Profile of entrepreneur Ross Perot, how he created EDS, and why he would create a start-up which is threatened by EDS.
Inside the private world of America's most public entrepreneur
H. Ross Perot is one of the most extraordinary -- and publicized -- company builders of our time. His recent decision -- after a quarter century of building Electronic Data Systems -- to start yet another business from scratch, raises some very provocative and unanswered questions. And so we decided to use this annual feature to examine just how Perot built EDS in the first place, and why he appears hell-bent on destroying his own creation now. -- The Editors
It is, to all appearances, just another episode in the Amazin' Adventures of H. Ross Perot. Call it "David v. Goliath."
This time the drama unfolds in a packed Dallas courtroom. At issue is the fate of Perot Systems Corp., a four-month-old start-up with 75 employees, under attack by the World's Largest Industrial Corporation. That's General Motors Corp., represented in this instance by its Electronic Data Systems Corp. (EDS) subsidiary, a 48,000-employee giant in its own right, generating some $4.5 billion in sales.
To hear the lawyer for Perot Systems tell it, his client is the victim of a kind of corporate child molestation. The company, he avers, is a mere "infant in its cradle." Its leaders, all former EDS employees, are simply "prepared to step out and build a better mousetrap," he says. "They're entitled to try to do that without having some big bully -- and this is the biggest bully I have seen -- pushing them off the street."
Smiles ripple through the phalanx of more than two dozen of America's highest-priced attorneys packed before the bar. A few reporters in the throng laugh out loud. What amuses them, of course, is that the lawyer has got it backward. After all, this "infant" belongs to Ross Perot, the jug-eared man in suspenders and a belt sitting stiff-necked in the second row. As everyone in the courtroom knows, this legendary patriot and entrepreneur-turned-populist scourge of GM isn't just working on a better mousetrap. He is threatening to ravage EDS, a company he built and sold to GM for $2.5 billion.
Goliath, it seems, has been snookered. Again.
"Bigger than life" is perhaps the best way to describe Ross Perot, although "Texas billionaire" is the more common appellation. He is, at 58, America's quintessential cowboy capitalist. It is an image he has been cultivating for some 20 years now, since he first stepped into the limelight, traveling to Laos in an attempt to fly supplies to U.S. prisoners of war in North Vietnam. Then there was the thrilling rescue of two EDS employees from an Iranian prison in 1979. That episode became the subject of Ken Follett's best-seller, On Wings of Eagles, as well as a television miniseries starring Richard Crenna as Perot.
When Perot wasn't sponsoring secret missions, he was fighting for education reform in Texas. Or attempting to move the Museum of the American Indian from New York City to Dallas. Or buying the Magna Charta from the British for $1.5 million, then donating it to the National Archives. Or waging a battle against the Dallas Citizens Police Review Board. But always there, in the background, was EDS.
Like most aspects of the legend, the story of Electronic Data Systems had a mythic tinge. Starting in 1962 with $1,000, Perot -- it has been said -- had created one of the world's great service companies, virtually inventing the systems-integration industry in the process. Just how he had done this was never quite clear, certainly not in the accounts of his extracurricular exploits. Indeed, it was only in 1984, when he sold EDS to General Motors, that he began to gain widespread recognition for his business accomplishments, as opposed to his various adventures.
At the time Perot was widely heralded as the savior of Detroit: the can-do entrepreneur who would help get Roger Smith's stumbling behemoth in shape to compete in the twenty-first century. Instead, he became its most im-placable public critic. Frustrated by the GM bureaucracy, he accused its executives of caring more about their chauffeured limousines than building cars. By 1986 his fellow GM board members had had their fill and voted to pay Perot approximately $750 million for his remaining interest in EDS, hoping he would shut up and go away.
He did neither. From the day the agreement was signed, he kept his fire on GM, while observing the clause that forbade him to hire away EDS employees before June 1988. Then on June 1 he announced that eight EDS managers were joining him to form Perot Systems -- and that the start-up already had a deal to help the U.S. Postal Service bring its costs under control.
There was a touch of whimsy to the launch. Capital came from a Perot family group dubbed HWGA, for "here we go again." The logo was a simple P.S., as if the company were a postscript to an earlier message. But Perot stated that he did not intend to compete directly with EDS. And in accordance with the buyout agreement, he noted, his company would earn no profits under the Postal Service contract until after December 1, 1989. From then on, Perot Systems would share a percentage of whatever savings it found in the system.
