EDS-WorldCom deal highlights outsourcing risks
EDS Corp yesterday outlined the current state of its relationship with embattled communications provider WorldCom Inc, amid growing scrutiny over the risks and accounting practices involved in large, long-term deals.
Meanwhile, the world's second largest services firm also announced that it had pulled out of the bidding for a potential $1bn-a-year outsourcing contract with consumer product goods manufacturing giant Procter & Gamble.
Concern over how Plano, Texas-based EDS and other major outsourcing providers report costs and revenue from major deals has grown since WorldCom, a major EDS client, said it had incorrectly booked $3.8bn of capital expenditure over the last five years. EDS's share price has fallen by 35% since WorldCom disclosed its accounting irregularities last week, with rival outsourcing providers IBM Corp and Computer Sciences Corp suffering respective 6% and 13% falls in their share prices in trading yesterday.
Giving its first update on its $6.4bn, 11-year contract with WorldCom since the scandal was revealed, EDS said it had booked about $150m in WorldCom revenue at June 30 for which it hadn't been paid, including some $60m that hadn't yet been billed. In a parallel contract, WorldCom is EDS's main supplier of telecom services to its clients, but EDS added that it would struggle to meet its obligations to WorldCom of paying it around $600m per year in light of the current controversy.
EDS accounts for revenue and profit from its contracts using the percentage-of-completion method, whereby it books some revenue before it is billed, and spreads some expenses out during several years. By structuring deals in this way, it avoids being hit by big losses in the early years of the contract when the costs are increased through the purchase of the client's assets. Equally, it does not make lopsided gains in the later years of the contract.
EDS had been in the running to win the contract with Procter & Gamble since it was first put out to tender at the end of last year, but said in a statement that its decision was related to the price the client wanted for the "intangibles associated with the business assets."
Dallas-based outsourcing provider Affiliated Computer Services Inc said it was still bidding for the deal, which will see P&G outsource its computer systems as well as back-office functions including human resources, accounting and payroll.