HP-EDS?

HP could use a better services arm - while it has some marquee clients like P&G, it is inconsistent in most outsourcing deals. EDS could use a layer of cover. The company which just about defined outsourcing has been running hard to stay even - flat growth over the last decade. So, at a macro level the potential combination announced today makes sense. Actually mouth watering at a price of just 0.5 EDS revenues for a blue chip client base. (HP is trading at 1.2x)

But EDS is not Accenture or PwC (which IBM acquired) or TCS or Infosys. Its major strength is still in infrastructure outsourcing (though it has been growing its application and BPO capabilities nicely). HP's outsourcing is similarly more skewed towards infrastructure. So, it is a scale play. But the timing is risky because infrastructure outsourcing is being challenged by data center consolidations, a secular decline in processing, storage and network charges and emergence of utility and cloud computing models. Not the world either EDS or HP grew up in. Talking about world - HP's hardware business has seen significant success in a number of emerging economies - running that infrastructure as a service does offer some unique opportunities.

Unlike Microsoft, HP does not not have lots of cash-on-hand. Only about $ 10 bn. If I was Mark Hurd, I would spend $ 5 bn towards a smaller infrastructure player like ACS (or even better one with footprint in emerging markets) and spend the rest (plans to spend $ 12 bn on EDS) on a BPO and an application outsourcing play. In fact around infrastructure, I would think even smaller and buy a cloud computing player and use HP's vast channel to build market on top of it.

But I am not Mark Hurd. If I was, I would get my print ink at a huge discount :)

Update: read more of my perspectives here

Update: Computerworld summarizes other perspectives on the combination

Comments

[Scott]

It feels like a HP Software play for the data center where the real money is at. Microsoft is proof of this.

[Subbaraman Iyer]

If indeed it is the intent to challenge IBM, then the scale play makes limited sense. The margins in the infrastructure management space is in single digits. If they have to challenge IBM the combined entity would have to seek higher margin business like very large ADM projects or BPO business. There is a significant opportunity there, but given HP's conservative track record in the services space, a major mind set shift is needed.

I don't think IBM would be impacted as much as some of the relatively smaller players like Cap Gemini or even Accenture.

For more: http://subbaiyer.wordpress.com/2008/05/13/hp-acquiring-eds-marks-new-challenges/

[Jez]

Want my opinion?? Have you seen what else HP are buying.. $3bn on BT's UK Data Centres? And they consolidated there own 85 data centers into six (3 mirrored centres).. Why did they do that? Plus they make servers & Switches.

Its for the data centers.

They want the space and the current sites. Go and find the case study on HPs New Data Center build. Very interesting read!

[vinnie mirchandani]

I wrote about HP's DC consolidation in blog below...that is very ambitious and impressive, but it's one thing for its IT to do it internally, another for its outsourcing group to deliver as a practice. Besides some of the other innovations in DC are coming more from amazon, Google, MS - not so much from outsourcers which are still milking older DCs. Lots of attitudes and business models will have to change...

http://dealarchitect.typepad.com/deal_architect/2008/04/data-center-mak.html

[kkk]

I doint know why you are so confident about your opinun..I think you know nothing about what happens in global market you should better learn before commenting.

[Sachin]

@ $13.9 billion I wonder what the opportunity cost is...

http://tinyurl.com/6zuquq

[vinnie mirchandani]

Sachin at 0.5X revs EDS was a bargain, at 8 to 10X revs many of the Indian firms are the other extreme.

KKK - look forward to you educating me about globalization though I am a bit wary with those initials of yours...

[gm]

HP+EDS = IBM-S (S for Software). Good move, but not without risks. HP is west and IBM is east...the beginnings of IT duopoly in the US if not globally.

your fellow gartnerite

[Avi kulshrestha]

Hi Vinnie,

I have started reading your blogg quite recently – they are very interesting and informative.

Having first hand existing relationship with both BT and EDS, and with HP, it is interesting for me to witness the changing landscape from so close. HP buying BT's data centres and all of EDS seems to me two different actions driven from two different strategic intents (despite suggestions of a common thread).

Only way HP’s two recent actions make sense to me is to take the BT Data Centres acquisition as a tactical decision to keep a large client warm and out of quarterly performance blues and the EDS acquisition as a more strategic decision to grow into services in big way – albeit in Infrastructure area (?). This being the case it doesn’t take HP to its popular and somewhat tired desire of Challenging IBM in services area?

Could you or your readers shed some blogging light on the impact of the recent events on EDS' customers - particularly on those who have recently given chance to EDS in large application outsourcing deal?

Cheers,

Avi Kulshrestha
London

[vinnie mirchandani]

GM - the outsourcing market is far more fragmented compared to hw, sw, telecomms...but short term you may be right, but like in software Saas vendors are challenging the majors, similarly in infrastructure outsourcing you have utility/cloud computing younger players

Avi, certainly will report as I hear from customers, but short term HP intends to let EDS run somewhat indepedently. If anything we should be watching how it affects HP services. I talked to a client today which had picked HP over EDS a couple of years ago and they are nervous whether HP would replace its incumbent team with an EDS one ...

