HP/EDS ready to launch huge IT outsourcing company

Hewlett-Packard this week announced another solid quarter of earnings and that its acquisition of EDS will close by the end of the month. HP's CEO Mark Hurd, with his usual confidence, indicated he is prepared to apply HP's financial and execution discipline to EDS' cost and delivery structures. With an unsteady global economic picture generating concern about long-term IT investments, Hurd will need to do that and more to ensure that customers, suppliers, partners and shareholders see benefits from an HP-EDS combination.

Even with ongoing global economic pressures, we continue to be upbeat, but very cautious about the outcome of this deal. As we've said from the time this deal was announced in May, HP faces a laundry list of integration issues with EDS: financial, organizational, operational and cultural (and interestingly cultural issues may present some of the highest hurdles).

HP has already said it intends to merge the two companies' outsourcing groups, which will clearly make HP an even more dominant force in infrastructure and increasingly in application-related services. While an economic slowdown may force customers to delay some IT investments, it can also open up new outsourcing avenues as customers turn to third parties to gain better operational efficiencies. Lucky for HP, then, that it will have one of the world's largest outsourcing operations under its roof in a few weeks.

In a conference call with analysts to discuss third quarter results, Hurd mostly steered clear of substantial details related to EDS as the US$13.9 billion (€9.442 billion) deal winds its way through its final approvals (shareholders from both companies have signed it off).

However, he noted that a team of some 500 people are dedicated to planning the HP-EDS integration, and repeated his belief that "HP's innovation" coupled with EDS' "scaled services business" will be a boon for customers. Ultimately, Hurd said HP will help EDS automate processes and operate with a lower cost structure to be more competitive in the market. HP intends to meet securities analysts on 15 September - with EDS personnel in attendance - to provide more details post-acquisition.

We're curious how this alignment will affect the consulting groups from both organizations - specifically, whether HP will combine them into one larger organization, and how close this organization will reside in relation to the outsourcing group.

We suggest that the decisions on consulting will be some of HP's most critical in the long-term: if one of HP's goals is to provide a true customer alternative to the likes of IBM and Accenture - which use consulting as the door-opener to broader outsourcing agreements with clients - then HP will need its "˜new' consulting to engage with top line-of-business leaders and to demonstrate its vertical market expertise.

HP couldn't have asked for a better earnings report to precede the close of the EDS deal and reassure investors, shareholders and customers that its financial base is more than solid.

In the just completed third quarter, net revenue was US$2.7 billion (€1.834 billion), up 10% from a year ago (5% when adjusted for currency), with growth in all regional segments, including 4% growth in the Americas. (By contrast, EDS reported a 6% dip in its Americas revenue for its most recent quarter.)

 

Hurd said HP continues to benefit from its broad product and services portfolio and global presence; in fact, 68% of third-quarter revenue came from outside the US, and almost a quarter of that revenue came from Brazil, Russia, India and China.

In the context of the EDS deal, HP Services (HPS) delivered one of its stronger quarters in recent memory, particularly in consulting and outsourcing. Overall HPS reported US$4.8 billion (€3.26 billion) in revenue, a 14% year-on-year increase. Consulting & Integration (C&I) and Outsourcing grew 13% and 18% respectively, compared to last year, while Technology Services, grew 13% more than a year ago, thanks to an increase in product-attached support services.

John Madden, Research Director

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