EDS buy to reshape Hewlett-Packard

Mark Hurd is the golden boy of IT. When Hewlett-Packard announced in May 2008 that it was to acquire pioneering IT services heavyweight EDS, few analysts questioned the HP CEO’s ability to make the eye-watering $13.6 billion deal work.

Observers were less unanimous, however, in their thoughts on what the deal says about the future of the IT services market. Does this act of consolidation spell the beginning of the end for the existing structure of the IT services market? – after all, consolidation often pre-empts decelerating growth. Or does HP’s play suggest there is much more money to be made as both systems and services giant?

Recent figures from Gartner support the latter position. In the $748 billion global IT services market, says newly published data for 2007 from the analyst company, IBM stands head and shoulders above all comers, with services revenues of $54 billion and a growth rate of 7.2% that is more than double that of its nearest rivals. And that dominance has never been challenged – until now.

The combination of Silicon Valley-based HP’s existing services division and EDS will be a new powerhouse of the industry, with expected total sales of $55 billion for next year. (Their joint revenue in 2007 was $39.4 billion, according to Gartner.)

Not only will ‘EDS – an HP company’ (as it is now to be known) exploit its parent’s greater global reach to chase down the growing services opportunities across the planet, it will also provide HP with a greater ability to use and sell its own systems within services contracts – a model that has proved highly successful at IBM Global Services.

But for some observers, the HP/EDS deal is less about mimicking IBM’s tricks and more about something altogether more forward-looking. “This is HP’s bet on utility and cloud computing,” argues well-read blogger and author Om Malik.

Corporations are increasingly interested in sourcing systems’ power as a managed resource, Malik argues. And that is posing a threat to HP’s model for hardware sales. But armed with a combination of utility computing and the kind of consultancy and data-processing services that EDS is famed for, HP – whose existing services arm is already strong on managed infrastructure services – could make the transition to utility provider, Malik says.

But not everyone agrees. Jeff Kaplan, of the THINKstrategies consultancy, took the diametrically opposite view, arguing that the EDS acquisition betrays old-world thinking at HP.

“EDS brings nothing to the table when it comes to SaaS, managed services or other utility-based offerings,” he says. “Instead, it saddles HP with lots of ageing people, facilities and business ideas that haven’t kept pace with today’s realities.”

Surprisingly, it came to Nicholas Carr, the Cassandra of cloud computing, to inject some realism into the debate. Utility computing is, he says, “still well out into the future, at least when it comes to enterprise-scale IT”.

“In the meantime, there’s a lot of cash to be made in running client-server systems for big clients,” Carr continues, “if you can significantly push down your costs by combining accounts, consolidating and automating data centres, and trimming staff.”

While his peers may have their heads in the clouds, it is this kind of practical thinking for which Hurd is so admired.

Further reading

An interview with Ann Livermore The head of HP’s $33 billion Technology Solutions Group talks to Information Age about the hottest topics in IT

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media (now Bonhill Group plc) from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The...

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