 "HP-EDS Deal Marks End Of Old IT Outsourcing Model")
The HP-EDS deal will create a service player with more than $38 billion in annual revenues and more than 210,000 employees across 80 countries, making it the world’s second-largest IT services company behind IBM.
In their early reactions to the news of the HP-EDS tie-up, many industry commentators have been quick to suggest that the deal would mainly be about HP trying to challenge IBM. However, the true significance of the announcement goes deeper. Despite continuing demand for outsourcing services and double-digit growth in the number of deals, traditional outsourcing vendors like EDS, Computer Sciences Corporation (CSC), or Unisys for years now have been struggling to adapt to changing market needs. The underlying problem? A 30-year-old business model that puts outsourcing deals and profits at risk because of rigid contracts, pricing, and service delivery structures that don’t accurately reflect on the changing needs of customers.
As a result, many of the large outsourcers over the past two years have seen their market values decrease and subsequently have been rumoured as potential acquisition candidates, while others have more openly been on the lookout for buyers. To this end, HP’s announcement to acquire EDS can hardly come as a big surprise. In effect, it points to the looming end of the traditional IT outsourcing model, a business model that EDS once helped to pioneer.
While market consolidation is likely to continue over the course of the next 12 months, the deal in itself will have significant implications for competitors and partners of HP and EDS.
Success of EDS acquisition will heavily depend on HP’s execution skills
HP has shown a somewhat ambivalent approach toward its services strategy in recent years. At one point in the past, it aspired to evolve toward an IBM Global Services model, while at the same time, it put its money and attention more on strengthening its product and software business. But CEO Mark Hurd and company have clearly made it work, with all of HP’s business lines showing good profits and growth, and the market has rewarded HP for its performance. Nevertheless, market drivers, changing buyer behaviour, and competitive pressures are driving tech vendors toward a services-led business model, one that is different from the business models that HP and EDS follow today.
Clearly, the EDS acquisition will force HP to finally come to terms with its services strategy. However, the key question is whether HP and EDS together can really pull it off. In this context, the following factors will matter:
HP adds massive delivery scale but needs to use it wisely
EDS is a powerhouse in the large IT services deal space and will give HP the scale and credibility to compete effectively in this market segment. But size will not be enough to differentiate in the long run. As customers increasingly look to commission service providers on the basis of shorter and leaner services contracts, HP needs to invest in building modular service platforms that are more flexible and efficient. At the same time, it needs to pick its deal targets wisely to strike a careful balance between larger and smaller contracts.
STORY CONTINUES BELOW THIS ADHP will still have significant gaps to fill in its service portfolio
Neither HP nor EDS have traditional strengths in the systems integration space or the operations consulting business. Although both players have been working hard to build out their application management footprints, their actual market share in comparison with competitors like Accenture or IBM is still relatively small. But clients are looking for an alternative to the current IBM/Accenture duopoly for global systems integration projects; if HP in the long run can leverage the EDS acquisition to pull off these required skills on a broader and more global scale, then the opportunity for HP will be significant.
HP and EDS share a passion for partnerships, but they will now have to integrate alliance
Both players maintain strong alliances with leading technology vendors to complement their offerings. EDS’s Agility Alliance program is widely regarded as the role model for partnership management in a multisourcing world. But strategic partners also include HP competitors like Xerox, Dell, and Sun Microsystems, for which EDS represents a key channel to market. Integrating the different alliances into a unified partner ecosystem will require a significant streamlining effort whereby not all of EDS’s partners are likely to be a part of that new ecosystem.
STORY CONTINUES BELOW THIS ADHP will have to leverage all of its merger expertise to tackle the integration challenge
There are not many tech vendors that have as much experience around mergers and acquisitions as HP, and it shows already. Similar to the way it integrated Mercury into its software business, HP has appointed the current management of the acquired firm to lead the combined business unit. In the past, this has proved to be a helpful measure to overcome some of the cultural hurdles and employee concerns during the integration process. However, EDS is a big fish to digest, so the integration will have as much of an impact on HP’s own way of doing business as it has on EDS.
Besides merging cultures, the technology and process implications of connecting the delivery components of two players as large and diverse as EDS and HP are daunting. The people, processes, and technologies of EDS still have tremendous value, and HP can now accrue that value if it integrates the firms well.
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