Massive Layoffs at HP Make for IT Outsourcing Identity Crisis

Major cutbacks at HP, at a time when its competitors are growing, raise questions about the company's IT services strategy for the future. Will it be a low-margin service provider or strategic business partner?

By Stephanie Overby
Thu, May 24, 2012

CIO — It's been more than three years since HP acquired IT services provider EDS, and the long-term direction of its bigger—if not better—outsourcing business is no more clear than it was on the day the deal closed.

While HP's purchase of EDS for $13.9 billion demonstrated an appetite for the IT outsourcing business, a series of subsequent leadership changes portended a shift away from services . And HP's announcement that it will cut 8 percent of its workforce—27,000 IT professionals—by the end of 2014—up to 15,000 of them in the enterprise services division, according to a Bloomberg article—could corroborate that theory.

"[HP] has been on a downward trajectory since they picked up EDS. It increased their footprint, but what they got was a lot of unprofitable business and unhappy accounts," says one outsourcing consultant who asked not to be named because of his employer's relationship with HP. "They're viewed as not nice to deal with by the rank and file of IT. Their reputation is that of yesterday's player focused on infrastructure services rather than strategic partnership."

Paul Pinto and Michael Engel, partners with outsourcing consultancy Sylvan Advisory, have been advising clients to take a wait-and-see approach to HP since the merger, and that's not likely to change anytime soon. "We felt the integration would be a struggle, and then the swings in leadership focus drove us to maintain our position," says Pinto. "Clearly, we are not the only advisors that feel this way, as we have seen HP compete in relatively few new outsourcing opportunities." A significant number of clients have chosen to walk away from HP at the end of their contract terms, adds Engel.

"The HP layoffs are really a symptom of larger problems with HP's services business—namely HP's focus on profitability at the expense of putting the client first and executing on a long-term growth strategy," says David Rutchik, partner with outsourcing consultancy Pace Harmon. "We have seen HP self-selecting out of significant multi-year deals because they don't meet HP's immediate profitability hurdles. This puts HP at a competitive disadvantage now and in the long term."

In its restructuring announcement, HP said it will be "accelerating service capabilities in the high client value areas of cloud, security and information analytics" and plans to "shift the portfolio to a more profitable mix of higher-growth services." The company remained the second largest IT outsourcer in 2011 both in terms of annual revenue ($15.1 billion) and market share (6.1 percent). (IBM leads with 10.9 percent of the market). But its revenue growth from 2010 to 2011 was just 2 percent, compared to an average of 8.3 percent industry-wide, 7.8 percent for IBM, and 18.2 percent for Accenture, according to Gartner. Only zero-growth CSC did worse among the large outsourcing providers.

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