EDS gagged. Lester M. Alberthal Jr., a 21-year veteran of the company and Perot's hand-picked successor as CEO, said he felt "betrayed." For one thing, the post-office contract would shut EDS out of a market it had wanted to get into. For another, Perot would undoubtedly try to recruit other EDS employees. Granted, that conformed to the letter of the buyout agreement, but the whole deal violated its spirit -- or so Alberthal would contend. In any event, he launched a full-scale attack against the post-office contract in the courts and on Capitol Hill. In the ensuing firestorm, Postmaster General Anthony Frank backed off, agreeing to open the contract up to competition.
Perot's response was predictable: he declared war. Comparing the EDS contract challenge to "the sneak attack on Pearl Harbor," he vowed to go after every contract EDS had, and left no doubt who would win. "It will be like turning a bunch of bulldogs loose on a bunch of poodles," he sneered, accusing the EDS leadership of becoming "wimps" and "lapdogs," who "can't order toothpicks" without GM's approval.
The name-calling must have hurt. It hurt even more when Perot Systems won the first marketplace competition, a contract to automate a division of McGraw-Hall Inc. Perot Systems also won in federal court, beating back EDS's legal challenge to the post-office contract. Meanwhile, Alberthal had filed another suit, charging Perot with violating the buyout agreement. And Perot countersued.
So it went through the fall. It was wonderful theater, and the media ate it up. There was pathos. There was humor. There were plots and subplots, intrigues and vendettas -- all leading to that sunny mid-October afternoon when Perot and Alberthal finally met face-to-face in the Dallas courtroom.
Alberthal, quiet by nature, sat with his lawyers and spoke only from the stand. Perot, master of the gesture, sat in the gallery with Pat Horner, the new company's president, and chatted amiably with the press during the breaks. He couldn't resist a jab at EDS for contending that Perot Systems wasn't really operating as a nonprofit. "Thanks to them, I'm sure to be nonprofit," he said. "I'll be paying these lawyers for the rest of my life." But, overall, he was unusually restrained. He said he found the whole thing a "personally painful" process. "The sad part is what this is doing to EDS."
Did he mean it, or were those just crocodile tears? It was hard to say for sure. Indeed, it is hard to be sure of anything about Perot, the real Perot, even after his 20 years in the public eye. Who is this guy? Just how did he manage to build a nearly $1-billion company from scratch -- and in the process create a whole new industry -- without ever having it outgrow him? And why did he then deliver that company -- fueled by a degree of personal loyalty rare in the annals of American business -- into the hands of a corporate bureaucracy that represented everything he reviled? What is his reason for trying now to destroy his own creation, the company he raised like a first-born son? Revenge, as some analysts contend? Wounded vanity, as EDS spokespeople suggest? How can he hope to build a new company around such motives, let alone win in the marketplace against the likes of GM and IBM? And what exactly is his plan for Perot Systems, anyway? Will it be another EDS, or does he have something even grander in mind? What will he do differently this time? What has he learned?
Scan the public record, and you'll find few answers to such questions. But then, maybe that's because few people ever asked.
Ross Perot is sitting in his Dallas office, under the American classic Spirit of '76. He is recalling how he sold EDS's first customer, Frito-Lay Inc. "IBM and Arthur Young were against us," he says. "At their request, the Republic National Bank joined in the chorus, saying they would put us out of business if Frito-Lay ever hired us. Herman Lay, who was an entrepreneur, listened to all this and turned to one of his associates, George Williamson. And he said, 'You know, these [EDS] boys must have something. There's just four of them, and they've got all these giant corporations teamed up against them. They must have something, George. We ought to hire them.' And he gave us our chance. That was our first account. And the fun part is that, years later, Arthur Young became EDS's accounting firm. And EDS became IBM's largest customer. And just this year, I underwrote the bailout of the Republic National Bank. So, if you live long enough, you get to watch things go around in a circle, and it's kind of interesting."
