Will Bigger Be Better? HP Spends $13.9 Billion on EDS to Find Out

Hewlett-Packard (HP), the world's largest producer of personal computers, announced yesterday the acquisition of EDS, a Plano, Texas-based company specializing in information-technology outsourcing, for the not-too-shabby price tag of $13.9 billion in cash. Analysts and observers have responded to the merger with both favorable and quizzical nods, wondering what the future of HP means for IT services -- and for CRM in particular, thanks to EDS's strength in that space.

EDS, named one of CRM magazine's Service Leaders in the Outsourcing category for several consecutive years, provides traditional, on-premise solutions as well as other services in the field of business process outsourcing. "EDS is more mature and more sophisticated in many of the processes that they bring to market than where we are," said Mark Hurd, HP's chief executive officer and president, according to a Thomson StreetEvents transcription of the conference call announcing the merger. "So frankly, it is almost us putting our outsourcing business into EDS, giving our outsourcing business the leverage of that capability and scale and maturity."

The acquisition means an obvious increase in scale; HP's intended strategy had been a topic of great analysis and debate. "This is consistent about what HP's direction has been for some time now, before Mark Hurd took over," points out Gordon Haff, senior analyst and principal IT advisor with Illuminata, a Nashua, N.H.-based provider of research and advisory services. "They want to be a high-scale, high-tech conglomerate, in many ways in the image of IBM. This brings them closer to that."

Putting a CRM lens to the acquisition, Jeffrey Kaplan, managing director of software-as-a-service (SaaS) consultancy ThinkStrategies, says that the merger doesn't bring anything new or fresh to life. He writes in his blog, "The HP/EDS combination doesn't fit this new world order," meaning that EDS lacks advancement in the newer CRM market -- especially in terms of the SaaS model. He does positively note, though, that EDS will bring strong expertise in traditional, on-premise CRM projects to HP.  

"Both companies have shown a lack of focus in the on-demand world and need to catch up to what's going on in that marketplace," Kaplan says, in a subsequent interview with CRM. "That takes a different set of skills, and a different approach to the marketplace, and a different set of relationships." Citing recent research, he wrote in his blog that "the number and size of traditional IT outsourcing deals has been declining for the past few years." Despite the fact that a great deal of the CRM industry's momentum is burning within the on-demand realm, Kaplan says it's a delivery method that neither HP nor EDS has greatly explored. In fact, in his blogpost, Kaplan went so far as to say that "EDS brings nothing to the table when it comes to SaaS, managed services, or other utility-based offerings."

Kaplan also says that EDS employees must be feeling some sort of ambivalence about losing their company identity. However, he adds, "EDS folks are salivating at the fact of access to HP customers, just as HP is looking forward to having access to the EDS customers that they haven't had before."  

The EDS CRM team did not respond to a request for comment on the acquisition. An EDS spokesperson says that, since the merger is brand new, no changes will occur for some time, perhaps another six months. Despite that assurance, however, an internal memo from EDS CEO Ron Rittenmeyer to the EDS staff, and obtained by CIO magazine, indicates that those changes, whenever they occur, may be quite significant. "Obviously, this news means major changes for everyone involved," Rittenmeyer writes in the memo. "There are many questions to be answered and decisions to be made in the coming months. Ensuring a successful integration is our top priority."

According to the memo, HP will create a new business group, to be known as "EDS, an HP company." That unit will remain in Plano, Texas, and be lead by Rittenmeyer, who will report to HP's Hurd.  

In a Forrester Research report, "HP Acquires EDS To Focus On Enterprise IT Services," analyst Paul Roehrig warns that the merger will be an "uphill climb," saying that integration will pose a serious challenge and that HP will need to fully strengthen its offerings to leverage the investment. He writes, "Although the scope of the deal is clear, just how many clients will decide that 'bigger is better' for their businesses remains the biggest unknown."

Another unknown is the impact the deal will have on EDS's decades-long relationship with Microsoft -- a relationship that was prominently featured at the most recent Microsoft Convergence conference.

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