by Stephanie Overby

Inside HP’s New $1 Billion Outsourcing Plan

Nov 10, 2010

HP today shared details on six countries that will become its global delivery hubs for enterprise services. In this Q&A, gets the lowdown on where jobs are being added and eliminated, lock-in concerns and the future of HP services. n

HP today revealed further details of its previously announced $1 billion investment in offshore outsourcing, selecting six countries—Bulgaria, China, Costa Rica, India, Malaysia and the Philippines—as its global delivery hubs. Those six spots are “best for our clients and best for where our markets are headed,” says Robb Rasmussen, VP and general manager, Best Shore, HP Enterprise Services. (Best Shore is what HP calls its global services delivery strategy within HP Enterprise Services.)

The company, which acquired IT service provide EDS two years ago, maintains that the restructuring will involved a total of 9,000 layoffs over the next two years as well as 6,000 new hires. spoke to Rasmussen and Jeff Womack, VP, Best Shore enablement, about HP’s increased focus on cost cutting and offshore delivery, its pursuit of domestic business in emerging markets, and the criticism that HP doesn’t adequately value the IT services business. Although these six hubs are not all new to HP, you will be staffing up in these locations. How many and what types of professionals are you hiring in each country?

Rasmussen: We did have a presence in these hubs already, but not at the scale we currently have or with the government approvals and tax benefits. We are aggressively hiring and building them out today. We don’t disclose [employment] numbers at the location level or the “best shore” level.

These six hubs are all large campus-like facilities, housing IT outsourcing, business process outsourcing and applications capabilities. From an enterprise services perspective. HP also has other needs for work done offshore. Take the case of our Cyberjaya, Malaysia location where we have opened a state-of-the art global delivery hub with thousands of employees that do global delivery work on behalf of our clients. Our CIO Randy Mott will also have cadre (in Malaysia) that will maintain applications for HP. Our CFO will build out financial functions there as well.

Womack: We’ve been doing business out of Kuala Lumpur [Malaysia] since 1986. It’s one of our longest running global delivery centers. Of course in India, we have our most mature center, anything from apps to IT to BPO. In China, we have been operating out of six different cities. In the last three weeks, we’ve opened up a center in Suzhou, China, which has the full-blown application suite—from application development and management to testing and SAP implementation. From an ITO standpoint, the primary focus is service desk. If you need level one or two support, we might do that in China. They’ll also provide BPO processingBPO without voice.

The difference between our hubs and the other centers is we will drive as much depth and breadth of the service portfolio in the hubs as we can so we can.

Rasmussen: In the early days [of outsourcing], clients chased the lowest cost location and many found themselves flying to four or five different countries [to manage their portfolio of providers]. Now they can have the same pair of hands managing their IT at a competitive cost. GM, for example, may prefer to have their North American work in India because they’ve had it done that way for many years. But as the business expands to China, they would want some services delivered there. There are all kinds of reasons why clients would want a single or double location. A lot of them want “India-plus-one.” Historically they’ve had a presence in India, but to mitigate risk they’d like to have some assets somewhere else. You announced 9,000 jobs cuts as part of this outsourcing business restructuring.. How will those lay-offs be dispersed by geography and job function?

Rasmussen: I can only reiterate what [HP announced in June] that there would be 9,000 positions eliminated over two years, and 6.000 would be brought on board. While we didn’t provide any specificity at the time, many of those 6,000 [new hires] are in sales and delivery, and when looking at delivery, would be mid-career professionals with four or five years of experience as opposed to recent college graduates. That’s as much granularity as I can provide. But you can’t you provide that level of detail about the positions you’re eliminating?

Rasmussen: No. Given the current economic environment and unemployment in the U.S., how do you address the criticism that you should be hiring more American workers rather than investing in employees overseas.

Rasmussen: When you take a look at some of the domestic business we do here, a tremendous amount of that work is with the federal government. We’ve established local centers here that provide that work because it cannot be offshored. We have to look at the right cities to provide tax benefits to do that work. The same is true in other countries. Some of our delivery centers in New Zealand were created to provide services to [government agencies].