Perot has lived long enough to see many things come full circle. Here he is, after all, 26 years later, starting over again with a new company. Is it the same? "No, not really," he says. "Starting EDS was months of terror. Because we didn't have any money. And we didn't know what we were doing. Keep in mind, we created a new industry with EDS. Today, it's a multibillion-dollar industry. We've got all these people who are beyond experienced, beyond talented; who are better than I am. We're fully funded. And, the last time around, whenever we opened our eyes, IBM was there, putting us out of business. This time, it's just General Motors. But, still, as I encounter these things, it's a lot like watching an old movie -- only this time I can afford the popcorn."
These days, Perot is not the only one experiencing that particular form of déjà vu. It is a sense he shares with people like Lotus Development Corp. founder Mitch Kapor and Apple Computer Inc. founder Steve Jobs -- to name but two of a growing number of successful entrepreneurs who are trying to do it again. Yet, even in that select group, Perot stands out. "He's just got a really wise perspective on things," says Jobs, who brought Perot in as an investor and board member of his new company, Next Inc. "We talk on the phone once a week or so. He's somebody we can always call up and bounce ideas off of."
Perot's wise perspective is anything but complicated. To hear him tell it, business success is largely a matter of hard work and common sense, combined with an understanding of human nature. "If I set the curriculum at the Harvard Business School, God forbid, the first and most important course would be human nature." And leadership? "Suppose somebody says, 'Look, Ross, I'm very busy. What's the most important thing you can tell me about leadership?' I'd say, 'Just treat people the way you'd want to be treated.' Then he'd say, 'That's the golden rule.' And I'll say, 'That's right.' He'll say, 'Well, wait a minute. Are you saying that, in a rapidly changing world, the principles of leadership are timeless?' 'Yup.' And he'll say, 'How can that be?' And I'll say, 'Because human nature doesn't change.' It doesn't change."
It sounds simple and obvious when he says it, but is this, in fact, business he's talking about? There's something unnerving about hearing Perot talk this way. Not that he seems insincere. It's just so out of whack with the public image he has created for himself -- with his legend.
Consider, for example, the Texas Medicaid battle of 1980.
EDS had been a subcontractor on the first Texas Medicaid contract, awarded in 1967. By 1980 it was the prime contractor, and the account was generating almost $4 million per year in earnings. When the contract came up for renewal in 1980, Perot didn't expect much competition: EDS's cost control and customer service made its work in Texas a national model. So he had flown to London while the contract was being bid -- then turned around and flew home when state officials awarded it to a smaller competitor from New York. Unable to imagine that he'd been beaten fair and square, Perot took personal charge of the counterattack.
It was a classic EDS operation, organized like a commando raid and executed with speed and precision. Arriving home, Perot went to his office and started working the phones, pulling key employees from projects around the country. "Pack your bags," they were told, "we're going to war." Within days, the team was assembled and the strategy set. They'd fight in the Austin statehouse, organizing a massive lobbying campaign to reopen the competition. They'd fight in the newspapers; Perot had connections there, too. They would dig into the motives and methods of every state official who might have had a hand in the contract award, looking for flaws in performance, ethical lapses, or personal peccadilloes. Then they'd work backward, digging into every contract their competitor had won, anywhere in the country, ever.
For the next four months, the EDS team searched for the smoking gun. "I don't like conflict," Perot told the press, but this was a question of principle. "Good guys don't necessarily finish first, and the world is not a fair place." Private detectives were hired and wired for sound; would-be confidential sources were secretly videotaped, then convinced to step forward on the basis of what they'd revealed. Shortly before the reopened contract was to be awarded, television viewers in Texas sat spellbound by an investigation of "Medicaid: The Finagle Factor." Much of the special report contrasted EDS's sophisticated mainframe operation, satisfied clients, and low costs with the competitor's operation -- a jumble of paper, dismaying honest doctors and enriching the Medicaid mills. The report probed the contract-award process, too, exposing the methods of state officials in Austin as slipshod at best. But the bombshell came near the end. In videotaped interviews, former officials in New York and California alleged they'd been offered high-paying jobs to swing contracts in the competitor's favor, a clear violation of conflict-of-interest laws.
"It was Perot as classic SOB," one source says. "He came screaming out of the sky, talons bared, and ripped their eyes out."
