HP/EDS redux

I know several of you are hounding me for my views here... we've put out a couple of pieces on this today at AMR - check out Bruce Richardson's blog where he raises the discussion. 

I have to confess this one came completely out of left-field while I was traveling, but does tally well with HP's focus on bundled BPO.  All-in-all, these are my key takeaways from this eventful day:

No-one saw this one coming, most of us were expecting one of the Indian providers merging with EDS.  This now raises the possibility of further mergers in services, even though this was looking unlikely until recently.  The incumbent Western providers need scale and depth to compete effectively with the lower-cost Indian firms, and we could see a response from one of the other top tier firms to swallow up one of the vulnerable services firms.

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.  As we discussed a few weeks' ago, BPO market leaders 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.

Culturally, this is definitely an odd one to fathom, but Mark Hurd has the track record and financial discipline to make this merger a success.  He also got a good valuation for the firm, so now was probably a good time to strike.

Interesting times... maybe we'll have some more days like this in the coming months?

Comments

[Sudhanshu Deshpande]

I believe HP has been plagued with a stop-start syndrome regarding its strategy around "services". I am hoping that with the aquisition of EDS, HP will firm up this area once and for all.

There are lots of synergies in the ADM and BPO space to be leveraged by both. HP could benefit by getting access to Defence and Government market segments where EDS is strong and EDS has the opportunity to cross leverage strenghts of HP across domains - Telecom is a good example. Together, HP and EDS could present a strong alternative to IBM.

Another interesting aspect to track over the next few months would be the Agility Alliance program of EDS focused on helping EDS fulfill the role of an 'independent' service and technology aggregator in a multisourcing world. It will be interesting how HP would react to this program given that it has quite a few products in its stable!

[Shyam Kerkar]

Phil

As they say - the devil is in the details.

The organization structure is a challenge that has been commented upon. Mr. Rittenmeyer will report into Mr. Hurd rather than Ms. Livermore. This makes sense when viewed from the lens of leaving old-hands in charge of the acquired unit to ensure smooth integration. However, for obvious reasons, there have been some questions to Ms. Livermore about her intentions to stay on. She has indicated that she will. The possibility that these two might run as two fiefdoms will cause potential conflicts and make it difficult to define a GTM strategy and to build in operational efficiencies.

I would want to juxtapose this against the way Cap Gemini's acquired Kanbay - a much smaller acquisition though. Cap Gemini India created a Finanical Services unit out of Kanbay and transferred existing FS projects run by CG to the CG FS units. On the other hand all of Kanbays non FS projects got merged into the greater CG India.

Its not clear as to whether HP and EDS have a similar strategy lined out for creating distinct services units led by Rittenmeyer and Livermore which would have specific non-conflicting focus areas.

The other talked about challenge is the margins. Given EDS's OM of 5% & HP's OM of 8%, the merger is not going to help the entity get any closer to IBM's 15%. If the management tries to bring in efficiencies while also grappling with the cultural challenges of merger - they are likely to loose some valuable skilled associates.

In that context - HP / EDS employees will not look too favorably at MPhasis's announcement yesterday to create a new 3000+ employee center in India.

Finally there is the timing issue. Ms. Fiona wanted to acquire a services company 8 years ago but had to back off in face of share-holder disapproval. In these 8 years IBM & Accenture have transformed themselves by changing the way they do business. HP has some amount of catching up to do - and merely acquiring a company will not help.

Shyam

[Phil Fersht]

Mark,

I don't see any issues with Towers-Perrin in the short term - and am sure HP will want to continue to use their HR consulting people. EDS were developing their benefits admin software for the SAP environment, so - if anything - HP will add more resources to developing it.

I doubt HRO was (anywhere near) top of the agenda when the merger went through, but it surely will benefit from the synergies here, and the total lack of overlap between company offerings - plus the fact that HP and EDS are two strong SAP shops,

Phil

[Mark Stelzner]

I won't go into the long rationale here (see www.inflexionadvisors.com/blog if you're so inclined), but insofar as the HR outsourcing market is concerned, the combined entity will remain codependent on the HR transformation and consulting skills of Towers Perrin in order to continue to play in the tier one market. Thus, EDS' ExcellerateHRO must remain intact on a go-forward basis up to and until another acquisition (BearingPoint?) eliminates this dependency.

Best,
Mark

[Clifton Knox]

A bad combination if the 2 are merged because EDS will for sure lose its business identity, and if you don't want to do business with HP well it will still be HP. If it remains a separate entity then it will mean nothing at the best. A company like Dell, or even a Sun Micro Systems would benefit from the addition of EDS and its addition of resources and talent. I believe that this is a poor move if you look at the fact that HP is currently executing brilliantly. Ride your success, don't dilute your business with worthless acquisitions..

[Ravi Raman]

Whether this works or not, this move is one more confirmation that the services outsourcing players always look at IT Plus BPO as the sure way forward.

Some might want to stretch the argument and say that this is a step towards making SOA ( Service Oriented Architecture)the way forward but HP is not a big time endorser of SOA.

However, by the time we get the answer, the merger pangs would have made life tough both within HP and EDS.

[Johnny Daugaard]

Hi,

I shall not go too deeply into the challenges HP and EDS have on the cultural side. I am sure there are big challenges. But to me the most important thing is the change in status that both HP and EDS will experience as a result of this acquisition.

We have had an outsourcing market for large corporations dominated by three major players for total outsourcing; IBM, CSC and EDS, where CSC and EDS were truly independent in their choice of sub suppliers. CSC and EDS were able to offer configurations using an optimized mix of platforms and brands. With this acquisition HP will still be an attractive supplier of high quality products, but ”EDS” will no longer be the independent total outsourcing partner.

The consequence is that IBM and HP conceptually will move much closer to each other and CSC will stand up as the only truly independent total outsourcing partner. This could be seen as an advantage to CSC, but my expectation is that large corporations don’t like to choose between one only.

There is a global trend among mid size and smaller corporations to do selective outsourcing rather than total outsourcing. They are typically in a much more vulnerable situation from the very beginning, and they are less likely to treat the independence issue as a real issue. They will definitely experience the HP acquisition of EDS as a major step forward.

Personally I look forward to this. EDS has got a golden opportunity to regain momentum by getting the HP organization behind them. It will be a major step forward for HP, EDS and the midsize total outsourcing market. Whether it will be a major step forward for the large corporation total outsourcing market is left to be seen.

Rgds
Johnny

[Manish Mehta]

I think the opportunity for HP is to strengthen their overall position on the infrastructure side where they are stronger and now also gain more depth and relationship with this acquisition, EDS is also stronger in the infra outsourcing space. So it works well.

Having said that EDS has been gradually building share on the ADM and BPO services. All of which is good for HP and complements well.

EDS has also strong capability/track record and business volume in the government sector (not necessarily offshoreable service delivery situation). This may also be to HP's advantage, as they may want to build some scale/grow clients in that sector.

EDS may have some chronic contracts that could be a challenge for HP.
Integration is not going to be easy for these two firms culturally...