EDS says time is right to attack Big Five

By Siobhan Kennedy

NEW YORK: Electronic Data Systems Corp. on Friday said it has combined its three largest units into two as the computer services giant takes aim at the lucrative consulting market following the downfall of accounting firm Andersen.

EDS, the world's No. 2 supplier of computer services, is trying to make a bigger name for itself in the business consulting market now dominated by the consulting arms of the Big Five accounting firms.

"There's a huge opportunity to go head to head against the Big Five consultants," said Jeff Baum, a spokesperson for EDS. The Big Five refers to Accenture, Deloitte & Touche, Cap Gemini Ernst & Young, PricewaterhouseCoopers and KPMG.

For a long time, EDS has looked to expand in the higher-margin consulting and systems integration market, where companies like Accenture help businesses install computer systems, write new software applications and link disparate business operations together, Baum said.

But the timing -- as the Big Five scrambles to split its auditing and consulting functions -- couldn't be more opportune. "The time is optimal because there are companies out there ... that don't want to do consulting business with their auditors anymore," Baum said.

Andersen got into trouble for mixing both consulting and auditing services for failed energy trader Enron Corp., sparking an outcry about the consulting practices of other major accounting firms.

EDS already derives $1.2 billion of its $21 billion in annual revenue from consulting services and the unit was the fastest growing business for EDS last year, Baum said. Under the realignment, EDS has combined its consulting business with another division, which manages software used to run companies' business tasks such as human resources, or purchasing. That software unit generated about $6 billion in revenue in 2001, EDS said.

The resulting consulting business has 40,000 employees -- a little under a third of its total employee base -- and combined revenues of about $7.2 billion, EDS said.

In addition to its consulting practice, EDS' second business unit will remain focused on its traditional computer services business, which generates roughly three-quarters of its total revenue.

The company said it was seeking to capitalize on the growing trend of companies that farm out entire business tasks, such as customer call centers or payment processing, to third parties.

This so-called "business process outsourcing" market already accounts for 13 percent, or $3 billion of its revenue. Forrester Research says this work will be worth $54.8 billion in 2006, up from $3 billion today.

That translates into 77 percent annual growth, or four times faster than EDS' traditional computer services growth rate, according to Forrester. Analysts praised the move.

"I think they've been pretty smart about recognizing the threat from the Big Five and doing something before the Big Five have really been able to mobilize," said Christine Ferrusi Ross, an analyst with Forrester.

Typically clients think of EDS as the company they go to when need someone to manage their huge mainframe systems and computer networks, Ferrusi Ross said. The Big Five, however, tend to do the higher-margin, "value-added" consulting services, she said.

"So it's significant because it's their initiative to change the world's perception of EDS as an outsourcer," she said. Shares of EDS closed down about 2 percent, or $1.20, at $52.85 on the New York Stock Exchange, close to their 52-week low of $51.94.

(C) Reuters Ltd.