Vindicated, he sent his smoking gun to law-enforcement officers and government officials as well as the press. "It was real hardball," recalls Steve McClellan, the Merrill Lynch analyst who may be the most widely quoted Perot watcher in America. "The competitor disappeared with a whimper."
From such battles, the EDS legend was born. "EDS was like a tank," says one veteran. "Put it in low gear, and it could run over anything."
"Our gunner's command was simple," another agrees. "Ready, aim, fire, fire, fire, fire, fire, fire."
But in the sound and fury of the Texas Medicaid battle, it was easy to overlook a more subtle, though equally important, message. Beyond Perot's fierce competitiveness, the operation demonstrated the power of his organization -- flexible enough to restructure in a few days; deep enough to know that each lieutenant called to headquarters could be replaced, instantly, with no noticeable effect on the customer or the troops in the field. The company had been built as a shifting collection of loose teams, assembled and dismantled as challenges were overcome. Their strength came from their ability to focus, and their loyalty to a shared cause.
And therein lies the irony of the Perot legend. From the Texas Medicaid battle to the Iran rescue mission, its glitter was constantly obscuring the one element that made it possible: the organization.
When you ask Perot how he did it -- where his ideas about company building came from -- he talks about his childhood in Texarkana, Tex., during the Great Depression, and the values he learned from his parents. He may also mention the business education he received at the age of 12, selling newspapers in poor neighborhoods where no one else was willing to go. Leadership, he says, was something he learned at the Naval Academy. As for his technical-training programs and philosophies, he credits those to IBM, where he went to work after his four years at sea.
Then he says, "So where does it come from? It's just a blend of all that, I guess. You see, I don't know where it comes from, but everybody asks me, so I try to create a story."
There was, indeed, no management blueprint or grand strategy for EDS. It began like most great companies: as an idea that sounded ridiculous to almost everyone who heard it. "People ask me how I made so much money," Perot says. "I was stuck with it." A star salesman for IBM, he had come up with the concept of selling customers computer services along with their hardware. "Everybody thought this was a really terrible idea. IBM heard me all the way to corporate headquarters and didn't think it was any good. I would have welcomed venture capital investors. Nobody would put in a penny. I was literally stuck with it."
The company was officially launched on Perot's 32d birthday, June 27, 1962. It got going with the help of Herman Lay, who not only became its first customer but agreed to pay in advance. What really fueled its growth, however, was the passage of national Medicare legislation in 1965, which opened up a whole new business of administering claims. Over the next 19 years, EDS grew to $947 million in revenues and 14,000 employees. Perot stayed with it, building the organization as he went.
Like any successful entrepreneur, he operated on instinct, by trial and error, figuring it out along the way. In recalling his experiences, he refers constantly to his mistakes. "When I started EDS, I didn't know anything about stock. I owned the whole company. As we went along, I just kept issuing stock to people who did a great job. I didn't realize how complicated that would get after we went public, because then the reward was controlled by the market price of the stock. So it became much more difficult to recognize and reward these bright, talented, able young people who were just coming up, and I didn't foresee that. That's probably the most serious mistake I ever made in the area of recognizing people.
"See, in a privately held company, you have a lot more flexibility. Then your challenge is to accept the fact that you're going to make a lot of mistakes. You need to recognize and reward people without trying to front-end load it too much. The one thing I know through experience -- the one absolute thing I know -- is that people don't know why they come to work until they don't have to come to work. There's a very large number of people who are eagles, who do brilliant work, but who just fold up on you once their financial needs are met. They lose their edge. And it's a tightrope, because you have an obligation to reward those people for excellence, but some of them are going to go soft as a result. So you just have to keep training the new young ones behind them."
Recognizing and rewarding excellence, searching for eagles, paying with equity -- it was all part of the corporate culture Perot began to create long before the phrase entered the business lexicon. He hired people like himself, then gave them the best of what he'd been given. Outsiders often commented on EDS's military trappings -- the fences and guards; the abundance of flags; the clean-shaven men in white shirts, dark suits, shined shoes, and army haircuts, all walking around in gung-ho double-time. Some people described the atmosphere as "militaristic," but they missed the point. Many EDS employees came straight out of the service. They were thoroughly comfortable in military surroundings and often unsure how to dress in the civilian world. The dress code solved the problem nicely.