We balance that the best we can and we do provide tens of thousands of jobs onshore. But our clients want a cost-optimized solution. More than 60 percent of HP’s total revenue originates outside the U.S. Is that a higher growth area for IT and business process services than Western markets?

Womack: That’s one of the key dimensions that’s driving some of our model change and investmentthe globalization of our client base. We had a client in Japan that was intrigued with our center in the Philippines because they are expanding into North Asia and that gives them gives them a good footprint. The breadth of this model was very appealing for that client.

Rasmussen: One thing that’s different about HP versus the competition, particularly the pure-play Indian firms, is that we’ve been very strategic in building a balanced delivery model. We’ve got thousands of employees in Eastern Europe, thousands of employees in Latin America, thousands of employees throughout Asia. We have that balance for lots of reasons, not just for geopolitical risk or education and skills. If you take a country like China, close to 50 percent of [outsourcing] business in China is serving China-based companies in China, and the other half is serving other Asian customers. As we look at building out our global delivery model, there’s clearly a chance to provide lower cost service to customers in higher cost economies but we also want to be prepared to deliver services to these higher growth markets. Many outsourcers are saving money by rebalancing their workforce to low cost countries. What will be the cost savings due to rebalancing your workforce with labor from low-cost countries?

Rasmussen: In every deal we structure, there’s always an element of value proposition required to win the deal—multi-year cost reduction, transition at limited cost. Each deal has to provide some increased value or lower cost to the client for us to be able to continue to win. We are advantaged by the assets we have in software, hardware, and our HP Labs organization. We’ve spent a bit of time to embed that software and automation into our global delivery centers so our costs are as low as possible.

Womack: It’s not just lower labor costs themselves. We want to take labor [out of the cost equation] as much as possible. HP is reducing its R&D spending. What impact will that have on your services business?

Rasmussen: There’s a little bit of work we do with R&D. Several hundred of our technicians work with HP Labs, which is often located near the “best shore” center. [This happens when] a client has an idea that they work with labs on to bring some innovation to their business and we team with them on the delivery. It’s applied R&D [paid for by the client]. Does the global delivery model lock customers in to some extent? Once client workload is dispersed to multiple global delivery locations, it becomes very difficult to back out of that kind of arrangement.

Rasmussen: When we acquired EDS, both EDS and HP had a global methodology for how we manage our business from an onshore and offshore perspective. In IT, there was the ITIL framework. In application development or testing or management, we use our [propritery management processes]. So if we get to a situation where a client wants to do more maintenance work in the Philippines versus India, it’s not very difficult to migrate [that work].The difference might be that you have developed relationships with people in India over time. But we have not found that clients are concerned about being locked in to a certain area.

Womack: Just as HP has embraced open standards from a software point of view, in services we have strong affinity for industry standards. We not only maintain our own rigorous standards so the learning curve is minimal when we transfer work from one center to another, we’re using industry standards such so if you want to go back in-house or, heaven forbid, to a competitor, the transition should be seamless. One of the major concerns for outsourcing customers, particularly legacy EDS clients, is that services is not the focus at HP. To some, the appointment of your new CEO and chairman denotes a further move away from services. How do you plan to demonstrate to more of a commitment to your services customers?

Rasmussen: Geez, I think the billion dollar investment is good affirmation from the board of directors that services is continuing to be important to HP. Service quality has to improve and improve and we’ve been vigilant about that. [This investment] involves five or six areas, one of which is the client experience and how to elevate that. We’re working on different kinds of client interfacesthe people who deal with the clients. We’re also refreshing our portfolio so that it’s the most modern and appropriate for buying needs today. We’re investing in our infrastructure and data centers. Will any part of this billion dollars be invested in cloud-based offerings. Will HP be acquiring additional software capability, opening new datacenters, or making other investments in this area?

Womack: That is a separate investment. But a lot of our “best shore” centers will be involved in remote monitoring for cloud-based offerings. Five years from now, what will differentiate HP from other service providers now that it seems all the big players have a captive hardware business, everyone is developing deep offshore capability, everyone has a central delivery center in the U.S.?

Rasmussen: Integrated solutions. If you look at what HP has—from hardware to software to middleware, to onshore and offshore—it’s the breadth of portfolio and how we interlock that together. Very few will have that full solution to sell to clients.

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