, other companies' plans took off. British Telecom today owns a 20 percent stake in MCI Telecommunications, while MCI last year acquired SHL Systemhouse, an up-and-coming EDS competitor.

"If you look around, the biggest [telecom] players have already aligned themselves," said Greg Jacobsen, a former EDS executive who later became an architect of the marriage between MCI and SHL. "My prediction is EDS will try with Sprint again because MCI and BT are just not available," said Jacobsen, now SHL's executive vice president of strategy and markets. Jacobsen believes AT&T is also a poor candidate because of the competitive nature of Solutions -- its infotech networking and consulting group.

"Whatever attempts we've had in the past to link with a telecom player, I think in the long run we'll be better off for not having completed it," said EDS' Reeves, who continued to emphasize the role of non-exclusive partnerships.

"You have to focus on the future and realize that the options are all still available. There is some organizational learning that needs to be done as far as how to make alliances more specific and less all-inclusive. And we must have a clear understanding of what we can do to add value to our partners," said Reeves.

George Newstrom, corporate vice president/group executive, EDS Government Services Group, said new partners will permit the integrator to complete an outsourcing "continuum," where no one service component is distinguishable.

"What we now need to do is work with partners who touch the customers at the end point of the continuum, and that means in the home and in the office. It's a matter of taking the capabilities that we have and matching them with communication capability, entertainment and media capability and putting it all together and providing services where you want them, when you want them and at the time you want them," said Newstrom.

"Telecom is tops on [EDS'] radar screen in terms of new opportunities," said Stuart Woodring, group director at Forrester Research, Cambridge, Mass. Communications companies across the board are starting to offer more one-stop shopping for clients that want seamless service. "Customers no longer want a la carte communications and information services. [They want] strategic partners who are integrated into their clients' operations," said Gerald H. Taylor, MCI president and COO when announcing the SHL purchase.

However, some analysts say EDS is likely to choose a partner with strong Internet capabilities, which the regional Bell operating companies are not known for. EDS doesn't want to get into the local loop business, and it doesn't want to be an Internet service provider. But it does want to offer its customers Internet services. "For EDS, where a strong relationship with a client is important, the Internet will be a dominant factor," said Woodring.

Brian Muys, a spokesman for Internet provider PSINet Inc., Herndon, Va., said the merging of systems integration and Internet has perfect synergy and would pose major competition to companies such as his. "The combination will be formidable," said Muys. "Internet has got to be high, if not No. 1, on EDS' list."

A.T. Kearney, the consulting arm of EDS, will have a big role in Internet offerings, predicted Woodring. Because the Internet entirely redefines distribution channels, companies need help setting up new systems. Consultants, not technicians, will be needed in full force to help set up the new arrangements, he said.

A number of analysts continued to underscore changes within EDS' telecom partnering plans.

"The pace of technology in networking is so fast that I think there has been a shift in thinking here. EDS may now be asking, 'why should we build a [telecom] infrastructure when I can buy it from a telecom vendor and let them worry about the technology upgrades?'" said Allie Young, an analyst with Dataquest Corp.

"Signing telecom partners is now as important a part of the competition between EDS and IBM as winning new customers, because having lower costs and especially lower telecommunication costs is allowing each of them to get more competitive on price," said Bob Djurdjevic, president of Annex Research, a high-tech research firm based in Phoenix. According to Djurdjevic's research, the integrator's margins continue to take a dive when it competes for deals valued at $500 million or more.

Certain EDS competitors believe the integrator's new partnering plan is nothing more than a game of catch up.

"For years EDS had pretended to be a telephone company with its big private network. They have attempted to compete on big outsourcing deals with AT&T and others, and they have been trying to use their network that was built on AT&T and others' circuits. It was ridiculous," said SHL's Jacobsen, who remembers urging EDS management to strike deals with local carriers rather than competing with them.

"At the time I was there I kept telling EDS they were going to war with the guys who make the bullets and that just because they owned a large private [network] did not make them a telecommunications company. Private networks are now a legacy and have become an albatross," said Jacobsen, who shortly after arriving at SHL put together a request for proposal designed to outsource the company's network management to a telecommunications partner. AT&T and MCI would both submit bids. MCI won, which laid the early groundwork for the merger. MCI would become SHL's exclusive supplier of telecommunication services. EDS is now expected to take a different path toward the same goal.

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