Inside EDS, moreover, the spirit was more democratic than militaristic. Rather than an army with a formal chain of command, the team operated like a loose band of guerrillas, with Perot as the leader. They honored the man in the field, encouraged him to make his own decisions, regardless of his title or his position in the hierarchy. Results were all that mattered, and compensation was geared strictly to performance. There were no class distinctions, no private parking spaces or executive dining rooms. There were no memos, either: if you had something to tell Perot, he wanted to hear it face-to-face. "I can't talk to a memo," he says. "I want a live, breathing human being in here saying, 'Look, I think you ought to do this, and here's why.' "
The system bred a kind of unity and loyalty that is rare in any organization. "I never doubted that -- if I needed any resource that Ross or the company had -- it would be there," recalls EDS veteran Gary Wright, now with Perot Systems. "And I never doubted that I had the same responsibility to everyone I worked with."
The model for loyalty came from the top. Once, in the early days, Perot disappeared from the office unexpectedly and went visiting, calling on the wives of each of his colleagues, thanking them one by one for putting up with the late hours, and giving each 100 shares of stock as a token of gratitude -- a token now worth about $165,000. But Perot gave more than money. If a family member were severely ill, he would be there, arranging personal planes, locating specialists, or finding a way to pay the bills insurance didn't cover. And he would do it for any team member, not just the executives.
But loyalty was never allowed to interfere with duty. Perot loved to see young men stand up, particularly if they were fighting for a customer. He still keeps a sign on his door: "Every Good and Excellent Thing Stands Moment by Moment on the Razor's Edge of Danger and Must Be Fought for." The reason, he says, is to remind visitors that they must be willing to fight even him for their ideas. "You might come in when I don't feel good, when I'm tired or distracted or whatever. But your idea is on the razor's edge of danger." Perot expected people to look straight into his piercing blue eyes and take him on head-to-head, if the good of the company was involved.
Those who fought, and those who performed, received enormous financial rewards, but not in the form of salaries, which were modest. Instead, excellent work was recognized with ad hoc bonuses and bestowals of stock. There was no uniform salary administration, no regular compensation review; discussing salary with a peer was grounds for dismissal.
Again, Perot served as the model. He set his own salary at $68,000 in 1965 and never gave himself a raise. Nevertheless, when he took the company public at $16.50 a share in 1968, he was said to claim a personal net worth of more than $350 million. By March 1970, with the stock trading at $162, the value of Perot's EDS holdings had grown tenfold. Not that the money seemed to matter much to him. He still ate in the company cafeteria, waiting in line like everyone else. He was as likely to shop K mart as Neiman-Marcus. And, in May, when EDS stock dropped back to $29 per share, he dismissed his losses as "Mickey Mouse."
"Ross is Ross," his employees would tell you. "He'll never change." What mattered to him was seeing EDS grow, training others to spread the code.
Perot says he never had a problem delegating responsibility and authority. "My experience is that people who are really, really bright find it very difficult to delegate, because they literally could do the job better themselves. For them, it's kind of unnatural to delegate and do all the things you have to do to go to a big organization. But for people like me, who are average, it's different. Oh, I've got an ego and all that, but I know I need help. So I go and get the very best people. Then you've got to motivate 'em, create a good environment, and so on."
He made no bones about what he meant by "the very best people," either. "I'm looking for people who love to win," he told potential employees. "If I run out of those, I want people who hate to lose."
Like everything else at EDS, hiring was driven down the ranks as the company grew. There was no personnel department; decisions were made in the field. Prospects would be brought in for a team interview by their potential peers, and looked at three ways: 1) would you want to work with him as an equal on a project? 2) what if he were your team leader? 3) what if you were his team leader? Ability to accept the culture was more important than technical skill or experience. And the code of loyalty was enforced: recruits who required technical training had to sign an employment contract, promising not to leave EDS to work for a competitor, and to pay back the approximately $9,000 invested in their training if they should quit or wash out.
Perot operated then, as now, in the belief that the eagles would separate themselves from the flock. "You just put them out in the field," he says, "right in the thick of competition, and the eagles emerge." Once they emerged, the challenge was to make sure they reached their potential, which meant piling on responsibility. "Give 'em more. Constantly give 'em more. Just keep them in a little over their heads. But don't drown 'em. The best ones are like corks. They have a lot of resiliency. But everyone has his own thermostat that determines how much pressure he can take, and he can't do a thing about it. People who can't take as much pressure as others wish they could, but they can't. So it's important not to push people beyond the point of no return. Aside from that, we really try to challenge them and have them grow as fast as possible."
