Catching Up or Staying Ahead?

Today's blog on the HP/EDS deal comes from Peter Allen, Partner and Managing Director, TPI.

The marriage of EDS and HP is not about catching IBM, as has been commonly reported, but about staying ahead of Google, Amazon and Dell, while emphasizing services over effort.

Look at the bigger picture: there are only two clear leaders covering the broadest spectrum of outsourcing services.  IBM and Accenture cover the gamut of IT and business process services, including many industry-specific processes for airlines, retail, pharmaceuticals, and banking. The nearest pursuers are in India: Infosys, TCS and Wipro.

The combination of EDS and HP is one step short of having the sort of coverage enjoyed by IBM and Accenture, but three steps ahead of everyone else.

HP is a strong player in F&A and procurement, along with infrastructure services and applications.  EDS, one of the fore-fathers of infrastructure services and business applications, is known for operational excellence, and has a respectable HRO operation. 

With the world heading towards ‘cloud computing’ or ‘utility computing,’ the emphasis on services over effort becomes more prominent, and both ends of the spectrum, technological expertise and operational excellence, are required. HP is investing heavily in technological innovation to make computing and communications a more efficient and cost-effective proposition for large corporations.  EDS is world class in operations, something that comes with experience and focus.

But many offshore service providers still depend heavily on labor arbitrage, and HP and EDS are directly attacking the labor-oriented business model. Both HP and EDS have reasonable headcount in lower-cost destinations, but the emphasis on services over effort changes the rules of the game, and that will affect the profitability profile of their IT and business processing services. 

As for the remaining independent IT service providers like CSC, ACS and Perot, I think these companies may be equally attractive to the emerging providers such as Dell, Google and Amazon, as well as the India-heritage providers that will not stand by to watch this move go forward unchecked. 

At the end of the day, we need to let this deal play out to see what comes of the combination and how it will impact the global outsourcing industry.

Comments

[Mark Mayo]

Peter, as always you do a good job painting the long term strategic implications of moves such as the HP-EDS combination. I tend to focus on the more readily apparent implications. HP will gain substantial improvement in time to market and momentum on a stronger, more consistent global delivery model. This should provide substantial benefit to HP's current outsourcing clients. EDS gains scale, and operating efficiency and potential synergies, allowing them to compete more effectively with IBM, and to separate themselves from the next level of Tier I competitors. How well the integration is executed will be the short term test. The long term grade will be based on how effectively the combined entity is able to enhance their global competitiveness.

[IT]

Peter,

You make an interesting point – however can you explain why “the emphasis on services over effort is the game changer” given that there is very little overlap between utility computing vs. offshore service providers’ current services.

[Peter Allen]

Both models - 'utility computing' and labor arbitrage sourcing - are changing.

The marketing hype of utility computing that has dominated for almost 5 years is finally being brought to reality, but by new entrants to the game. Namely, Google, Amazon, Dell, and ... HP?

At the same time, most of the India-heritage providers that earned a seat at the table via the labor arbitrage route are hurrying to leapfrog the established ITO providers. How? By building out services that leverage a great amount of domain learnings and a willingness to sign up for outcomes.

So ... whether you're in the 'cloud computing' business (as I surmise to be the destiny that EDS/HP seeks) or the rapidly-evolving offshore service provider universe, there's renewed emphasis on Services over effort.

It's a good thing.