HP's Acquisition of EDS Misses Real Market Opportunity

Hewlett-Packard's (HPQ) decision to acquire Electronic Data Systems Corp. (EDS) cannot be faulted when measured against all the standard metrics for doing a mega-deal in the traditional technology world. It gives both companies greater scale and access to more corporate customers without a lot of overlap.

The problem is that we are in the midst of a fundamental change in the way customers acquire technology and the way they perceive their vendors. The HP/EDS combination doesn't fit this new world order.

There is no question that EDS strengthens HP's hand when it comes to building and managing complex enterprise data centers. The acquisition also gives EDS ready access to HP's installed base of customers.

Wherever there are big systems integration and ongoing management projects to be won, HP/EDS will be in a better position to compete with IBM (IBM) and the off-shoring companies than they were a day ago as two separate companies.

However, many corporations are looking for new ways to leverage technology that permit them to be less dependent on traditional data centers. This no longer means simply outsourcing their data centers to the IBM's and EDS's of the world, but transforming where and how they obtain computing power.

Check the market stats of the leading research firms who follow the outsourcing business and you'll see the number and size of traditional IT outsourcing [ITO] deals has been declining for the past few years.

Corporations are fed up with the hassles of managing their own IT operations, but they are equally dissatisfied with the poor track record of traditional ITO deals.

The ineffectiveness of legacy systems and software combined with the inflexibility of traditional ITO arrangements has driven a growing number of companies of all sizes to evaluate and adopt a widening array of on-demand Software-as-a-Service [SaaS] and managed services.

I first identified this shift in 2006. Gartner finally recognized this trend two years later, when in January 2008 it proclaimed that:

...the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area through 2008 and beyond. More providers are developing utility-based offerings across infrastructure, application and business process domains. The trend toward software-as-a-service [SaaS] is gaining the most traction...

Unfortunately, EDS brings nothing to the table when it comes to SaaS, managed services or other utility-based offerings. Instead, it saddles HP with lots of aging people, facilities and business ideas that haven't kept pace with today's realities.

Since HP has also failed to establish any thought-leadership or demonstrate any market leading capabilities in the SaaS or managed services markets, it isn't likely that it will be a catalyst for change within EDS' calcified operations.

So, the question is how long will it take for the EDS acquisition to bring HP down or can the combined entities wake up in time to respond to the changing marketplace?

Comments

[Kanji]

Good points but the reality is that SaaS and Service Oriented Architecture is still an open question. In fact it existed in some subscription models in the 90s, but it is unproven for large enterprises spanning the globe and will remain so for years to come. (Those models still require hardware/network/hosti... by the way i.e. little technological difference just housed somewhere else where it may not have as much scale).

That said, it may be the future, but HP and EDS, and shareholders are better served if those two combine on the question than if they ponder it alone.

From my perspective, there is still a general 'applications/software... gap (regardless of SaaS, etc) compared to IBM, but again better to combine efforts than go it alone. Thought leadership comes from IP and IP has more opportunity to develop in a combined entity. I think this merger is very positive for both.

[joejax]

It might have been helpful if Mr. Kaplan had paid attention to where H-P is going, not where it's been. He might have profited from reading Dana Gardner's article in today's lineup: "HP Joins Desktone's Partner Program to Advance Virtualized Desktops as a Service." H-P's extensive R&D is wide and deep and likewise pointed toward future possibiltities, not merely innovations on the past.

[naveed]

Interesting contrarian viewpoint! The trend is certainly going towards SAAS. However the traditional ITO arrangements are far from dead. There's still plenty of deals to be made. In the meantime, HP should be formulating their SAAS strategy over the next several years to remain competitive.