The $21-billion, global it services vendor, EDS, has been crawling at a 1-2 per cent revenue growth for the last couple of years. Shrinking gross margins (currently at 1.7 per cent if all its troublesome contracts are included), and a slow turnaround pace resulting in a downgrade by global rating agency Moody's to junk bond status last month have all added to the it giant's woes. To cap it all, research firm Forrester has shown up EDS as lagging behind its key competitors on global delivery efficiency, in a study released this month. It looks like the Ross Perot-founded company (he sold out to gm in 1986) would need some derring-do to stage a comeback. BT's Priya Srinivasan spoke with David Clementz, Executive Vice President (Service Delivery), EDS, on issues facing the company. Excerpts:

How much of your global delivery happens offshore and specifically how much of it is out of India? Could you quantify this for us?

Let's define the so-called offshore delivery model first. We have a trademarked process that we call "best shore deal approach" and it starts by certifying several of our global delivery sites. We have 92 service centres around the world and we have a process that we go through to certify them as part of our best shore portfolio. Those are a dozen criteria-where the location is, technical competence, industry knowledge in the region etcetera. We have knitted together 22 of these centres. The application service centre in India is one of those. It is present in four cities in India. The number of people in this best shore capability model is 14,000. In India, there are 2,000. By the end of the year there will be 2,500 and by the end of 2005 it will be 5,000. It's more than just labour arbitrage that you read so much about in the press. If that was all there to it, then we have lower cost centres that we could use to provide people from-Malaysia and Egypt are very competitive. It's more about all the capabilities I defined.

Since when have you felt a compelling need to offshore services and why?

It was 1990, in Ireland, to support gm in Europe. It was long before anybody heard about offshore and since then it just continued to grow. As we got spun off from gm (it was EDS' parent) and continued to support them around the globe, it gave us an automatic footprint. Since then we have picked up many global clients and the model has matured.

What kind of savings do you see with offshoring?

It varies from place to place and it's not the primary driver. It may be the first driver. If it's purely labour you are looking at and it's US versus international, then the savings could be as much as 60 per cent or 70 per cent. But very often we are not looking at just labour. You start to add the value, the value of global leverage and then the savings get eroded as you add virtual connectivity, and value-added services and so on.

There is an interesting observation in a recent Forrester report which says that clients feel getting IBM, EDS or Accenture to offshore is like getting their teeth pulled out-they hate offshoring. What would you say to that?

Well, they didn't talk to me (laughs). We do some of our own internal EDS support in India and we are going to push more of it here. Many of the deals in our pipeline, which is potentially $70 billion worth of possible deals that we are pursuing, a huge percentage of those have some component of offshore work. I don't know what sales force is resisting offshoring. In the large mega deals-the $500 million to $1 billion-plus-those have some component of offshore (could be call centre, technology, help desk, applications development maintenance, some kind of hosting) and usually it's the client resisting offshoring, not the vendor.

"You have to go slow to go fast. Once strategy's in place, accelerate"

Coming to EDS' financials, your revenue growth is crawling at about 1 or 2 per cent, gross margins are as low as 1.7 per cent and losses in the region of $170 million. What exactly would you say is the problem at this point?

We have a very strong base business and we continue to have challenges with one large contract that's been written about a lot-the Navy contract. We are starting to turn the corner on that account. We think that we will be in a much better situation in the months ahead. We are pretty much on target (in terms of sales). We generated $5 billion in the second quarter. By the end of the year, we will have $5 billion in cash and marketable securities in the bank. We have a strong sales pipeline of 30 per cent (y-o-y growth). We are confident we have stabilised the broken accounts and are moving forward. We have targeted to take $1 billion out of our costs this year and another $2 billion after this. By mid-year, we have already taken out $580 million (of costs).

However, Moody's doesn't seem too impressed with your pace of turnaround. They have downgraded EDS to highest grade junk bond status last month...

And we disagreed with them. We still disagree with them. Taking out a billion dollars of cost takes time and you can't be indiscriminate about it and start hacking away. In my opinion you have to go slow to go fast. You have to be methodical and thoughtful. And once you have the strategy in place, you can accelerate. We disagree with their (Moody's) assessment.

Why are you behind companies like IBM and even HP on the revenue growth front?

OK, if you plot a chart, it would show IBM is clearly the leader in total revenues, EDS is second and hp barely makes the chart. In fact, some of the Indian firms are in that category and generally it's easier to grow on a smaller base. We have to put this thing in perspective.

According to Forrester, EDS lags behind IBM, Accenture, TCS, Wipro and Infosys on several parameters. You have the least number of clients doing applications maintenance offshore, least number doing new development, least number doing packaged applications maintenance and least number of dedicated offshore development centres. Yet you are present in the maximum number of companies in terms of offshore presence. Surely you see an anomaly here?

If you look at the large players, a big chunk of what they do is for themselves offshore. A big chunk of IBM's work offshore is IBM for IBM. But I haven't studied this report and it would be interesting to find out where the data came from and how they did the comparisons. I have been a CIO for six-and-a-half years and have always looked at these benchmarking studies with a high degree of scepticism and have often refused to participate since I can't rationalise the information that comes back. The difficulty is primarily in getting people to define uniformly what constitutes offshoring. We could easily claim that all work outside of the US is offshore and assign 40 per cent of revenues to offshore. I don't want to minimise the value here but without knowing how the definitions were created, I can't comment.

Just one other thing in the same report. Global delivery revenues for IBM, EDS and Accenture are $200 million each and for the Indian vendors, it blows out to $800 million-$1 billion. Again, why are the multinationals generating so few revenues overseas?

If you consider Infosys or Wipro, their offshore revenues are just about everything they do. If I took everything that I had outside of the United States and aggregated it, it would be about 8-10 times that of the Indian vendors. It just doesn't make intuitive sense to me.

OK, let's talk specifically about India. Is your initiative here generating the kind of revenues you expected?

Having an offshore or best shore delivery capability is an essential element of winning the next $70 billion pipeline that I described earlier. The sales that we are competing for have a heavy dependency on our ability to leverage our talent across the world. That's what spurs us on to build new centres or take away the ones that aren't relevant to the model anymore. With best shore technology I can start a contract at lower cost, price deals lower, beat the competition and still give myself a margin. We are looking at taking costs down 20 per cent in the next two years. Our competition is following similar patterns, which means we have to get down below that. We see a 6-8 per cent combined annual growth rate in the services industry. People are continuing to outsource services. In order to compete in the future, there will have to be large degree of offshore component.

Post Script: EDS officials who have studied the Forrester report on global delivery maintain that the study is rather India-centric, whereas EDS' offshore capabilities span several countries. While the study points out that EDS services the least number of contracts across applications maintenance, new development and packaged apps management offshore, EDS maintains that the size of individual contracts it services are much larger than those of most vendors.