Mistakes were forgiven -- indeed, encouraged. "We teach people that mistakes are like skinned knees for little children. They're painful, but they heal quickly, and they're learning experiences. All over corporate America, you get to be chairman of the board by keeping your nose clean and not making mistakes. My people are covered with the scars of their mistakes. They've lived out in the field; they've been shot at; they've been hit in every part of their bodies; and they're real. By the time they get to the top, their noses are pretty well broken. The chances of them getting there with a clean nose are zero. Because they get there by producing, and the by-product is to make mistakes."
It was a grueling regimen. Team members would often get calls on weekends, in the middle of the night, or during vacations, instructing them to report immediately or the next day to help another team on a troubled project. Many of them burned out. Others found the rewards not worth the strain.
But the eagles thrived. "The focus was always, #1, do the job for your customer; #2, make money at it; and, #3, teach someone along the way to do it," Gary Wright recalls. "If you accomplished those, he was eager to let you have your head and do it your way."
"Ross Perot is not a manager -- he's a leader," insists Perot Systems president Pat Horner, who joined EDS right out of the Air Force in 1976. "He works with you to challenge you to reach your highest potential. It's the antithesis of micro-management."
In 1982 Horner was part of a team competing for the biggest contract in the history of the industry, $656 million to build a nationwide computer network for the U.S. Army. Before the competition got under way, Perot called the team together, but not to give instructions. "He said, 'I just want to explain to you how important this is -- the jobs it's going to create, the milestone it's going to be in our evolution toward the world's largest systems integrator," Horner says. "All too often people try to manage the what and the how, but Ross manages the why. He can create a vision of the here and now as a reflection of the past and a turning point for the future."
No matter how much distance Perot kept from a proj-ect, though, he was always there for the customer. Former army project manager Clinton Black recalls that the day the contract was awarded to EDS, Perot walked up and passed him a slip of paper with a phone number on it. "You can always reach me here if you feel we're not living up to our agreement," Perot said. "Twenty-four hours a day, seven days a week." Black never forgot the moment. And the EDS team made sure he never had to make the call.
By 1984, EDS was a truly impressive company, earning $81 million net on gross revenues of $947 million. More to the point, it had a reputation as the best in its business and was on its way to becoming one of the premier companies of the twentieth century, a role model for all who wanted to compete successfully in the emerging international economy.
So why did Perot sell it?
"Pride goeth before the fall," say Perot. He is referring to the decline of America's international competitiveness since World War II, but there are echoes of another "fall" in his words. "You can go back to the Bible. This is human nature. Man, when he is successful for too long, becomes arrogant."
Was it arrogance that led Perot to sell his company? Was it pride? Was it boredom? Was it the need for a truly monumental challenge, one that surpassed any he had yet encountered? Whatever caused him to do it, the sale of EDS to GM was perhaps the greatest blunder of his career.
Perot had, in fact, been looking for a major new project, an industrial corporation that would let his people expand on the capabilities they had developed on the army contract. It never occurred to Perot or his people, however, to take on a major automobile manufacturer; they had no experience in that industry. And when Salomon Brothers broached the idea of a friendly takeover by GM, Perot was skeptical. Roger Smith didn't need to buy the company, he argued. Why not just become a customer?
But the GM chairman made EDS an offer Perot couldn't refuse. It wasn't the $2.5 billion; it was the challenge of trying to infuse America's lagging automaker with the code of the eagle, combining GM's resources with Perot's entrepreneurial dynamism to create a giant that would, once and for all, put the Japanese in their place. How could he refuse? Perot signed the letter of agreement on his 54th birthday -- June 27, 1984 -- and the sale went through in October, making him GM's largest stockholder and its best-known board member. His mission: to combine GM's data-processing and communications mishmash into a single lean unit, processing the paychecks and programming the robots.
But something else happened with that stroke of the pen, something that only became evident in the ensuing weeks and months. Perot stopped being a company builder and was instead thrust into the role of corporate politician, a job for whi