Customers set to benefit from HP-EDS mega deal

HP's agreement to buy services giant EDS for $13.9bn (£7.2bn) has sent reverberations throughout the IT industry. Sceptics were quick to disparage the deal, and HP's stock dropped sharply after it was confirmed.

However, customers of both firms may be able to turn the short-term uncertainty created by the merger to their advantage.

Forrester analyst Christine Ferrusi Ross said that uncertainty created by the deal strengthened the position of IT leaders when dealing with HP and EDS. She advised firms negotiating with the vendors to press for more favourable terms.

Meanwhile, a spokesman for EDS customer Shell said it had already received full assurances over the merger. Shell is in the process of transferring 3,200 IT jobs to a number of outsourcing partners, including EDS. The spokesman confirmed that "we will continue with the timely transfer of services and personnel from Shell to EDS as planned".

The landmark deal will create a global competitor that could challenge IBM’s dominance of the IT services market. But the short-term uncertainties associated with such mega-deals provide a window of opportunity for customers.

Over the next 18 months the two firms have 39 deals worth a total of £6.6bn up for renewal, noted IDC analyst Mette Ahorlu. “When contracts are up for renewal, customers look around more and, on average, 30 per cent switch,” she said. That will add to the pressure that HP is under to demonstrate the merit of buying EDS, and improve customers’ bargaining position, she added.

However, IT leaders should also be aware that the HP-EDS tie-up presents risks as well, said Forrester analyst Christine Ferrusi Ross. “They should also pay extra attention to exit clauses and terms,” she warned.

Indeed, Ahorlu predicted, many EDS customers will already be anxious about the acquisition. “HP is a company with a very different culture and history to EDS,” she said.

EDS appeals to cautious clients, such as banks and public-sector organisations, and most of its work revolves around mainframe environments and building bespoke systems for its customers. “In contrast, HP tends to offer customers standard solutions,” she added.

HP chief executive officer Mark Hurd said the acquisition would redefine the IT services market, creating “a leading force in global IT services”.

According to analyst group Gartner, HP’s existing services division delivered revenues of £8.9bn in 2007, while EDS’ IT services revenues were £11.4bn. During the same timeframe, market leader IBM had IT services sales of £27.9bn. The combined HP-EDS will therefore still trail IBM, based on services revenue.

And while the deal creates the potential for cost savings in areas such as network and desktop management, where both firms have established offerings, it fails to address some significant gaps in HP’s service offering, said Ahorlu.

“EDS is not an ideal buy for HP because both firms are infrastructure-focused and want to enter the applications space,” she explained. Neither company enjoys the business-level dialogue with its customers achieved by IBM and Accenture, she added.

Nevertheless, Hurd will be keenly aware that in inking the deal, his fortunes are irrevocably tied to its success. His predecessor, Carly Fiorina, lost the support of HP’s management board after the hapless acquisition of Compaq. And Hurd has been quick to highlight the strategic benefits the EDS deal will bring, arguing that it will expand HP’s services presence in verticals such as government, healthcare, manufacturing and retail.

Furthermore, HP will also benefit from gaining EDS’ considerable datacentre estate, which it could use to develop cloud computing offerings, suggested Gartner analyst Allie Young. HP will obviously have the chance to pack those data halls full of its servers, she noted.

One of the big challenges for HP is the task of integrating EDS’ army of consultants. It is unclear how Hurd aims to minimise the clash of organisational cultures, though the initial strategy seems to be to keep EDS at a distance. HP plans to create a new division called “EDS – an HP company” that will be based at EDS’ headquarters in Plano, Texas.