Put your eggs in more than one basket, says EDS. If only it took its own advice

Mega-deals have come home to roost at the IT services giant, says Clayton Hirst

'Can your business survive a disaster?" This stark question was posed by EDS to "celebrate" national Business Continuity Week which, for those of you who missed it, took place earlier this month.

As the world's second largest IT services company, EDS decided to do a spot of preaching. So, in a how-to guide to surviving corporate catastrophe, it came up with a to-do list for companies, to help prevent them losing lucrative contracts, and avoid financial writedowns and rows with customers.

Or, as in the case of EDS, not, because the publication coincided with one of the lowest points in the company's history. Critics point out that it could do with taking a dose of its own medicine from its somewhat ill-timed guide.

Take one of EDS's tips: don't put all your eggs in one basket. For years, EDS was the expert in mega-deals. Founded by Ross Perot, who later stood as a candidate in the 1992 US presidential election, the company would go into a government department, tell it how to run its systems and emerge with a multi-billion-dollar IT contract. But over the past few months, EDS's customers - both in the UK and the US - have started to do things differently. Instead of issuing one eye-popping IT contract, governments are breaking them down, introducing competition and encouraging companies to work together in an effort to save money. This point was underlined last week when the Chancellor, Gordon Brown, announced that by 2008, government departments would have to cut their administration budgets by £20bn, most of this by improving IT systems.

EDS, which is the UK Government's largest IT supplier, has been slow to react to the change. "There is still a shade of arrogance at EDS, a hangover from the old ways of doing business," says Richard Holway, an independent IT consultant.

Late last year, EDS was stripped of a £3bn contract to run the Inland Revenue's IT systems. Despite being blamed for the bungled introduction of the tax credits system, it had wrongly believed it would cling on to the contract. However, EDS now claims it has learnt a lesson. A month after losing the contract, it appointed its first UK manager in charge of its public-sector business, Sheelagh Whittaker, something EDS's critics think it should have done years ago. "Governments need special attention," says an executive from a rival firm.

Ms Whittaker admits: "We allowed ourselves to become distracted by the introduction of the new tax credits system. I also think that we relied too heavily on our outstanding service record."

In the US, EDS is struggling with a similar mega-contract, a $6.9bn (£3.8bn) IT deal with the US navy. Earlier this month, EDS announced a $354m loss, largely due to problems with the contract. The US Securities and Exchange Commission is now looking into the matter. EDS's chairman, Michael Jordan, who joined after the contract was signed, has hinted that this sort of contract could be a thing of the past.

To the next point in the EDS action plan: when disaster strikes, the first thing to disappear is the plan. In EDS's case, when disaster strikes, its first reaction has been to lash out and worry about a plan later. On losing the Inland Revenue contract, the company hinted the switchover to another IT supplier might lead to delays in the payment of tax credits. And when, earlier this month, the NHS decided to terminate a £90m contract to supply email to its one million staff, EDS threatened to sue. Both parties have now agreed to call in independent mediators. In a statement, the NHS says: "EDS's delivery of the contract has been subject to ongoing concerns, including unacceptable delivery delays, issues in the functionality of the service and the service capacity. There has been a low take-up of the services and therefore the contract is not delivering the value previously hoped for."

EDS refuses to comment, but it may have picked a fight with the wrong department. The man in charge of IT at the NHS is Richard Granger, a former head of public sector outsourcing at consultants Deloitte & Touche. An associate of Mr Granger says he isn't a man put up with "companies trying it on".

However, EDS's Ms Whittaker is confident of future success with the NHS: "The origins of EDS are in healthcare. This is the foundation of our business. That history will be brought to bear with the NHS."

So, to the final pearl of wisdom from EDS's guide: when disaster strikes, competitors notice. EDS's recent form has caught the eye of BT. Keen to expand into new areas, BT's services arm, Syntegra, has picked up an impressive number of IT contracts. Analysts say Syntegra has been quick to learn from the mistakes of EDS, and has so far netted £2.1bn worth of health sector contracts.

But EDS's problems may also be self-perpetuating. According to Mr Holway, customers have noticed the recent stream of bad news. "EDS is out of favour in Whitehall," he says. "There is a certain amount of positive discrimination in favour of EDS's rivals, but in some regards this has almost gone too far. EDS has a huge amount of experience. It would be a blow to the Government if this was lost."

Sadly, EDS's guide to corporate disasters has no words of wisdom on rebuilding bridges.