As the number of IT services providers capable of global or large-scale governmental projects steadily declines, are the remaining few becoming too powerful?

When Hewlett-Packard agreed to acquire Electronic Data Systems (EDS) in May 2008, the shape of the IT services industry changed dramatically overnight.

EDS was the world’s second-largest provider of IT services, while HP’s IT services division ranked number five in global market share last year. Combined, the two companies took $39.4 billion in IT services revenue in 2007.

What this means for the market is unclear.

On one hand, the HP/EDS conglomerate will become the first IT services provider to come close to the weight of that gorilla of the industry, IBM (which had 2007 services revenues of $54.1 billion).

On the other, for companies or public sector organisations of a certain size, an already limited list of providers with the clout to support multinational or governmental IT projects has just got shorter.

The consolidation is set to continue. “When acquisitions of this size happen, it tends to have a domino effect,” says Eric Woods of IT analyst Ovum. “Companies tend to think, ‘We have to be an acquirer or be acquired.’”

The UK government recently announced the shortlist of technology partners for its controversial ID card scheme. Going through to the next round of trials are five vendors – competing for just five contracts.

The Home Office describes this as a natural result of its new procurement process.

But one vendor named in the shortlist, Fujitsu, had that same week been dropped from the NHS transformation project, possibly further delaying the already over-budget programme.

This suggests that the UK government has too little choice to be able to negotiate with potential contractors with sufficient leverage to get value for taxpayers’ money.

However, some observers say consolidation may revive competition and innovation. If the top-tier vendors do not provide compelling service at an appropriate price, buyers will look elsewhere. This may help promote new models of service delivery, new technologies and new vendors to the global or governmental stage.

The experts' response

Gartner research VP Lorrie Scardino says that, while the HP/EDS deal does limit choice, there is no need to panic just yet

If your organisation has a need for global-scale projects, one choice of provider has been taken away in an already compressed market. But our advice is don’t panic. Even with four or five competitors, you are going to get pretty good competition. And as the market compresses on one end, it usually opens up on the other.

We say to those organisations, go back and look at your sourcing strategy. Make sure that the market is still the same place it was when you made your decisions, and if not you have to recalibrate.

Nigel Roxburgh, research director for the National Outsourcing Association, argues that the deal may actually improve choice

HP/EDS will be a force to be reckoned with, and that in itself will change the morphology of the IT services industry. But I wouldn’t say it was a huge reduction in choice. You could argue it is more choice for some people; here is a new major-league player in some respects. But organisations might feel there are conflicts of interest, depending on where they get their desktop infrastructure from. Most outsourcing contracts have an ‘in the event of change of ownership’ clause, and I would recommend taking a look at it.

Further reading

Worldwide surge in demand for IT servicesIT services are increasingly in demand, although big players like IBM still take most of the pot

EDS buy to reshape Hewlett-Packard Analysing HP's $13 billion IT services acquisition

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