Corporate Profile: The Outsider

Dick Brown was brought in on a huge salary to save the faltering EDS, the company founded by Ross Perot and famous for strict dress codes. Today, jobs are being slashed but male employees can wear beards and profits are growing again
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Just a few weeks after Dick Brown was appointed as the surprise head of Electronic Data Systems (EDS), executives at the British subsidiary of the computer services group were called in to meet their new chief executive. It was a Saturday in February this year, at the company's UK headquarters at Stockley Park near Heathrow, and the assembled managers were invited to write down questions which were drawn from a hat. The first demanded: "You spent 29 months at Cable & Wireless, how long are you going to stay with us?"

Mr Brown is well remembered in Britain for his fast-moving, deal-cutting two-and-a-half-year tenure as chief executive at Cable & Wireless. But as a lifelong telecoms executive, he was an unexpected choice when it was announced last December that he would head the world's largest pure computer services company. (Unlike IBM, its main rival, EDS does not sell its own product lines.) Mr Brown admits he had hardly known of the company a year ago.

At Stockley Park he was given what one of those present described as a "thorough grilling" by sceptical staff, a baptism he shrugged off confidently. Mr Brown now runs a company that remains best-known as the business founded by Ross Perot, the two-time independent US presidential candidate. EDS made Mr Perot's fortune and, even though he left 13 years ago, he is still strongly associated with the company - to the frustration of current executives. Mr Brown's task is to turn around a business that effectively stopped profit growth between 1994 and 1998, and finally to break the psychological link with Mr Perot, whose regime's strict dress codes - white shirts and no beards for men, no trousers for women - were only revised in the Nineties.

The company clearly wanted Mr Brown badly, in part because he was an outsider. Shareholders now want to know if he is really worth his astonishing remuneration package. A $1.5m (pounds 1m) annual salary was topped by a $4.5m "golden hello", gifts of 275,000 shares over five years, options for a further one million shares, and potential annual bonuses worth 200 per cent of his salary. Dick Brown is now a man in a hurry to prove himself. "We have to raise the profile of EDS again," he said. "There's a lot to change; it needed to be done in a hurry. This is an industry that's changing rapidly."

EDS is based in Plano, Texas - on a futuristic campus 20 minutes drive from Dallas - but the company touches the lives of everyone in Britain. Its UK operation runs computers that calculate your income and corporation tax on behalf of the Inland Revenue; it manages the mainframes that pay social security benefits; and its computers manage driving licences - a database that the previous government wanted to use to create a national identity card system.

Of every pound spent by the UK government on non-military computing, EDS gets 25p. Furthermore, it has a 70 per cent share of the Government's private sector out-sourcing. Yet despite its massive market presence, the company has not been implicated in any of the recent government computing disasters, notably the passport fiasco, which damaged the reputation of rivals.

EDS also handles all, or a large proportion, of the computing needs of companies as diverse as Rolls-Royce, Airtours, General Motors and Derby County Football Club, which it also sponsors. It makes its money partly by running an organisation's computers more cheaply than it is possible for a company's own IT department, using its global scale and skills. But increasingly it does deals in which it takes a cut of new business won by its customers through better use of technology. Every job seeker getting a job over the phone via the Government's Employment Service now results in a payment to EDS. Not only did EDS design and build the call centre, the company has operated it for the Employment Service since the January launch.

EDS is the largest software and computer services firm in Britain, with bigger UK revenues than Microsoft, and a larger turnover than IBM, excluding sales of hardware. The British turnover in 1998 accounted for 12 per cent of the group's $16.89bn worldwide turnover. In the UK, EDS employs around 13,500 people out of 120,000 worldwide. But, employees and Derby County football fans apart, most people have never heard of it.

Computer services firms are not high-profile organisations; they hardly advertise and only need to sell to executives controlling multimillion pound IT budgets. In fact, before joining EDS, Mr Brown signed off on Europe's biggest ever computer services contract on behalf of C&W's UK subsidiary, C&W Communications. The successful bidder was IBM, EDS's arch- rival. It was worth pounds 2bn over 10 years and it brought Mr Brown face to face with IBM's chief executive officer, Lou Gerstner, who is now his key business competitor. And what did he learn from the encounter? The answer is polite: the importance of the boss "making himself or herself available to customers" and showing the virtues of "visibility and accessibility".

When Mr Brown arrived at EDS it was principally the American wing of the company that desperately needed a shake-up, and which had lost its leadership slot to IBM. The previous chief executive officer, Les Alberthal, had gained a reputation for remoteness, preferring to remain in the company's Texas headquarters. In the words of one staffer: "You never saw him; he never came to meet people."

EDS had become too dependent on its largest customer, the Detroit car maker General Motors, which still accounts for a quarter of all revenues. GM, uneasy at its dependence on a single supplier, had actually acquired the firm in 1984, with Mr Perot leaving two years later. EDS was not floated again until 1996, with an agreement that GM would spend $100m a year less with EDS for the first three years after the flotation.

Patrick Burton, an analyst at Salomon Smith Barney, said: "Under GM the company was living the good life. Senior management had 14 corporate aircraft. They always had GM to bill." The financial performance of the company was disappointing, particularly in the run-up to Mr Brown's appointment. Despite estimated growth globally in the computer services market of around 15 per cent, during 1998 EDS profits dropped, the company won less new business, and turnover increased less than the market's growth. Meanwhile employee numbers increased by 9 per cent.

