The Second Biggest Job at EDS

For more than a decade, the strategic business units of Electronic Data Systems Corp. have labored in the shadow of the integrator's manufacturing services group, the largest and arguably the most mature of EDS' six leading vertical segments.

When asked how the government unit's growth continues to outpace the integrator's other segments, George Newstrom, EDS' top government executive, fails to recall the integrator's recent win at the National Institutes of Health and its new contract with the Defense Information Systems Agency. Instead, the 49-year-old executive dwells on the integrator's expanding offshore business.

"Asia Pacific is probably the fastest growing component of our government business today," said Newstrom, corporate vice president/group executive, EDS Government Services Group, Herndon, Va. Besides Asia, EDS' government unit is getting a sizable boost from Europe and the United Kingdom, where the public sector's outsourcing schemes are easily dwarfing those of customers back home. During its second quarter that ended in June, the integrator's Asia Pacific and European markets grew 71 percent and 56 percent, respectively.

Part of that expansion will be augmented by a string of strategic offshore alliances, a strategy the integrator can now more easily pursue after splitting last June from its parent company, General Motors Corp. The split, expected to help the integrator more freely enter foreign markets, may also be hindering the ascent of certain EDS commercial segments.

But the split and a surge in new government business are only part of the story. Over the next 12 months, a heated interindustry battle is expected to take place as government edges closer to eclipsing the commercial market's technology lead and reclaims the leadership position it arguably held more than 20 years ago.

"The government first led in technology and then commercial industry became the leader, but now I think it's at a point where it will be government's turn once again," said Dennie Welsh, general manager of IBM Global Services and chairman of Integrated Systems Solutions Corp., the margin-pounding integrator that bumped EDS back into the No. 2 slot in services in 1995.

"Because of their mass and the open systems phenomenon that has happened there, and because of the Internet," said Welsh, government will surpass the commercial sector and become the early adopter of the next generation of enterprisewide solutions.

According to Welsh and other top services executives, those solutions will embrace the precepts of electronic commerce and enable government to serve its citizens like never before.

All eyes fall on Newstrom. After 22 years with the integrator, EDS' top government executive is recognized as one of the early prophets of the developing phenomenon he simply refers to as "24-hour government."

"We don't lead with technology. Technology is an enabler to get government where it needs go. The question remains, 'What is your world and how do we make that world better?'" said Newstrom, repeating the familiar dictum he shares with government chief information officers from South Dakota to Australia.

So far, the integration opportunities behind 24-hour government and the enterprisewide outsourcing contracts that often accompany it remain largely offshore -- a fact that plays nicely into the hands of EDS government salespeople.

Newstrom's unit grew by 50 percent in 1995 and captured $1.5 billion in revenue. And for the first two quarters of 1996, EDS' government unit comfortably kept its lead above the integrator's other services units by growing more than 40 percent. Now, as EDS moves into the government's biggest buying season, Newstrom is expected to safely match last year's growth number.

"We are delighted at the growth. We literally had zero government business outside the United States when we entered the '90s, and last year 15 percent of the corporation's (sales) was outside the United States," said Newstrom, who indicated the government unit's offshore advance is now likely outpacing the company's overall rate of expansion. What's more, by crossing international borders, EDS' government unit is enjoying higher margin contracts since the battles being fought overseas are less competitive as those inside the U.S. federal sector.

"We pretty much compete with EDS and IBM everywhere today," said Van Honeycutt, president and chief executive officer of Computer Sciences Corp., El Segundo, Calif. "Whenever there is a large outsourcing contract that means $100 million a year or more, you will generally find three players no matter where it is in the world: us, EDS and IBM," said Honeycutt, who also today ranks offshore government as one of CSC's fastest growing sectors.

Helping magnify the EDS government unit's performance are the mixed results of the integrator's commercial segments.

Just what impact the split is having on the integrator's different commercial services units is still too early to tell, but some separation pains may already be evident. EDS has for two consecutive quarters seen a large drop in new contract signings, according to industry analysts. In fact, during the first six months of 1996, Annex Research Inc., Phoenix, reports the integrator's new contract signings dropped by nearly 50 percent.

"Top management took its eye off the ball," said Annex Research president Bob Djurdjevic. While Djurdjevic attributes the drop largely to EDS management being occupied with the split from GM, he also believes the integrator may be experiencing some "indigestion" from its acquisition of management consulting firm A.T. Kearney last summer.

In 1995, sales of EDS Government Services reached $1.5 billion, compared to manufacturing, which reached $1.9 billion in non-GM related business. For its part, GM bought an estimated $4.1 billion in manufacturing services from EDS in 1995. According to an agreement signed by EDS and GM before the split, GM will now have the opportunity to solicit outside bids from other integrators to compete with EDS for portions of the once captive account.

"From an industry perspective, the split really doesn't affect this [sector] on a day-to-day basis," said Newstrom, who believes most of the unit's growth will now be tied to replicating already deployed solutions inside other parts of the world.

"We are now trying to prioritize our plans [offshore]. When you look at certain parts of the world, we are seeing some tremendous opportunities in Hong Kong, Japan and Malaysia."

While EDS' manufacturing unit undoubtedly benefited from its captive GM business over the years, government is now clearly taking advantage of the integrator's global infrastructure, a parental dividend largely subsidized by the automaker's global presence, analysts said.