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LLC: A Case Study of Organizational Learning at EDS
Chapter Four, Company History
The Eagles of EDS
Electronic Data Systems (EDS) is generally recognized as a leader in the management of information technology. The company designs, installs and operates data processing systems for customers in the automotive, communications, energy, financial, government, health care, insurance, manufacturing, retail distribution, transportation and utilities industries. As an innovator in facilities management, EDS originated the concept of long-term-fixed price contracts for this industry. It became a wholly owned, independently operated, subsidiary of General Motors in 1984. EDS owns and operates one of the worlds largest private digital telecommunications network, conducting business in all fifty states of the USA and thirty-seven countries.
The Beginning
EDS is now a multi-billion dollar corporation. EDS had a very unpretentious beginning and was started on June 27, 1962. H. Ross Perot, a frustrated IBM salesman, incorporated EDS on his thirty second birthday. IBM had changed its commission structure and by the end of January of that same year Perot had already fulfilled his entire annual sales quota. He was unsatisfied with the administrative job he was subsequently offered by IBM. He had recognized an unmet need among IBM's many computer customers. Most companies had limited knowledgeable personnel to operate their new computer equipment. Perot's concept was to offer skilled electronic data processing management services to these companies. IBM executives had expressed no interest in this idea when Perot had previously approached them. 17Perot was a product of a military background. At the age of nineteen, he received a much desired appointment to the Navel Academy. He found the military too restrictive to make it his career, even though he valued his time in the service. In 1952, while he was still in the Navy, he was recruited by IBM. 18
EDS developed a business concept that came to be known as "facilities management". Companies could concentrate their energies on their strengths, while EDS handled the computing and data processing tasks. EDS was equipped to accomplish these tasks efficiently and economically.
Perot spent the first few months of 1962 on the east coast and in the midwest looking for his first customer. He had purchased wholesale computer time on Dallas based Southwestern Life Insurance's IBM 7070 computer. Collins Radio in Cedar Rapids, Iowa became Perot's first customer and a new industry was created. 19
The Growth
As EDS prospered, Perot modeled behavior after the standard he had experienced during his military service and while at IBM. He demanded conservative dress and honesty with customers. He expected his employees to stay sharply focused and highly disciplined.Perot ran the company with military precision, but also established a management that listened to employee ideas and suggestions (his had been rejected at IBM). In April of 1969, a trade journal called "Datamation", indicated Perot's goals were "to create a climate of complete intolerance to company politics, to provide the finest personal and financial advantages for employees, to make EDS an exciting place to work ... and to promote from within..." He believed in loyalty, but held duty at an even higher level. He had a motto on his office door which read "Every Good and Excellent Thing Stands Moment by Moment on the Razor's Edge of Danger and Must be Fought For." Perot expected his employees to fight for their ideas. 20
EDS signed its' first long-term commercial facilities management contract with Herman Lay of Frito-Lay. At the time, other service companies were offering hourly rates for short-term contracts of sixty to ninety days, while EDS was writing five-year fixed-price contracts. EDS set up a customer's data processing system, provided the staff to run it and once the system was running smoothly, reassigned then available personnel to new projects. Because EDS could cut expenses over the life of the contract by decreasing its personnel costs, its profit increased. The customers benefited because they could budget long-term electronic data processing costs. EDS gained stability from these long-term contracts.
With the passage of Medicare legislation in 1965 came another opportunity to enter a lucrative market. Government agencies involved with the Medicare legislation were about to take on mountains of paper work. EDS organized Medicare and Medicaid claims processing systems in many states. In 1968, Medicare and Medicaid contracts were providing twenty-five percent of EDS' revenues. By 1977, health care claims processing accounted for nearly forty percent of EDS' revenues and sales continued to grow from this point forward. 21
EDS won its first insurance company contract in 1963 with Mercantile Security Life. By 1990 EDS was the largest insurance data processor in the country. The year 1968 brought its first financial institution customer and EDS eventually became the largest provider of data processing services to banks and savings and loan institutions. Starting with eight credit unions in 1974, sixteen years later EDS serviced more than 3,000. In 1978, EDS had only three employees in its' Washington D. C. office, by 1990 the office had grown to 6,000 people working in the government area. 22
The First Public Offering
In 1968 Perot investigated a public stock offering and made the decision to take the company public. The initial release was 325,000 of his personal shares and 325,000 new EDS shares. This represented, at the time, about seven percent of the company. The offering was very successful, opening on Wall Street at $16.50/share and closing at $22.00/share. Perot and EDS each received about $5 million dollars from the public offering. The company's revenues doubled almost every year between 1964 and 1970. In the 1970's, revenue increases slowed to twenty-two percent in 1971 and thirteen percent in 1977. The company has continued to demonstrate earnings growth. 23
Continued Growth
Perot was the company's President from its' beginning in 1962 until he appointed Hart to that position in 1970. Hart was President until his resignation in 1977. During that period Perot was Chairman of the Board and CEO. He resumed the presidency from 1977 until 1979.EDS pioneered the concept of distributed processing, by which systems and terminals communicate with each other from remote locations. It developed custom computer systems set up to serve specific industries. These systems could then be modified according to each customer's needs. In the 1970's EDS developed Regional Data Centers, where customers could transmit their work to be handled by EDS' data processing equipment and personnel.
