HP swallowing EDS may open channel services opportunity

As HP (NYSE: HPQ) moves forward with its US$13.9 billion acquisition of IT services firm EDS Corp. (NYSE: EDS), industry observers say there will be opportunity for channel players in the burgeoning services space.

Once the acquisition closes HP will be folding its services business into EDS, headed by EDS CEO Ron Rittenmeyer. Currently, HP’s services practice is designed to be complimentary to its channel partners, and HP president and CEO Mark Hurd said in a conference call that the channel focus won’t be changing with this acquisition.

“It’s good for HP, so I think it’s going to be good for our channel partners,” said Hurd. “Our commitment to channel partners is in the very DNA of the company. I don’t think there’s going to be anything but goodness (for the channel).”

A business as usual approach vis-à-vis the channel is also expected by Michelle Warren, a senior analyst with the London, Ont.-based Info-Tech Research Group. Warren says the large services players such as EDS and HP often bid on large contracts and outsource some of the service delivery to the channel; that’s unlikely to change.

While the merged company will be a large and formidable competitor to IBM Global Services, Warren says there will be more opportunity for smaller, specialty services players, both through EDS/HP contracts and bidding for opportunities on their own.

A services company that both competes against and works with HP is Mississauga, Ont.-based CCSI Technology Solutions, a division of CompuCom. Phil Soper, vice-president and general manager with CCSI, says he sees a deepening of both their competition and cooperation with HP coming from the acquisition.

“The reality is we’ll compete more and more, and as we move up that services value-chain into managed services the playing field gets bigger. Out of that will come some opportunities,” said Soper. “They’ll expand their portfolio of customers, and depending on how they integrate those two companies they may need delivery expertise that we can provide.”

The acquisition will help move the company out of IBM Corp.‘s (NYSE: IBM) shadow, according to one industry analyst. But not before EDS’ Canadian operations face some potential reshuffling.

“If I was in the technology group for EDS, I think I’d be a little worried, considering there are a lot of duplication of tasks and clients,” Sebastien Ruest, vice-president of services research at Toronto-based IDC Canada, said.

Much of HP’s focus in the last few years, he added, has been in creating its technology solutions for its business outcome mantra and perfecting the infrastructure services layer it delivers.

The potential for job cuts was also echoed by EDS’ Rittenmeyer, who said that while the overlap was not too extensive, both companies have some customers in the same space.

“In terms of job cuts, we are continuing to streamline our workforce at EDS and we’ve been doing this for some time,” he said in a press conference Tuesday. “Obviously there’s going to be some changes, we’ve already been doing that this year, so I don’t think it changes our plans in this area. We’re going to continue to look at automation and quality. Automation makes quality and service better for the client and it’s part of the evolution.”

Interestingly, some of those working in HP’s services unit may also be feeling a little “worried” as the Palo Alto, Calif.-based tech giant plans to move some of its workforce into the future EDS business group.

“HP is actually moving some of its service unit into EDS, so it’s an interesting twist where we’re being acquired, but some of their employees are going to be impacted as well,” Bob Brand, director of corporate PR for Plano, Tx.-based EDS, said. But according to Ruest, the people that might be the most “worried” about the deal could be those working for IBM.

Ruest said from a post-deal revenue perspective in Canada, HP and EDS would have a combined $1.4 billion in IT services revenues, compared to IBM’s $2.7 billion in IT services revenues.

“If I was IBM, I’d be a little scared because the combination of HP and EDS worldwide would probably have an annual revenue of $130 billion, and nearly $40 billion of that in IT services,” he said. “HP has been in the shadow of IBM’s global services for so long. EDS has recognized delivery models and it has a fairly strong agility alliance that probably rivals IBM in some cases.” Ruest also said HP doesn’t have an application services portfolio or a business process outsourcing (BPO) practice, both of which EDS Canada is fairly strong in.

HP Canada spokesperson Mehboob Jaffer said the fact that the there’s not huge overlay from a customer perspective means HP will have a tremendous opportunity to grow its business and utilize EDS’ strengths as a result of the deal.

“We’ll be able to align our costs in the services business to EDS’ capabilities, and they’ll be able to benefit from HP’s vast portfolio of technology and R&D,” Jaffer, head of corporate PR and executive communications for HP Canada, said. “We’re in a tough market generically and the services business is a very strong piece of how we see ourselves growing in the future. This is an opportunity for us to strengthen that area and really go into the marketplace at the number one or number two level in each of the areas that HP and EDS operate in.”

The HP and EDS deal is set to close in the second half of this year. EDS will retain its brand and become EDS: An HP company.

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