CBA silent on EDS profit warning

EDS' profit warning last month caused analysts to warn clients to keep an eye on the service provider. However, local major customer Commonwealth Bank remains quiet on the issue.

Electronic Data Systems said it expects to post earnings-per-share in the 12 to 15 US cents range instead of the74 cents it had previously forecast for its third fiscal quarter (to September 30).

Commonwealth Bank CIO Bob McKinnon declined to comment on how the profit warning issued by EDS will impact a high-profile, 10-year outsourcing contract it has with the service provider, nor the potential impact on some 1500 former bank IT staff employed at EDS Australia.

In one of the first and largest high-profile outsourcing contracts in Australia, Commonwealth Bank signed a 10-year $3.7 billion outsourcing deal with EDS in 1997.

Under the deal, EDS Australia acquired the bank's operations, desktop, communications and applications development. The bank took a 35 per cent equity stake in EDS Australia, whilst EDS offered employment to 1500 of the bank's IT staff. CBA retained a chief information officer and some staff to manage strategic issues associated with the technology.

Analysts in the US warned EDS clients to monitor the cost-cutting measures the service provider may take, claiming they could affect the quality of the IT services EDS provides to them.

Research director of sourcing at Gartner, Jim Longwood said it is unlikely there will be layoffs in EDS Australia as a result of the expected profit shortfall in the US, yet added clients of service providers should be wary of service level agreements in the current economic climate.

Gartner anticipates a financial crunch for service providers as the industry goes through a shake out with possible mergers at the top level, said Longwood.

"In these MAD times [of mergers, acquisitions and divestures], make sure contract allows right to exit contract is the service provider is sold or merged in that time," he said.

Spokesperson for EDS Australia Brian Finn would not comment specifically on the impact of the expected short fall on its services to the Commonwealth Bank.

"EDS business operations in Australia are unaffected by our recent revision of earnings guidance. The economic downturn has had a severe impact on us and our industry, but EDS remains a strong, profitable enterprise, and our financial foundation is solid," he said.

"We continue to serve our clients and win new business. We'll have more details on our prospects and growth plans when we announce full third-quarter results on October 30."

US based Gartner analyst Lorrie Scardino said it's likely that EDS will be looking to make its "under-performing" contracts more profitable by seeing if it can meet its service-level obligations with less resources. For example, if EDS is contractually bound to solve a specific problem in one hour, and it has consistently been solving that problem in 15 minutes, it means EDS could remove resources tied to that task and still meet its obligations, Scardino said.

Revenue warning

EDS, the second-largest provider of IT services behind IBM, warned last week that earnings and revenue will fall way short of expectations in its third and fourth fiscal quarters, an announcement that surprised and shocked investors and sent EDS' stock plummeting.

It's common for IT service providers facing a financial crunch to review their portfolio of contracts, with a special focus on those contracts which aren't generating the expected revenue and profits. Consequently, IT managers and chief information officers (CIOs) should pull out their EDS contracts and reread them, so that they know how the service arrangement could change, and proactively talk to EDS about any concerns they may have, Gartner analyst Lorrie Scardino said. In some cases, a renegotiation of the contract might be necessary for a client to secure a service level it may have come to depend on, she added.

"IT managers need to do due diligence on the resources that are on their contracts now, to make sure they retain the resources delivering value to them," Scardino said.

It's also possible that EDS will resort to switching staffers among projects, to put its best people on the most profitable projects and vice versa, she said. Then there's the issue of potential layoffs and the effect of the financial travails on staff morale at EDS, two things CIOs should monitor because they could also affect the quality of EDS services if the company doesn't handle them properly, said Andrew Efstathiou, a Yankee Group analyst. However, at this point, EDS remains a viable provider of IT services, he said.

-- With Juan Carlos Perez.

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