Competitive Intelligence

EDS Pays $135 Million to Buy Its Way Out of a Bad Deal

"EDS remains a tale of two cities," CEO Mike Jordan said in a press release. "Our ongoing business is now fully competitive, with increasing sales momentum reflected in our results as we lay the groundwork for further gains in 2005.

"At the same time, we continue to be burdened by the cleanup of past problem contracts, as exhibited by our lower cash flow guidance on Navy and the charge this quarter to terminate the company's 'other commercial contract.'"

So, just who is this 'other commercial contract' firm getting the $135 big ones? Well, nobody really knows for sure... but there is one top suspect:

EDS has paid $135m to pull out of a loss-making IT outsourcing contract, believed to be with US firm Dow Chemical.

The termination, effective from 1 August, was revealed in EDS's results for the quarter ended 30 June.

The Texas-based outsourcer recorded a 3.5 per cent rise in revenues to $5.24bn and an operating loss of $84m, compared with last year's $184m profit. However, the sale of the UGS PLM unit led to an overall post-tax profit of $270m, compared to $88m for the same quarter last year.

Buried in the earnings report was a one-line announcement that EDS has reached an "amicable agreement" to terminate a "commercial contract".

EDS is keeping tight-lipped on which company the loss-making contract was with but industry sources have named Dow Chemical as the number one suspect.

One source told silicon.com that the reason the name is being kept secret is that as a result of settling amicably EDS will get a shot at some BPO work from the firm in the next three to six months.

Dow Chemical, however, is also keeping tight-lipped and a spokeswoman would neither confirm nor deny it is the company in question. All she would say to silicon.com is that Dow has been in active conversation with EDS and is happy with progress.

Robert Morgan, business development director at outsourcing consultancy Morgan Chambers, said that whichever deal it is, it is likely to be part of a "hit list" of troublesome contracts drawn up by EDS CEO Michael Jordan back in February.

"Jordan ordered a review of accounts and those not performing had to produce a report. He has met with most of the CEOs of those companies to see if it is possible to retrieve the situation or not. Jordan is taking a very personal interest and this hit list has more than a dozen companies on it. This is the only one so far that has been settled like this," he said.

Anthony Miller, analyst at Ovum Holway, said in a statement that the results are a "tale of two halves" with duff contracts pulling down the bits of EDS's business that are improving.

"There's still a huge job ahead, not made easier by EDS first having to explain its credit rating downgrade to all of its major clients and prospects -- not the best way to have to start a sales call," said Miller. "Embattled, certainly, but beaten? Not by a long way."