In the early 1970's EDS bought Wall Street Leasing, a computer services subsidiary of Dupont Glore Forgan, Inc., one of the country's leading retail stock brokers. Perot assigned Morton Meyerson, EDS Vice President, the responsibility to lead an effort to rescue the financially troubled firm. By 1973 Perot invested further funds in another retail brokerage house, Walston and Company. He proposed a merger, that never happened, between the two brokerage houses. By early 1974, Perot was defeated by his $60 million in losses at Dupont and Walston and left Wall Street. 24
The Company Goes International
EDS entered the international market in 1976 when it signed a contract with King Abdulazziz University in Saudi Arabia. Later, that same year, EDS signed a three year, $41 million contract, with the Iranian government to provide computer services and personnel training for the Iranian social security division. In December of 1978, EDS suspended all operations because Iran was six months behind in payments. The scope of the Khomeini revolution grew in Iran, and after the Iranian officials, with whom EDS worked, were jailed, Perot ordered EDS employees and their families to return to the United States. A few employees remained with the hope that the chaos would be resolved. The situation grew worse with the arrest of EDS executives Bill Gaylord and Paul Chiapparone. Bail was set at $12 million dollars. Diplomatic channels appeared closed and Perot took direct action. In early 1979 he organized a rescue team lead by Green Beret Colonel Arthur "Bull" D. Simons. Perot had previously hired Bull to make private forays into Vietnam looking for servicemen missing in action. Gaylord and Chiapparone walked out of prison when a mob released all prisoners and the EDS team got them out of the country. 25This illustrates the commitment that Perot felt and demonstrated to his employees.
The Industry Shifts
In the mid 1970's, since many companies were becoming interested in running their own data processing systems, EDS began a shift from facilities management. In 1979, Morton Meyerson became president while Perot continued as chairman. Under Meyerson's leadership, EDS diversified its business interests through the acquisition of turnkey systems (the sale of systems to be installed at the customers site) for hospitals, small banks and small businesses. EDS purchased Potomac Leasing in 1979 and moved into the field of federal government contract work. The bulk of EDS' business remained in facilities management, with the processing of health care claims a large percentage of the business through the 1970's and into the 1980's. 26EDS adapted to the times and became a systems integrator, sending in teams of experts to connect and coordinate a company's entire computer systems, software and telecommunications. As a result of EDS' experience, in 1982 it won a $656 million, ten year contract for Project VIABLE, to streamline and update the U. S. Army's computerized administrative facilities and to build a network connecting forty-seven bases throughout the United States. 27
The GM Purchase
Although EDS had never had a contract with an automobile company, on June 27, 1984 (Perot's birthday) EDS became a wholly owned subsidiary of General Motors Corporation (GM). GM paid $2.5 billion for EDS, the largest amount ever paid for a computer services business. GM agreed to maintain EDS as a separate entity, keep key personnel and issue a special class of common stock, called class E, which would be tied to EDS' performance, not GM's. Perot retained managerial control of EDS and was added to the GM Board of Directors. 28GM purchased EDS to coordinate and manage its huge, unwieldy data processing systems and to cut its' $6 billion annual data processing costs. Roger B. Smith, GM's Chairman of the Board, thought, at the time, that Perot's management style would be an asset to the GM organization.
Conflict
The differing management styles of Perot and Smith surfaced as a problem within the first year. The August, 1984 issue of Wards Auto World indicated "Mr. Perot is a self-made man and iconoclast, used to calling his own shots.....Roger Smith is a product of the GM consensus by committee school of management, never an entrepreneur." 29EDS' revenues increased as a result of the GM business. In 1985, the first full year after the GM acquisition, EDS revenues tripled to $3.4 billion. By 1986 personnel had almost tripled from the pre acquisition time frame to 45,370 employees. EDS also diversified into telecommunications and factory automation. Although revenues increased, profit margins fell in 1985. GM preferred contracts which stipulated a fixed percentage for profit; EDS wanted to continue with fixed-price contracts, which it found so successful since EDS' inception. Additional problems developed as a result of different corporate cultures. 30
In 1986 GM management bought Perot's class "E" shares for $700 million. For the first time in twenty-four years, since starting the company, Perot was no longer in charge of EDS. Meyerson also resigned.
At that time, Les Alberthal became the President and CEO. He had joined EDS in 1968 as a systems engineer for the California Blue Cross Blue Shield account. In June of 1989, Alberthal was named Chairman of the Board for EDS. Under his leadership, EDS broadened its customer base and reduced its dependence on GM generated revenues. Total revenues reached new highs.
Diversification
Alberthal diversified the company and moved EDS into energy, transportation, communications, manufacturing and other new business areas. Diversification also included further expansion of international business. Administration of the company was reorganized through a leadership council, spreading the responsibility and authority for daily operations to lower levels of the EDS hierarchy. This allowed top executives to focus their attention on the development of long range strategies. 31Within the GM alliance, EDS developed one of the largest private digital communications network in the world, called "EDS*NET". The consolidation of both GM's and EDS' network required three years, a staff of 2,000 people and cost over $1 billion dollars. In 1989, EDS opened its Information Management Center in Plano, Texas. The facility serves as the heart of EDS' extensive worldwide communications network and information processing centers where voice, data and video transmissions travel to their destinations via state of the art technology. This center is the hub for fifteen North American and six International Information Processing Centers located all over the world. EDS can respond immediately to the needs of its more than 8,000 customers, who are able to take advantage of leading edge information technology.
Educational Focus
Over the years EDS has contributed to the community and the nation as part of its company policy. EDS emphasizes employee training, spending over $100 million per year on the Systems Engineer Development program, to give customers the best service available. The firm has the technology and skills to continue the global expansion of its' information technology services. 32EDS' emphasis on strategic positioning was the motivation behind the project, Leading Learning Communities studied as part of the structured thesis entitled "Investigating Culture, Learning and Change" sponsored by George Roth of the Organizational Learning center at the Massachusetts Institute of Technology. A perspective on the competitive environment that EDS was operating within is reviewed in Chapter Six, Organizational Strategy.
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Copyright © 1995 Diane M. Fries and Robert A. Kruse Jr.
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