HP should use split to make up lost ground in IT services

When HP acquired EDS for $13.9bn in 2008 the scene was set for the IT giant to challenge IBM in the IT services sector

When HP acquired EDS for $13.9bn in 2008 the scene was set for the IT giant to challenge IBM in the IT services sector, but little has happened to cause IBM to look over its shoulder.

After thousands of redundancies and an almost $9bn write-down, EDS is a shell of its former self. General Motors’ decision to bring its outsourced IT back in-house in 2012 was a high-profile example of the blows HP’s service division had to take. 

General Motors (GM) was a highly outsourced organisation, with HP its major supplier. The EDS business HP bought was previously the internal IT function of GM. 

But how could EDS, a pioneer of IT services with a list of customers the envy of every IT company on the planet, lose value so quickly? The loss of experience, a drive to get cash quick, a lowering of service levels and a commoditisation of IT have all contributed, say sources.

HP has announced that it is to split into two separate companies, one focusing on PCs and printers, the other on enterprise computing. The PC and printer business will go by the name HP Inc and the other half Hewlett-Packard Enterprise, which will be a $58.4bn company selling servers, storage, networking, IT services, software and cloud services.

But what difference will the split make to the IT services business of HP, or Hewlett-Packard Enterprise as it is to become known?

HP preparing for restructure

Peter Schumacher, CEO at management consultancy Value Leadership Group, said the split at HP is probably just the beginning of years of restructuring. 

“This announcement is just going to open the door. Once it is split, it will more manageable sizes and will be able to restructure them, including the services arm,” he said.

Schumacher said the momentum is with other IT services suppliers, particularly those in India, and HP services needs to restructure if it is to compete. “Up to now, since the take-over of EDS, HP has just cut costs by reducing the headcount,” he said.

He added that the IT services business – the former EDS arm – could eventually be spun out or parts of it could be sold.

HP needs to become more flexible and agile

Schumacher believes the timing of the split could be unfortunate. As it will probably trigger years of restructuring, he said, the IT services arm might miss out on the increased IT spending planned by large businesses over the next couple of years. 

“A lot of European organisations have moved from just spending on IT to keep the lights on to spending on IT to change the business through technologies such as cloud, social analytics and mobile technologies. All the HP restructuring will come at a time when many of the big companies are spending money,” he said.

Schumacher’s claim that HP is being left behind is backed up by Forrester analyst Peter Burris. “We don’t routinely see HP show up on the shortlist for crucial application and transformation services deals. We also often hear from clients that existing HP service agreements don’t do enough to help CIOs deliver more modern, agile services to business," he said. 

"Now’s the time to engage with HP to help shape its enterprise services vision. Tell HP to get creative on terms and pricing. The company is experimenting with different relationship forms. Now may be the time to press for the one you want," said Burris.

“HP should press for a more modern, agile enterprise services strategy,” he added.

Transformation takes time

Former EDS senior executive Jean-Louis Bravard, currently a consultant to IT services firms, agreed that HP services needs to be a lot more nimble and flexible than it is today – and the split of HP could be a good first step to do this. 

“Some companies just get too big and impossible to manage with lots of conflicts of interest,” he said.

Now’s the time to engage with HP to help shape its enterprise services vision. Tell HP to get creative on terms and pricing

Jean-Louis Bravard, IT consultant

Bravard suggested that once HP splits it will be more manageable and can focus on certain businesses such as services. But he warned of major challenges ahead.

“My biggest worry is that a lot of talent has left the enterprise side at HP,” he said. “A lot of business knowledge has gone and, at the same time, the expertise of clients has gone up,” he said, adding that more people are likely to leave as part of the break-up of the business.

Bravard said the market has changed and HP might struggle to catch up on more nimble competitors that have already adjusted how they work. “The opportunity today is not so much transformation when a client trusts a supplier to run the show. CIOs know what they want, they want it quickly and at a low cost.

He said the focus was good but, like Schumacher, he believes HP services could miss out on current opportunities due to a long transformation process: “This will only happen next year and then there will be more restructuring.”

He added that this slow process might mean HP’s services division misses out on opportunities in digital transformation. 

“We are just at the beginning of the digital revolution. A lot of the large companies have not yet realised that this is being driven by consumers, so there is much more to come” said Bravard. “This long restructuring period is good for competitors such as the Indian suppliers or companies like Capgemini and Atos in Europe.”

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