How EDS Got Its Groove Back

The phone that didn't ring -- that was the clue that told Dick Brown something was wrong. He summoned a technician to his office who explained the problem: To avoid incoming calls, the previous CEO had had his phone lines cut. The leadership of EDS, the company that invented the information technology-services industry, had had itself disconnected.

More out-of-touch signs soon surfaced. Brown wanted to know how many people were employed at EDS. It took six phone calls -- once his lines were restored -- to find out. He asked to see the previous month's financials. The numbers weren't available. The company closed its books on a quarterly basis. He asked for the previous month's sales results. Same answer. Sales were totaled at the end of the quarter. "Unbelievable," says Brown. "We're a $19 billion company, and we were closing quarterly."

The kicker came when Brown tried to send an email to EDS's 140,000 employees. It couldn't be done. The company, he learned, was tangled up in 16 different email systems: AOL, Exchange, Hotmail, Notes -- some EDSers even used their clients' systems. EDS was responsible for keeping more than 2.5 billion lines of code running at 9,000 corporations and government agencies worldwide, but its CEO couldn't send an email to his own people. "Totally unacceptable," Brown says, shaking his head at the memory.

When he took the reins at EDS in January 1999, Brown joined a company that was floundering in a world it had created. EDS had pioneered the IT-services industry -- the fastest growing industry in the world. But when it split off from General Motors in 1996, EDS was too slow for the fast-forward IT marketplace. Faster, nimbler startups -- Razorfish, Scient, Viant -- ate away at EDS's market share. IBM launched its own IT-services division, Global Services, and promptly steamrolled EDS on the way to grabbing the lead. At a time when the market for computer services was estimated to be at half a trillion dollars -- and growing rapidly -- EDS's growth slowed, and its market cap declined.

The company's sins were numerous: It missed the onset of the Internet wave. It missed the start of the client-server wave. It missed the beginning of the run-up to Y2K. Even worse, it wasn't seen as a cool company. The digerati dismissed EDS as stodgy, arrogant, and chained to old technology.

"When Scott McNealy of Sun Microsystems first had us do a piece of a contract for him, he wouldn't let us publicize the deal, because he thought we were too old economy," recalls John Wilkerson, who shotguns indirect sales channels at EDS. "Sun was cool. We were the knuckle draggers."

That was then. This is now: At the end of July, EDS announced a 17% increase in its quarterly profits, a 7.5% rise in revenue, and an $80 billion backlog of signed contracts. The quarter caps a remarkable turnaround for EDS, a transformation that began last October when the company outmaneuvered IBM to win a whopping $6.9 billion contract from the U.S. Navy. EDS signed an additional $32.6 billion worth of new business in 2000, up 31% for the year. This year, as the Scients and Viants fell to earth, EDS's E Solutions unit grew by 35% in the first quarter. At a time when the tech sector is awash in pink slips, EDS has hired 6,000 people since January. It has signed very public and very profitable partnerships with most of tech's corporate leaders: Cisco, Dell, EMC, Microsoft. And as for Sun? In July, it unveiled a partnership with EDS that is expected to bring both companies an additional $3 billion in revenue over five years.

The EDS turnaround offers an instructive story for the post-dotcom era. It's an object lesson in how an old-line company with real assets, real size, and real profits can reinvent itself for the digital economy, fully absorb the Internet, and turn into an old-economy company that really gets it. But as powerful as those turnaround lessons are, they aren't even the best part of the story.

One hundred days after Brown arrived at EDS from Britain's Cable & Wireless, where he had been CEO for two years, he took a half-dozen of his top executives to the New York Stock Exchange. As they looked out over the trading floor, Brown vowed that they would restore EDS to its full financial health. The company would boost its operating margin by 30%. It would climb back to double-digit earnings per share. And its revenue growth would meet or exceed the market's overall growth rate. Brown committed the company to some hard numbers. Then he set about changing the company by focusing on the soft stuff: EDS's culture and its people.

"Most business leaders are afraid to talk about culture," says Brown. "They're far more comfortable with numbers. While I am very numbers focused, you can't change a business with numbers. Numbers are the end result. You change a business by changing the behavior of its people."

This, then, is the story of how EDS, a global company that is larger than some cities, built a massive change effort on one of the fuzziest, most elusive terms in business: culture.