New HP CEO Could Signal Strategic Shift From IT Services to Software

Outsourcing analysts are divided on whether HP's appointment of a veteran software CEO to replace Mark Hurd indicates a dramatic shift for the company toward software and away from services. In the short term, however, they say HP's IT services unit will remain focused on its ongoing EDS integration, which is good news for customers.

By Stephanie Overby
Tue, October 05, 2010

CIO — HP's appointment of former SAP CEO Leo Apotheker to replace Mark Hurd has generated much discussion about the Palo Alto-based tech giant's future business focus. For HP's IT services customers (many of whom are legacy EDS clients), the question is what the arrival of Apotheker, whose résumé screams software—and a very specific brand of software to boot—means for its outsourcing business.

"It does cause one to wonder where HP perceives its real growth to be," says Ben Trowbridge, CEO of outsourcing consultancy Alsbridge.

HP's services unit remains its most profitable business, but enterprise software delivers better profit margins than labor-intensive outsourcing. While the company already has a sizable business in infrastructure management software, bringing a seasoned ERP salesman on board could enable HP to cushion its coffers with a bigger piece of the business systems pie.

"It doesn't seem as though outsourcing will be HP's focus. This [appointment] shows an emphasis on software as a growth engine rather than services," says David Rutchik, partner with outsourcing consultancy Pace Harmon. "HP is disappointed with the growth in the outsourcing area—both its internal results and external market opportunity."

Truth be told, HP never was an IT services company per se, even after its acquisition of EDS. Although it is the number two outsourcer in the world based on volume of business, IT services comprise just a third of HP's revenues compared to about half of IBM's sales and 100 percent of Accenture, CSC and CapGemini's businesses.

And if HP is thinking about getting software-company-acquisitive, as some say the Apotheker hire suggests, the relative importance of traditional IT services to HP could diminish even more.

"Elevating Ann Livermore [head of HP's services business] to the top job would have made a statement that HP is a services company," Rutchik says. "That is what IBM did when appointing Sam Palmisano." (Palmisano was instrumental in creating the business unit now known as IBM Global Services, although he also held management positions in its enterprise and personal systems groups.)

"This is an acknowledgment that, while services are still an important part of the business, these other pieces are that much bigger," says Alsbridge's Trowbridge.

Software and Services: Combine and Conquer

Some of Apotheker's assumed software bias may be counterbalanced by HP's new non-executive chairman of the board, Ray Lane. A former COO at Oracle, Lane certainly has software credibility, but he also has some serious IT services bonafides: He created and led Booz-Allen & Hamilton's global IT consulting group and served as a division vice president at EDS.

It's not a stretch to imagine that Lane and Apotheker could come together to combine the best of both worlds, at least from HP's perspective, if not from its outsourcing customers' perspectives. "You could start to see a lot more solutions which stress new enterprise software as the key to the outsourcing transformation," says Adam Strichman, president of Richmond, Va.-based outsourcing consultancy Sanda Partners. "There is abundant precedence for this type of change."

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