With EDS, HP Buys Its Way Into Outsourcing Big Leagues

The $13.9 billion deal creates the second-largest IT and business services company.
The proposed deal is unusual in that customers of the acquirer, HP, might be affected more than EDS customers. That's because HP would effectively hand off its outsourcing unit to EDS. "This is a reverse merger of our outsourcing business into EDS's outsourcing business," says Robison.

At P&G, CIO Filippo Passerini actually nixed giving the business to EDS back in 2003, in part because of concerns about the outsourcer's financial health. He sees promise in this merger. "EDS has tremendous capabilities which can help P&G improve its business processes and IT infrastructure," Passerini says in an e-mail.

Under HP, EDS will have a healthier balance sheet. But P&G and other big customers can ill afford service disruptions during the integration process. "The challenge for HP and EDS is to stay focused on the customer and to continue to deliver with excellence plans and projects under way," says P&G infrastructure solutions director Jim Fortner, also in an e-mail. Any slipups with performance or uncertainties caused by integration could play to IBM's hand, as well as to India-based providers such as Infosys, Tata Consultancy Services, and Wipro Technologies.

A loser in all of this activity could be EDS's Agility Alliance, a collection of hardware and software vendors that provide the company with bulk-rate products for installation at customer sites. If the merger passes regulatory muster, HP would have an inside track on selling its own systems and wares to EDS accounts, at the least neutralizing an advantage of alliance partners such as EMC and Sun Microsystems, and preferred partners like Dell.

All About Scale
HP Services
$16.6 billion
services revenue (2007)
Key clients:
Procter & Gamble, General Motors
$22.1 billion
revenue (2007)
employees (45,000 outside the U.S.)
Key clients:
American Airlines, Bank of America, General Motors, Royal Dutch Shell
It's high stakes: A recent deal called for EDS to install 41,700 Dell PCs at financial services group Barclays. Robison insists EDS will remain technology-neutral under HP. "We're going to listen to our customers and support the Agility Alliance as it is today," he says. Hurd said the merger's success hinges on cost cutting, not on improving sales by pushing other HP products. "We did not bake in a lot of revenue synergies," he said. By adding EDS, HP could stake a claim that it's the vendor, with the possible exception of IBM, most capable of furnishing business customers with the widest spectrum of IT products and services--from PCs, servers, printers, and storage to infrastructure software and global outsourcing services.

How they'll fit together is the biggest challenge. HP has a history of being more flexible than the "solutions in a can" big IT vendors, says Judy Poirier, VP of IT at Canadian electronics maker Celestica, who used to work at HP and for a few years was the lead delivery executive on the P&G deal. EDS brings experience managing megadeals that HP lacks, she says, but that could quash the flexibility and responsiveness that made HP different from the largest IT services firms. Still, Poirier says, "if I'm contemplating an outsourcing deal, I'll consider HP more, while in the past I may not have."