by Stephanie Overby

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

News Analysis
Oct 05, 2010
ERP SystemsOutsourcing

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.

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.”

Such precedents include the hardware-IT services mergers of recent outsourcing history: Xerox and ACS, Dell and Perot Systems, even HP and EDS. “I know several Perot clients, and the push to convert them to Dell hardware is well underway,” Strichman says. “Most new outsourcing deals from Perot stress that a Dell hardware conversion is the secret to success and push both desktop and server solutions. IBM sings the same song, as does EDS and HP now.”

That said, HP hasn’t acquired an enterprise software company, simply a former enterprise software CEO. And some outsourcing industry observers don’t expect HP’s IT services sales team to start pushing specific software to new or existing customers any time soon.

“The reality is that this is not a merger. There are no true synergies coming together, just a historical bias, perhaps, on Apotheker’s part,” says Strichman. “Just because he came from SAP doesn’t mean that HP will start pushing ERP software any more than they do now. [Outsourcing] clients are not ready to be pushed on that front. The hardware push from vendors is difficult enough now.”

Pedaling specific ERP software to services customers is not only unlikely, but unwise, adds Trowbridge: “It’d be so imprudent. Software like SAP doesn’t fit in a whole bunch of situations.”

That’s not to say that some major acquisitions aren’t in HP’s future. “HP needs to try some new approaches to re-energize its services business, and acquisition is the most likely route,” says Phil Fersht, founder of outsourcing analyst firm Horses for Sources. “HP has a track record of buying up tech giants whose best days are behind them with the confidence to absorb them into their organization and try to perform miracles with their products and services.”

The Future of HP and Cloud Computing

But the real pressure may come from cloud-based competition. “The more strategic question is how will HP respond to and capitalize on the ongoing merger of the software and services business as manifested in cloud computing and software as a service,” says Stan Lepeak, managing director of global research for outsourcing consultancy EquaTerra. “The winner in the long run coming out of the legacy software and services markets will be the provider that can best meld and integrate software and services.”

For now, the continued integration of EDS will remain the focus of HP’s services unit. “I don’t think this changes any of that,” says Trowbridge of Alsbridge. “There’s still a lot of work to do.”

In the short term, that may be good news for HP’s outsourcing customers. “We expect HP to initiate extensive technology solutions in delivering outsourcing services to customers—utilizing more automation and systemization, replacing [their] labor [base], and driving down their costs,” says Pace Harmon’s Rutchik. “While this is true industry-wide, HP’s efforts could be disproportionate, benefitting their outsourcing customers via lower prices and more innovative solutions.”