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HP rolls up EDS

May 13, 2008

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.

Comments

I think this move can be viewed as both backward and forward looking. HP really gets the best of both worlds in terms of consolidation of legacy systems, and the building blocks for expansion into the "cloud computing" space that we're already stepping into. It's a good move for HP and the timing is right on.

Posted by: George Tuvell at May 13, 2008 10:25 AM

ComputerWorld.com made the point that support is a big item in this deal - no doubt EDS has a gynormous call center or two to handle all their clients.

Since I'm a grey-beard OpenVMS veteran, I can tell you HP DOESN'T GET SUPPORT. They outsourced their OpenVMS phone support to India, leaving us 'high-availability' guys stranded. IIRC, they gave them 3 weeks training on a product with literally millions of engineering hours invested in it. All in the name of cost cutting.



I suspect Herd thinks he can squeeze a bunch of costs out of EDS operations using many of the same tactics he used in HP. Enterprise customers take note: Naan bread for lunch tomorrow, and every day thereafter!

Posted by: spinLock at May 13, 2008 01:14 PM

spinLock:

Under current US tax law, HP doesn't have to pay a penny in taxes on profits it make in subsidiaries abroad. Adding the revolving door for outsourcing provided by the H1B and L3 visa program and the fact the labor costs in India is dirt cheap can you blame Herd? These are corporate welfare give always provided by your own government. Can you really blame a “corporate welfare mom” like Herd for using them?

Posted by: Linuxguru1968 at May 13, 2008 05:18 PM

"cloud computing promises to turn many traditional systems-outsourcing businesses into pure commodity businesses - undifferentiated utility services"

Absolutely agree. The transition from a product economy (with competition based upon feature set) to differentiated services and then to undifferentiated services (with competition based on price & quality of service) will be slow at the Enterprise level.

However this disruptive change is already starting to happen.

Fantastic post Nick.

Posted by: Simon Wardley at May 16, 2008 07:29 AM

very nice article.
estetik cerrahi

Posted by: ankaranakliyat at June 6, 2008 08:32 AM

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