HP's $600 Mn GM Services Deal At Risk: Sources

General Motors’ decision to bring much of its information technology work in-house threatens an IT service deal worth some $600 million a year to Hewlett Packard Co, two sources with knowledge of the matter told Reuters.

It is unclear how much of the HP agreement would be affected. But the GM contract is one of the bigger contracts at the IT company, one of the sources said, adding that the loss of a significant amount of that business would be a “big deal.”

The sources spoke on condition of anonymity because the details of the arrangement are private. HP and GM both declined to comment.

The Detroit carmaker is a major client of HP, which has provided technology services and support to GM for a quarter-century.

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GM said this week it now plans to handle most of its own IT needs internally, completing the transition within three to five years by hiring thousands of software developers and replacing its outsourced work.

HP revealed in July 2010 that it had bagged a multi-year, $2 billion services agreement with the carmaker, which outsources some 90 percent of its IT needs.

The world’s No. 1 PC maker now manages GM’s technology infrastructure including providing applications development and management services for product development, manufacturing, business services, and supply chain.

GM’s automotive division alone accounts for $350 million annually in IT services business for HP, the source said, adding that HP also sells a lot of its products and other related services to GM. The $600 million figure does not include that portion of HP’s work with the company.

The automaker also outsources technology-related work in its OnStar division, a contract that is separate from the IT services deal the two hashed out, and one that GM may find difficult to unravel, the second source said. OnStar is GM’s in-car navigation and communications system.

HP has been staving off slowing demand for personal computers by moving aggressively into helping corporations manage hardware, software, and networking and storage. But in these areas it has to cope with stiffening competition from the likes of Dell Inc and IBM.

Its Services business generates $36 billion annually. So while a potential loss of a good portion of GM’s business would hurt the company, it is not devastating.

Still, the news comes at a bad time for HP as the company is trying to jumpstart growth while analysts warn of deep technology spending cuts by corporations in the second half of the year.

GM’s IT transformation is being led by Chief Information Officer Randy Mott, who oversaw a global restructuring of HP’s IT operations while he was CIO at the Silicon Valley company. Mott, who joined HP in 2005 under then-CEO Mark Hurd, was one of the many executives who left HP last year during former Chief Executive Officer Leo Apotheker’s short-lived regime.

HP acquired a lot of GM’s business through its purchase of Electronic Data Systems Corp, the Texas-based technology outsourcing company, in 2008 for $13.9 billion. EDS was previously owned by GM, one of the pioneers in outsourcing, for more than a decade before it was spun off in 1996.