H-P and the Challenges of Outsourcing
H-P
moved to buy a bunch of new outsourcing business this spring when it
agreed to pay more than $13 billion for services giant Electronic Data
Systems, a deal set to close August 18. Meanwhile, the computer giant
has learned that holding on to outsourcing customers isn’t always easy.
Deutsche
Post–the parent company of DHL–appears to have had second thoughts
about a big outsourcing agreement that H-P announced in January.
Information Week reported last week that Deutsche cancelled the deal
because it wouldn’t provide adequate cost savings.Cost savings are a
big point of outsourcing deals. When H-P’s deal with Deutsche Post was
announced, H-P said in a press release that it would save Deutsche Post
“at least 1 billion euros over the next seven years by driving down
overall IT costs and better leveraging IT,” and that H-P would hire
about 2,500 employees who currently provide tech services for Deutsche
Post.
An H-P spokeswoman provided a brief emailed statement
about the Deutsche Post affair. “Given the strong relationship between
both companies, and the information gathered through this exercise, it
was jointly agreed to revisit the situation if and when appropriate at
a future point in time,” she wrote.Another issue is whether the H-P-EDS
merger impacts the pricing strategy of General Motors, a major EDS
client. GM has sought to drive outsourcing prices down by splitting its
IT services between several vendors. In 2006, when the company
finalized a number of new outsourcing contracts, GM (which owned EDS
from 1984 to 1996) awarded the biggest chunk to EDS. At the time, EDS
said it would get $1.2 billion to $1.4 billion a year from the deal. GM
gave smaller pieces of its IT business to other companies, including
H-P, which at the time said it would get about $700 million from GM.
Bob
Djurdjevic, an analyst with Annex Research who follows the IT services
industry, said GM has tried to use a number of providers to create
pricing competition. “GM’s unhappiness with putting all its eggs in one
basket goes back five years,” he said, adding that GM “cannot be happy”
that two key providers have merged.But in the long term, he has high
hopes for H-P’s services department in the future, and he says the
company should have acquired EDS years ago. Indeed, he said, he told
then-CEO Carly Fiorina to buy EDS in 2004. “I saw it to be very
complementary,” he said.A GM spokesman did not immediately respond to
requests for comment.