Saturday, May 17, 2008

Vendors Survival: Will HP Survive until 2018? – HP's EDS acquisition First Take

In a previous post I asked the same question about Microsoft and predicted that the probability that at least three of the four leading SOA Echo Systems vendors, including Microsoft, will survive in the next ten years is high. I planed additional posts on other potential Long Term survival candidates.

HP's intend to acquire EDS changed my plan, so this post topic is HP's EDS acquisition. I would have predicted before the intended acquisition, that the probability that HP will survive until 2018 is high due to its dominance of the high volume Printers market and its position in other hardware markets (Servers, Storage, and PCs) and Network and System Management (HP OpenView).

For a long time HP tried to expand its business lines beyond hardware. Acquisition of a J2EE Application Server company resulted in BEA WebLogic as the preferred Application Server used by HP. It failed to acquire Price Waterhouse Coopers and few years afterwards acquired Mercury and few other software companies. Mercury acquisition enriched HP's software portfolio with Testing and Business Performance tools as well as leading SOA products, originated by Systinet which was acquired by Mercury.

As far as size is concerned Compaq acquisition by HP on 2002, is the most similar acquisition to the proposed EDS acquisition. HP's revenues in 2007 were more than 100 milliard USDs and EDS's revenues more than 22 milliard USDs. HP has about 170,000 employees and EDS 137,000 according to AP Associates Press . It was not easy to merge two competing companies (HP and Compaq): PCs, Servers Storage and UNIX operating Systems were overlapping Products Lines.

Issues in HP-Compaq merge
  • Overlapping products lines
As far as overlapping products lines were concerned, the key problems were:
Which product line will be the leading or strategic line?
Which Brand will be the leading Brand and last but not least who will manage the product line?
  • Organizational Culture
Organizational cultures of different companies are not the same. Usually the culture of the merged company is more similar to the culture of the acquiring company, in this case HP. It should be noted that Compaq acquired DEC and Tandem few years before being acquired by HP, so the process of stabilizing its organizational culture was not completed.
  • Overhead
Other functions such as Financial Departments were redundant so as result of the merge some people were fired and others changed their role.
Some of the redundant roles are executives. For example there was no need for two CIOs or two CFOs in the merged company.

Reason for HP's EDS acquisition
EDS is mostly an Outsourcing company competing with that market leader IBM Global Services. Other major player in this market is Accenture. HP is a player in that market and by this intended EDS acquisition aspires to become a leader in that market, challenging IBM.

The optimistic View
HP-EDS combination will be a Co-Leader of the Outsourcing market together with IBM. The customers will benefit from competition between two equal sized giants commercially and technically.

First Take
Sorry, but the optimistic view seems to me less realistic than other scenarios.
Let's look at the dark side and not only at the bright side. Under the assumption that the acquisition will take place, the unified company needs to address the following challenges:
  • Internal Competition in Outsourcing
HP is a player in the Outsourcing market and not a small one, therefore in a lesser extent the company will have to address conflicts resembling in a way the conflicts cited above about HP-Compaq overlapping Products Lines. EDS Outsourcing is roughly twice than HP's Outsourcing business. Both companies strength is in Infrastructure and Technical Services Outsourcing. According to Cnet news Blog EDS Outsourcing revenues on fiscal 2007 were $38 milliard while HP's revenues on the same fiscal year were $16.6 milliard. EDS Outsourcing is roughly twice than HP's Outsourcing business.
The company should select one of the following three Long Term strategies:

Strategy 1: EDS remains as an independent unit keeping its brand
The main concern is HP's own Outsourcing business:
Is it possible that two units of the same company operate efficiently on the same field? Which unit will be the flagship? Should HP Outsourcing compete with EDS or focus on a specific Niche?
IBM Global Services size advantage over both HP's Outsourcing divisions is another concern.
Strategy 2: Merging the two Outsourcing units using EDS as the prime unit and brnad name
This strategy addresses size issues, but requires a long and costly process of merging the two Outsourcing businesses. Organizational Culture changes in HP outsourcing unit and layoffs are expected as part of that strategy.

Strategy 3: Merging the two Outsourcing units using HP Outsourcing as the prime unit and brnad name
This strategy is a mirror of the second strategy. Similar challenges to those cited for the second strategy are expected, but in larger magnitude because the challenges are applicable to the bigger unit instead of the smaller one.
Another possible undesired effect could be loosing customers due to abandoning EDS strong brand name.
  • Can EDS keep its current Hardware & Software strategy?
EDS strategy and IGS strategy are totally different. IGS solutions are based on IBM's large portfolio of hardware and Software. IGS synergy and knowledge of internal products is incomparable to third party knowledge and synergy. The strategy is based upon integration between products of the same vendor.
EDS's strategy is Best of Breed strategy. As a company which is not a software or Hardware vendor it emphasized partnerships with vendors with no significant services capabilities creating a Win-Win partnership. Like EDS these vendors are competing with IBM. EDS is an excellent partner due to its vendor neutrality, Size and Ability to Execute and sometimes even its participation in the Software or hardware vendor R&D activities.
In every hardware and software topic EDS employee acquired knowledge and experience in its partner's products. Usually there are few partners in each area and in some cases one of them is the preferred partner (e.g. EMC Storage, CA its Texas neighbor in Network and System Management and SeeBeyond, which was acquired by Sun because of its SOA products, in Integration).

Even if HP will stick to one of the first two strategies cited above, some of EDS's partnerships will no longer be Win-Win partnerships.
Some of EDS's partners are HP competitors: EMC, Sun, Dell, CA. Will they continue their partnerships with EDS? I doubt if these partnerships will endure. I am almost sure that if these partnerships will continue they will be changed to tactical partnerships
On the other hand partnerships with Microsoft, Oracle & BEA (HP's partners as well as EDS partners) could be extended. I see no reason for changes in partnerships with Cisco, Tibco, Borland or other vendors, which are not HP's competitors.
  • Will the Outsourcing be biased towards HP hardware and software products?
Probably HP Outsourcing strategy, including EDS, will be based on its own Software and Hardware products, similar to IBM's strategy and HP's Outsourcing strategy prior the acquisition. However, HP's software portfolio is not as complete as IBM's, so partnerships with other vendors will be required.
  • Outsourcing as a subset of Services
Another challenge to HP Services Organization is to combine a huge Outsourcing activity with other Services.

In Summary
I am quiet skeptic about HP- EDS ability to address properly the complicated challenges if the acquisition will take place at all. If it will fail, than IBM and other Outsourcing vendors, such as Accenture and the Indian Outsourcers (TCS, Infosys and Wipro) will benefit from this acquisition.
HP's high survival probability will become higher if EDS acquisition will be a success. In case of a partial success or a failure the probability will not be as high as it is.

1 comment:

Avi Rosenthal said...

I received two comments from EDS employees by e-mail. I will summarize them as anonymous comments.
The first comment:
Good blog about EDS and HP. I expect that EDS will loose a lot of being "vendor independent". This was already happening since EDS started with liaising with its strategic IT partners.

The second comment:
HP gets after 7 attempts finally a professional service business in house with a strong BestShore component in India, China, Cordoba/Argentina, Brazil and Mexico
The good news is that EDS remains an independent HP company and that the HP service business will come to EDS. It will be together certainly the number one in the business (desktop/workplace outsourcing, testing etc. )

I think that within 2 years they (HP+EDS) will become a real strong competitor for IBM, the Indian companies and certainly Accenture and/or CSC. HP and IBM are becoming the big guys

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