HP Could Prune Outsourcing Services: Sources

Hewlett-Packard is considering selling or shutting parts of its outsourcing business to focus on the higher-margin areas of its technology services offering, people familiar with the matter said.

A year after buying Electronic Data Systems for $13 billion, HP executives are discussing the possibility of divesting parts of the outsourcing operations, especially in its business process outsourcing (BPO) arm, sources told Reuters.

“The calculation is, can we get more cash for this asset now versus the cash flow the asset is expected to generate in the coming years?” said one of the sources familiar with HP’s plans.
HP’s India operations or its human resources BPO unit could be among the businesses divested, the source added.

Housed within HP’s services division, the BPO unit posted $709 million in revenue in the quarter ended April 30, compared with $40 million a year earlier. HP got most of its technology outsourcing and BPO business from EDS, a pioneer in the field, which it bought in August 2008.

HP could decide not to sell anything should the assets fail to fetch a good price, the sources said.

If the assets were to be shopped, Indian technology companies and outsourcers like TeleTech Holdings and Stream Global Services could be interested, a second source said.

In The Margins

HP views business process outsourcing, which provides back-office support to clients, as a low-margin business that is not central to its growth plans, the sources said.

“I don’t think it’s lost to anybody that (CEO) Mark Hurd doesn’t like the BPO industry,” said the second source. “At some point, he is going to look at shedding the BPO revenue, although this may not be the right time because of valuations.”

The company currently trades at roughly 10 times estimated 2010 earnings, below rivals IBM, Cisco Systems and Dell. HP also has a lower services operating margin than IBM.

However, margins are not the only consideration when it comes to determining which parts of the BPO business to sell and which parts to keep, a third person familiar with the matter said. It likely will keep BPO operations that complement HP’s hardware and software offerings, even those that are low margin, the source said.

HP declined to comment for this story. The sources spoke anonymously because the discussions are confidential. (Reuters)