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5/14/2008
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HP Outsources Outsourcing To EDS

HP has been trying to grow its IT services business for years, without a lot of success. Will the acquisition of EDS let it better compete with IBM for big contracts?

It was to have been the deal that would vault Hewlett-Packard into IT services' big leagues: A 10-year, $3 billion contract to manage tech operations for no less a customer than global consumer products giant Procter & Gamble.

"We're popping a few bottles of champagne around here," HP services chief Ann Livermore told InformationWeek in 2003, when the deal was struck.

That was five years ago. HP has had little success since then parlaying the victory into more big contracts. It turns out the company's legendary garage shop DNA didn't come with an outsourcing gene. CEO Mark Hurd tacitly admitted as much Tuesday when he announced plans to abandon efforts to grow HP's also-ran services business internally and buy Electronic Data Systems for $13.9 billion.

"This fulfills our strategic objective of expanding in the services area," said Hurd, during a conference call.

Under the merger plan, EDS CEO Ron Rittenmeyer would lead a new organization called "EDS -- an HP company" and report directly to Hurd. Livermore would continue to oversee what's left of HP's Technology Services Group, but she's not likely in a mood for more bubbly.

In one stroke, the deal would create the world's second largest IT and business services company, next to IBM. The combined services revenue for EDS and HP last year was $38 billion, compared to $54 billion for Big Blue. HP's EDS unit would house 210,000 employees.

The deal "gives us scale," said HP chief technology officer Shane Robison, in an interview. "One of the things you need in the services business is people with a lot of vertical expertise and operational expertise," Robison added, noting that EDS has a strong presence in lucrative industries such as financial services, energy and health care, as well as government services.

EDS would also give HP blue chip customers like American Airlines, Bank of America, and Royal Dutch Shell.

But can the combination of a PC and printer company with a history of treating services as a poor relation and an outsourcer that some view as an old school advocate of stadium-sized data centers staffed by legions of techies yield an organization capable of embracing new wave IT trends like cloud computing and software-as-a-service?

Hurd is optimistic. "We think the fact that we bring a $4 billion R&D stream and a research stream from HP Labs brings leverage into the business on a number of fronts," he said.

And Robison insists that EDS isn't all that sclerotic. "[EDS executive VP] Charlie Feld has been talking a lot about software-as-a-service and how to deliver more of their capabilities through SaaS and cloud-based infrastructures," Robison said.

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