EDS hit by losses on UK Government deal

Inland Revenue and pensions ministry contractor admits to bleeding cash on British project as forecast earnings fall by $500m

Electronic Data Systems (EDS), the troubled Texan technology titan, has admitted that it is bleeding cash on one of its large contracts with the UK Government.

The group, whose shares have tumbled from $40 to just $12 after it warned on cash flow and profits, counts the Government as one of its biggest clients, generating business worth £1bn a year.

Its largest contracts are with the Inland Revenue, where it operates the computer systems including those currently running the Self-Assessment scheme, and the Department for Work and Pensions, where it heads the Affinity programme to modernise the DWP's systems, in partnership with IBM. Both these deals are worth more than £2bn and it is believed that it is the contract with the DWP that has run into trouble.

EDS's chief financial officer, Jim Daley, said last week that it would fall short of analysts' predictions for its third- quarter earnings by as much as $500m (£320m). He pointed to two problematic deals as a cause of the group's current financial troubles: a $6.9bn contract to run internal intranet services for the US Navy; and a UK Government contract.

An EDS spokesman said that the shortfall was split 70 per cent for the Navy contract and 30 per cent for the UK deal.

He would not detail which UK contract was responsible, but sources within the IT industry said they believed it was the Affinity programme, as the Inland Revenue deal was thought to be running smoothly.

Indeed, EDS has joined forces with Accenture to bid for a £5bn extension to the Inland Revenue contract, starting in 2004, which would also bring in the controversial NIRS 2 system that collects national insurance. As predicted in The Independent on Sunday earlier this year, most rivals have pulled out of the bidding for the new deal, believing that EDS and Accenture have the contract sewn up. Official bids have to be in by the end of this month and only two competitors to EDS have emerged – BT Group and Cap Gemini Ernst & Young. Neither are thought to have a chance.

EDS said that it hopes to have its problematic UK contract back on course and generating cash by next year.

Lorrie Scardino, an analyst at Gartner, the IT consultancy, said that EDS would be looking to make more money out of existing contracts in the coming months to shore up its finances. "What they will do is look at underperforming contracts and look to make operational efficiencies." She said clients should monitor EDS's performance and be tough on any negotiations about changes to the contracted service levels of any deals.

She added that the group's financial position may mean it will not be able to bid for contracts that require a great deal of upfront expenditure. Typically, EDS has struck deals to take over the running of systems for big clients, with large numbers of staff moving from the client to EDS.

An EDS spokesman denied the group would have any financial constraints that would stop it from bidding for new contracts.

The company, which is based in Plano, Texas, was founded by H Ross Perot, independent candidate for the US presidency in 1992. After being bought by General Motors in the 1980s, it was demerged and floated in the mid-1990s. It is now headed by Dick Brown, the former chief executive of Cable & Wireless.