Not surprisingly, its share price has underperformed the Dow, dropping to the low $30s from its 1996 float price of $58.25. It's a different story, however, over on this side of the Atlantic: the UK wing has doubled sales over the past four years.

Analysts and senior executives believed an outsider was exactly what the company needed. Linda Cohen, a research director, with technology analysts Gartner Group, says: "Dick Brown is exactly what the doctor ordered. If you're going to change the culture radically you have to have an outsider." EDS's European boss, David Thorpe, says: "The previous management had outlived its time. Brown has implanted a real sense of urgency for change."

Since joining, Mr Brown has moved characteristically fast: reorganising, cost cutting and clearing the decks of senior executives. One of his top team describes arriving at the office routinely at 5am because there's so much to do. The question is whether this "Brown-sizing", as some staff call it, will alienate employees and damage relationships with customers. British observers, in particular, question whether the successful UK operation deserves to take an equal share of the pain.

Six months ago, the company had no clear e-commerce strategy - widely expected to be the most important driver of corporate computing. It was a delay which Mr Brown admits "cost us". He has now created "", an e-commerce organisation with 20,000 employees.

Mr Brown has taken the axe to some workers with outdated IT skills. Some 5,200 staff worldwide - including at least 270 in the UK on big accounts such as the Inland Revenue and Rolls-Royce - have gone. Last month a plan was launched to seek the early retirement of up to 8,000 staff in the US. At the same time virtually every top executive from the previous regime, including the European boss John Bateman, has departed.

Trade unions have been taken aback by the ruthlessness of Mr Brown's job cuts. Peter Skyte, national secretary of the Manufacturing, Science and Finance Union's IT branch says the union "was surprised and disappointed that the company adopted a rather crude across-the-board approach to chopping jobs. It remains to be seen whether this will have adverse effects on the outlook of the company's staff".

Mr Brown aims, by next year, to increase margins to 10 per cent, reduce costs by $1bn, and beat sector growth of 15 per cent. He rejects suggestions that the changes and cuts will damage the outlook of the company, saying simply: "Any business can cut one-sixteenth of its costs."

Cable & Wireless observers recall his love of the deal. At EDS his efforts have mainly been on internal restructuring; the deals that have been done were in train before he arrived. In February the firm struck a canny $17bn "convergence" deal, one of the largest ever, with MCI WorldCom where EDS would handle MCI's computing requirements in return for outsourcing its telecoms needs. Last month the company signed a smaller but no less significant deal with Microsoft, to train thousands of technicians.

So far the vigour is winning plaudits from investors. The stock price has risen from the low $40s when Mr Brown joined to $59. The latest quarterly results show profits growing and a record-breaking order book, but turnover growth is still unexciting at 10 per cent.

Reports of internal unease have not been matched, to date, by customer complaints. While trade unions worry about the scale of the staff changes, corporate customers are getting cost savings - and not complaining about loss of service. Outsourcing consultant Robert Morgan, the chairman of Morgan Chambers, a consultancy that advises companies considering doing business with EDS or one of its competitors, said: "Talk to big customers like the Inland Revenue and Rolls-Royce and they're happy with the cost cutting, because it's reflected in lower charges."

If improved customer satisfaction can be matched by improved financial results, then Mr Brown could be on the way to taking home his hefty annual bonus.

Fact File

Market Capitalisation: pounds 18bn

Turnover in 1998: $16.9bn

Pre-tax profits in 1998: $1.13bn

Main business: The world's biggest hardware and software computer services firm not selling its own product lines. It designs, operates, and owns computing facilities on behalf of multinational companies and public sector organisations. These facilities include the computer systems which calculate income and corporation tax for the Inland Revenue, and those which handle administrative processes, such as setting up call centres. It is the largest computer services firm in the UK. EDS's market leadership came to an end in the mid-1990s because the company had become bloated and too reliant on General Motors. The group is restructuring to improve profit margins.

Key executives: Chairman, chief executive officer: Richard "Dick" Brown; president, chief operating officer: Jeffrey Heller; chief financial officer: James Daley

Employees: 110,000 before redundancies and early retirement take effect

Key Dates For A Data-Handling Giant

1962: EDS founded by an IBM salesman, Ross Perot (left), in Dallas after IBM executives had dismissed Mr Perot's idea of creating a computer services business

1968: Company goes public

1979: Two employees arrested in Iran during the Islamic revolution. Mr Perot sends a team to rescue them

1984: EDS acquired by General Motors in a deal valuing the company at $2.5bn

1986: Mr Perot leaves EDS, and his General Motors stake, acquired in the 1984 deal, is bought out for more than $700m. Les Alberthal succeeds him as CEO. Two years later Mr Perot founds another IT services firm, Perot Systems, which he still runs

1991: EDS makes its major entry into the UK market acquiring the computer services firm SD Scicon for pounds 162m, and rapidly takes up a leadership position

1996: GM floats off EDS on Wall Street, with a secondary listing in London. GM signs a deal with EDS reducing the amount of business it will give to the firm

1998: Les Alberthal resigns as CEO in August, and is succeeded by Dick Brown in December

1999: Mr Brown announces radical cost-cutting program including 5,200 redundancies and 8,000 early retirements