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HP's Acquisition of EDS May Face Integration, Global Delivery Challenges Sign Up to receive Daily News Alerts in your E-mail Inbox
Posted on Sunday, June 29, 2008 5:00:00 AM |
Hewlett-Packard Co.'s most recent foray into the enterprise services market was, for the most part, an unexpected one, most industry observers agree. But when it announced its intention to acquire computer services stalwart EDS in May, HP, in effect, became the number two provider in the overall services market. The $13.9 billion deal, scheduled to close in the second half of the year, calls for Palo Alto, CA-based HP to merge its outsourcing operations into the Plano, TX-based EDS, to form a new entity to be called EDS, an HP company.
The combined HP/EDS will boast IT services revenue of $38 billion (double HP's former services revenue), positioning the new entity behind IBM and its market-dominating $54 billion position. Through the acquisition, HP gains access to EDS' client base across a variety of industries, 43,000 additional globally dispersed employees, and the benefit of EDS' strength in certain areas, including applications outsourcing.
EDS, in turn, gains a corporate parent with the resources to help mitigate some of the financial uncertainty that has plagued the company in recent years. But despite the many positives attending the deal, questions remain, particularly with respect to integrating the two cultures while leveraging the strengths each company brings to the union, and doing so on a global stage.
Although EDS employs roughly 40,000 personnel in its "Best Shore" operation, a services strategy that blends onshore, near-shore, and offshore outsourcing delivery capabilities on a client-by-client basis, historically the company has lagged behind such competitors as IBM, said Gartner analyst Dane Anderson. "As the offshoring phenomenon started to take hold around the turn of the century, most multi-nationals thought it eventually would pass, but, in fact, it continued to gain steam," he said. "IBM and Accenture have been decidedly more aggressive at developing a globally integrated enterprise."
Bringing HP and EDS into harmony, culturally and otherwise, will likely pose the most formidable challenge following the acquisition, according to AMR Research. Both companies have their roots in the era preceding global services delivery - before the rise of low-cost IT services locales such as India. And despite significant investments both onshore and off, both companies are still adjusting to the global climate, said AMR analyst Phil Fersht. Coordinating their efforts will be all the more difficult at twice the scale.
It will also fall to the new company to make smart and nimble decisions with regard to areas of overlap. "It's going to require some strong self-analysis," Fersht said, as the combined company decides how best to leverage its newfound power to compete head-to-head with the likes of Accenture, IBM, Capgemini, and other multi-national, multi-function business process outsourcing (BPO) providers. For example, Fersht said, there will be opportunities to consolidate and invest in certain delivery centers, while divesting others where it makes sense.
The companies also will have to decide which service management methodologies to adopt, Anderson said. "My guess is EDS'," he added, noting that EDS has made significant investments in the past few years in its services development. But either way, he said, "They'll have to look at the existing client bases and standardize their approach."
"HP bought a strong brand with EDS," Fersht said. "Despite several acquisition options, they went for a higher-priced and bigger company like EDS because they want to go after IBM, and this is how they're going to do it."
But when it comes to competition, concerns remain about marketplace bids against IBM, Accenture, and others that already have established relationships at the coveted "C" level. Much of what will make HP/EDS the number two services provider will be based on the combined companies' strengths in infrastructure and management outsourcing, Anderson said, but the new entity will still face plenty of competition for pure consulting and systems integration engagements.
AMR's Fersht agreed, adding that despite EDS' strengths in call center and HR services, and HP's well-established finance and accounting BPO portfolio, the combined company still lacks in business-facing consulting and application integration capabilities.
Despite the challenges ahead, however, market conditions appear to be on the new HP/EDS' side. Though the current economic climate has negatively affected other technology segments, including enterprise software, all indications are that the market remains healthy for IT services providers. The question is: How quickly can the combined company optimize its marriage?
"Anytime you try to integrate a $22 billion company into a $100+ billion company, it's going to be a challenge," Gartner's Anderson said. "It boils down to how much fear, doubt, and uncertainty will remain about the combined entity's real capabilities, and how quickly they can get back to winning deals."
Both HP and EDS declined to be interviewed for this article.
This article originally appeared in the July 2008 issue of Managing Automation.
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