A new venture for EDS
The joint venture, with estimated annual sales of $600 million, gives EDS entré¥ into the growing market of human resources outsourcing. The Plano-based company is trying to develop beyond its technology outsourcing roots.
"This is a very big part of the revitalization of EDS," said EDS chief executive Michael H. Jordan. "These are the kinds of moves we've got to make."
The as-yet-unnamed joint venture will sell and market services such as consulting and payroll and benefits administration. Towers-Perrin and EDS will operate the services for the joint venture's clients. EDS will own 85 percent of the company, with Towers Perrin owning the rest.
EDS will pay Towers Perrin $420 million in cash as part of the deal to set up the joint venture. Towers Perrin's administration business, which handles pension and health benefits for clients, will become part of EDS.
Separately, Towers Perrin hired EDS to run its technology infrastructure in a 10-year, $365 million deal. That contract will count as part of the company's first-quarter bookings.
Towers Perrin is one of the top firms in the human resources consulting business. The company advises clients on how to better manage employee benefits, but it hasn't developed the technical expertise to run its clients' human resources functions as an outsourcing company.
EDS, with its long history in managing other companies' technology, has the know-how to quickly take over operations and run them efficiently, said Towers Perrin chief executive Mark Mactas. He visited EDS' sales conference Tuesday at Dallas' Wyndham Anatole to sign the contract with EDS.
The transaction still must be approved by Towers Perrin's shareholders. The companies expect the transaction to close in the first quarter. Towers Perrin wanted to work with a company that had operations across a wide span of the globe, Mr. Mactas said.
"At the end of the day, this ends up enabling us to serve our clients more effectively," he said. Through the deal, EDS gets instant cachet in an attractive market it has struggled to enter.
Human resources outsourcing has become a big business in the last few years as a way to cut costs. It's part of a larger industry known as business process outsourcing, or BPO, which also includes finance and accounting outsourcing and supply chain outsourcing.
"EDS today is not really recognized for having a human resources outsourcing service offering that is very well promoted in the marketplace," said Peter Allen, managing director at consulting firm TPI Inc., in a conference call last week.
"The money right now that's being spent in BPO is largely in human resources, and the service providers that have capabilities there enjoy greater swings in opportunity."
EDS is exploring ways to build a bigger presence in other types of BPO, said Steve Schuckenbrock, the company's executive vice president for global sales. Steve Bohannon, who oversees EDS' human resources business, will run the Towers Perrin joint venture. A board of directors from both companies will govern the venture.
About half of the venture's estimated $600 million in annual sales come from EDS' business. Analysts expect EDS to report 2004 sales of about $20.6 billion. Hewitt Associates, one of the human resources outsourcing industry's biggest players, welcomed EDS and Towers Perrin to the fray.
"It's good news for the market," said Bryan Doyle, who oversees Hewitt's outsourcing business. "It shows the next evolution. Two to three years ago, people were talking about if HR BPO made sense, and I think we've moved beyond that."