Oracle has enjoyed considerable success by rolling up the software side of the the now-mature client-server model of corporate computing. With its $13.9 billion acquisition of sluggish outsourcing giant EDS, Hewlett-Packard is playing the same game on the services side. It’s buying vast tracts of data-center space in which run the computers and other IT machinery that power the operations of lots of large companies and government agencies. The addition of EDS more than doubles the size of HP’s services business, giving it a scale closer to that of the leading IT outsourcing company, IBM.
Om Malik argues that the acquisition is a forward-looking move, aimed at building up HP’s cloud-computing infrastructure for the next generation of corporate IT. I would argue it’s backward-looking: an acquisition aimed at boosting profitability through consolidation and cost reduction in a mature business. The transition to the cloud will, for big companies, be a slow one, and there will continue to be much money made in running client-server infrastructures for many years.
Vinnie Mirchandani, noting that EDS’s business is dominated by infrastructure outsourcing, calls the acquisition “a scale play,” and HP CEO Mark Hurd would seem to agree. In a conference call this morning, he highlighted “a leaner cost structure” as one of the major benefits of the merger. “There’s a tremendous leverage you get from scale,” he said. With this buy, Hurd doesn’t have his head in the clouds. His concerns are altogether earthly.
It’s worth noting that cloud computing promises to turn many traditional systems-outsourcing businesses into pure commodity businesses – undifferentiated utility services. But that’s 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, particularly if you can significantly push down your costs by combining accounts, consolidating and automating data centers, and trimming staff. This deal is likely to set off an aggressive period of acquisitions in IT outsourcing – just as we’ve seen in recent years in enterprise software. Make hay before the sun sets.