XEROX SELECTS EDS OVER IBM

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Xerox Corp. has chosen Electronic Data Systems to manage its information management systems after IBM Corp. apparently backed away from the price war in outsourcing services it launched earlier this year.

The contract, believed to be the largest of its kind, is worth $3 billion to $4 billion.

EDS, a Dallas-based subsidiary of General Motors Corp., won the high-profile contract based largely on an aggressive price bid.

EDS was founded by Ross Perot and has become the industry leader in helping companies manage their computer systems. It expects to take over four information management functions from Xerox when the deal is finalized by midyear.

These functions are data center operations in the U.S., the U.K. and Brazil; worldwide voice and data telecommunications; desktop systems support; and designated business-support applications.

As a result of the contract, 2,000 Xerox employees who perform these functions are expected to become EDS workers. In addition, EDS is expected to pay Xerox about $100 million for operations it will take over.

The move is part of an ongoing Xerox commitment to contain costs and reduce its work force.

"Xerox has been addressing their cost problems since the early 1980s by streamlining manufacturing, and this is the next logical step in attacking the cost structure," said Walter Fitzgerald, an analyst with RAS Securities, New York.

Outsourcing, Xerox said, is a "keystone" in the strategy to transform the company. "By partnering with third parties having core competency in information management, we can bring large-scale operating efficiencies and improve technologies to these critical Xerox functions," Patricia M. Wallington, Xerox VP-chief information officer, said in a statement.

Xerox will retain control of information management functions that focus on strategy, architecture or new applications developed for business process re-engineering.

EDS won the contract over a joint bid by IBM and AT&T. Analysts say IBM lost the contract after it pushed Xerox for cost concessions.

"IBM has been selling its services for too little," said William O'Connor, an analyst with Fourteen Research, New York. "They got up at the analysts meeting earlier this year and showed the gross margins in their services business and it was disgraceful. It could be that IBM has backed away from the superaggressive price war they started" in outsource contracts.

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