HP and EDS: better integration is key to success

Having acquired EDS in May 2008, HP has identified significant revenue potential through integrating the firm into its Global Technology Solutions Group. However, Datamonitor believes that HP's go to market strategy requires work, as EDS still appears to be a somewhat non-integrated component. Margin differences and EDS's reliance on General Motors may yet weaken HP's consolidated results.

Following the HP Global Technology Solutions Group (TSG) Analyst Summit in March, a greater degree of insight into the HP and EDS integration has been achieved. So far, the integration of the services and software portfolios of both companies looks promising. However, Datamonitor believes that there is still much to be done before the full synergies of the acquisition can be achieved. On paper at least, the opportunities which would arise from integrating EDS into HP's TSG are clear. Greater manufacturing industry coverage (in particular, the automotive industry) from the perspective of client bases and expertise, entry into new industries (such as transportation), revenues generated by cross-selling of solutions into existing customers, and cost reductions all rank as opportunities that, in Datamonitor's opinion, justify the $13.25 billion acquisition.

So far, the integration efforts have focused on specific areas as HP looks to quickly yet intelligently bring EDS fully into the HP fold. Account management has been paramount in the company's efforts to ensure that customer attrition is minimized. Among manufacturing companies, there are always concerns as to the continued provision of services by an acquired company. Similarly, issues such as multiple points of engagement and customer contact can often frustrate the efforts of sales forces ultimately batting for the same team. Selecting customer leads from both HP and EDS representatives with clearly defined processes for co-ordination between two existing account management teams has been an important step for HP. While such a move sounds obvious, making errors at this stage can significantly impair the subsequent efforts to cross-sell services from the two companies.

So far, efforts to integrate the go to market strategy for the vendor have been challenging, and in Datamonitor's opinion require further work. EDS still appears to be just another service line underneath the TSG umbrella alongside HP Software & Solutions and Technology Services (among others). In reality, EDS's portfolio represents a mix of services and, to an extent, software that should be distributed within HP Software & Solutions, Technology Services, and potentially a third category to represent non-overlapping areas. Ultimately, such a portfolio matrix will be complex and should obviously remain a key element of HP's integration efforts going forward.

One of the more publicized integration efforts thus far has been cost cutting initiatives. While there is a degree of opaqueness in the reasoning behind redundancies from both HP and EDS given the economic crisis, it is obvious that there has been a reduction in headcount from the acquisition. Similarly, efforts have been made to apply some of HP's datacenter technology and solutions to EDS and its datacenter services offered to clients (such as IT outsourcing). Datamonitor believes that this latter type of cost reduction represents a significant opportunity for HP, particularly as it brings in other complementary acquisitions such as EYP, a datacenter design consultancy. IT services is essentially a people business and while technology can provide automation, a drop in headcount can jeopardize the delivery of contracted services, which is now a potential risk for HP.

There remain a number of challenges and risks for HP as it targets the manufacturing industry, not least being the impact of the global downturn on IT budgets, sales cycles, and attitudes towards outsourcing and services engagement. Datamonitor's research indicates that manufacturers are shying away from large transformational projects in both the services and outsourcing space, instead opting for smaller projects that increasingly exist within a multi-source environment. This represents a challenge for the company as it seeks greater agility with its combined services and outsourcing portfolios, but is something which will be enhanced with more time and additional integration efforts.

Similarly, there still exists a significant reliance upon General Motors (GM) as a key customer for EDS and, given GM's much publicized financial difficulties, there could be an exposure to risks associated with a firm in such dire financial straits. While a close working relationship with GM has brought HP excellent process frameworks for the automotive industry, even these may be made somewhat redundant given the upheaval in the automotive and other manufacturing industries. Indeed, efforts to rationalize EDS's and HP's process frameworks are continuing and in Datamonitor's opinion should represent a continued area of focus, given the support which a consolidated view can provide to subsequent, industry-driven service portfolio integration.

From a financials perspective, HP TSG faces a significant challenge. With profit drops in HP's Personal Systems Group and Imaging and Printing Group, TSG is being seen as key to HP's continued financial success. There is a noticeable difference, however, between the operating profit margins of both HP TSG and EDS: at the time of acquisition, the latter's sat around 6%, while the former's was around 12%. Continued cost cutting efforts will help to mitigate a dilution in the operating profit margin of TSG, but only time will tell whether TSG's total contribution to HP's financials is impacted significantly.

In conclusion, Datamonitor believes that HP's integration work is still in its early stages, though noticeable steps are being taken. So far, visibility into the deals secured through a joint HP and EDS approach is low. Such a measure will be the true metric for whether or not the acquisition was a success. Improvements in the integration of manufacturing process frameworks, service and software portfolios and general go to market strategies are still necessary to ensure that the combined forces of EDS and HP can react to the demands of what is a tumultuous industry.

Adam Jura

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