[Phil Fersht]

Vinnie,

On the BPO side, this is a great move, with the merger filling both companies’ BPO portfolio gaps, most notably in finance and accounting (F&A) and HR processes. Accenture and IBM have already been aggressively pushing their combined portfolios of finance and accounting and HR BPO services, with increasing emphasis on bundling these services with their application outsourcing services. HP is looking to follow suit, with the likes of Cap Gemini, Infosys, Wipro and TCS avidly observing how they can broaden their global BPO and IT services depth, scale and industry specialization. Now HP has deep HR delivery expertise to draw on, which elevates its bundling capability, in addition to EDS's $1 billion call center outsourcing and global IT services business.

Will be interesting to see what happens with ACS now - you think CSC will make a renewed play? Also - you think Hurd will make a move for a consulting arm to really go after IBM?

Phil.

[Mohinder Mahal]

I doubt this is going to challenge IBM as much as is being talked about all over the place. All HP has done is beef up its infrastructure services. HP would have been better served acquiring a consulting outfit (like IBM did with PwC) or a pure play SaaS/cloud computing player. (I would have loved to see HP acquire Salesforce.com for instance).

Yes EDS came at 0.5X of revs - a bargain indeed, but it also comes with a lot of baggage... something even a $100+Bn HP may find too hot to handle. It is very safe to say, for instance, that at least 2 in 3 customers of the joint organization dissed the other company to jump over to the other. Also it is very safe to estimate that at least 1 in 3 customers who flipped to a competitor, now ended up where they started. Considering these were multi-year, multi-million dollar deals to start with - you get the picture. And I am sure some of them have already reached out to their IBM sales reps ;)

On the BT front, I agree its unrelated to the EDS deal. It does, however, demonstrate a desire to increase its global hosting footprint - call me crazy, but this move was probably more threatening to IBM than the EDS acquisition :-)

Just my $0.02 worth!

[Shiju]

Well, the deal kills more birds with one stone than we can possibly imagine. Its a smart deal. Check out my blog to know more.

[Someone]

I love it when people that don't know make comments -- regardless of where you fall on the subject, Infrastructure Outsourcing is not going away, if it were, then companies such as Infosys, TCS, Wipro would not be running like hell to get into the business. Applications run on Infrastructure -- The Global 500 have to modernize both their infrastructure and Applications -- it's about having a full spectrum of services -- from assessment to design to implementation to run. With RUN being on a component of the spectrum. The HP/EDS combination gives one the Run capability and other everything else. Datacenters ARE the primarily world of in the new infrastructure -- and for the G500 privacy and security are the top criteria. Go find an India service provider that has the ability to keep a Cobol application running at it's peak while the new application is being created.

Margins: they are actually fairly high for ITO regardless of all the industry nay-sayers -- over the life time of any single contract, you can make really good margins. But, there is risk and investment required in those $100M+ contracts - and since EDS only works with the largest companies in the world, one contract can drag down the financials. And as you apply more and more automation to these deals, the better the margin.

BT -- this deal (along with others with HP) is completely related. Who do you think is going to manage those datacenters, who do you think will leverage those datacenters, who do you believe will benefit from those datacenters? Quit thinking in one-dimension with this deal.

Market Expansion -- EDS' target market is probably the top 5K organizations in the world. HP goes from consumer to the largest. Now, what if EDS' expertise could be leveraged "down market" what if you could just expand EDS' ability to deliver their services to the top 10K companies in the world -- what if they could actually create some decent managed services that could be rolled out through HP's indirect channel? EDS has attempted this a few times, with little success -- because it requires a new sales and support channel -- but HP already has that in spades. Once again, quit thinking in terms of how EDS operates today and think market expansion.

Competitive Landscape -- this is completely disruptive to all of HP's direct competitors in every space, in every nook and cranny. HP has with one stroke forced Dell, Sun, EMC, IBM, BMC, others to create a task force to evaluate the implications. Think about how this disrupts those companies -- BMC has already had to address this question during their financial results call this week.

Now -- there is a third party in the mix that will not be mentioned, but is a big partner for both companies. When it is announced that HP and EDS are going to help them with "cloud" computing and SaaS -- the picture will begin to get a little clearer on how this merger is really changing the game.

[vinnie mirchandani]

Someone, I agree with some of your points. Did you see my follow up posts which says the myth is services are low margin?

I also agree with you infrastructure outsourcing is not going away any time soon

But it is way more than data centers. It's about WAN, IT help desk, asset management, mobile device management, messaging, LAN and WLAN etc etc. And in each segment there are plenty of competitors. EDS is strong in many but I run evaluations for clients and when you look at geographic market shares, even it does not have more than 10% market share in many of these categories.

My biggest issue is both HP and EDS are "old school" outsourcers. They will have to be pulled kicking and screaming into utility and cloud models. It's like Oracle and SAP versus the SaaS players. In that sense the combination is not a "game changer", just a market share change.

As for the Indian providers, they have primarily been focused on infrastructure services that can be remotely delivered - monitoring, diagnostics, tuning etc. They are loath to make big capital investments and tend to sub-contract hosting, WAS etc. Also, they cannot support local deskside support easily. They are growing players but their real impact has been in apps management and BPO. Far more than in infrastructure.

BTW: not sure why you need to mask your name. You say your URL is HP, but I could not verify that from your IP address. Whether you are not, this blog is about open debate. I usually do not allow anon posts and only because you took the time to write a long comment, I allowed it. ...I would welcome a continued dialog...but Pls use your real name and affiliation