EDS had managed to weather the economic storm better than most, but it's suddenly taking on water. The $21.5 billion services firm is struggling to deal with bankrupt clients and delayed projects. Now, in a letter to company shareholders, CEO Dick Brown says EDS will take "specific actions" that include "a companywide reduction in overhead costs, a reprioritization of sales and expenditures, and initiatives to address underperforming assets."

Bolstered by a successful IT-outsourcing business that for a while seemed to defy budget cuts by potential and actual clients, EDS boasted a $405 million profit for last year's fourth quarter. Profits have since tumbled to $316 million for this year's second quarter. And while revenue had remained stable from quarter to quarter this year, EDS last month said its revenue for the third quarter of 2002 would be down 2% to 5% compared with the second quarter.

EDS's troubles reflect a larger problem in IT. The company reveled in news of fat contracts with the U.S. Navy and Marine Corps, WorldCom, and U.S. Airways. Now EDS says that U.S. Air's bankruptcy will subtract $69 million from the company's third quarter. WorldCom's bankruptcy puts an 11-year, $6.4 billion contract in jeopardy, and rollout of the eight-year, $6.9 billion Navy and Marine Corps contract has been delayed repeatedly. A contract like the seven-year human-resources outsourcing deal with Aon Corp. that EDS disclosed Tuesday does little to help. It's barely a revenue ripple for a company as large as EDS. A deal such as the proposed 10-year, $8 billion outsourcing contract with Procter & Gamble Co. is much closer to the type of transaction EDS needs. Then again, the amount and duration of the deal could put EDS right back in its current predicament if business conditions deteriorate further.

EDS's financial problems have "done permanent damage to the perception that the IT-outsourcing business is annuitylike and predictable," Lehman Brothers analyst Karl Keirstead wrote in a market bulletin Monday. "The customers and their consultants need to alter their view of outsourcing deals as a mechanism to push capital risk on the suppliers. This model, better suited to good times, is simply inappropriate at a time when the suppliers have greater balance-sheet risk than the customers."