All eyes on HP-EDS services integration plan

HP's announcement this week that it would cut thousands of jobs as it digests EDS' IT services business didn't come as a total surprise to industry watchers, but the company's integration plan did raise eyebrows.

"It's going to be a huge challenge to bring together two very dissimilar businesses," says Ben Pring, research vice president at Gartner. "HP wants to standardize and make processes repeatable. It has the cloud, multitenant, multiclient mindset. EDS in its history approached each client with a very singular unique method. EDS will have to relearn how it does IT services, and the industry will be watching if HP can change the mindset at EDS."

HP met with financial analysts this week to discuss the company's plans for integrating with the EDS business, and the immediate news centered on some 24,600 staff cuts to be made over the next three years. HP reported the 7.5 percent reduction in combined staff will eliminate redundancy in corporate support and other functions, and save the company US$1.8 billion annually when complete. And HP told analysts it will reinvest those savings into its workforce with a plan to hire back up to 50 percent of those eliminated positions over three years as well.

HP will transfer its outsourcing unit to EDS, and parts of HP's consulting unit will fall under the EDS business unit or HP Software, which is set to be renamed to HP Software and Solutions in November. That means HP's services will essentially be run out of EDS, says Paul Roehrig, a principal analyst with Forrester Research, and that will mean HP staff will have to ramp up to EDS' level in terms of IT services. EDS was ranked as the No. 2 vendor in IT services (behind IBM) and reported US$22.7 billion in revenue for fiscal 2007. HP reported its fiscal 2007 services revenue at $16.6 billion, and IBM brings in about $54 billion with its services business.

"HP will have to be able to move fairly quickly to take advantage of EDS' strong brand. HP has to be able to prove it can deliver across multiple lines of services and be able to do that efficiently," Roehrig says. "[HP CEO Mark Hurd] has shown a willingness to execute more and streamline integration efforts."

Cultural issues aside, other factors could hinder HP's success, as clients accustomed to EDS' business model might balk at HP's attempt to incorporate its software into its services offerings. IBM strategically separates its Global Technology Services business from its product offerings, promising to remain vendor-agnostic and apply technology best suited to the customer environment. Yet industry watchers worry HP has plans to bring its software and services business closer together, effectively pitching HP wares with outsourcing offerings.

"IBM made that strategic decision a long time ago and it has paid dividends," Gartner's Pring says. "The EDS model is technology-agnostic, and HP should understand veering away from that is a dangerous strategy. If HP pushes its own products too aggressively in outsourcing accounts, they will shoot themselves in the foot."