by Stephanie Overby

IT Outsourcing: What HP’s Latest Strategy Change Means for Customers

News Analysis
Sep 07, 20114 mins

Will HP deliver on its promise of bold transformation and innovation in IT services? Its outsourcing customers shouldn't wait to find out, IT analysts say.

The specifics of Hewlett-Packard’s planned shift away from hardware remain unclear, and opinions about the company’s stronger focus on enterprise software and services have run the gamut from “corporate suicide” to “it’s about time.”

What does this iteration of HP’s strategic future tell CIOs about its IT services business, and more importantly, what does it mean for HP’s outsourcing customers?

HP is clearly attempting to model itself after outsourcing powerhouse IBM, says Adam Strichman, founder of outsourcing consultancy Sanda Partners. He notes that Big Blue continues to bundle the hardware it no longer owns into its outsourcing deals.

“IBM heavily markets its services offerings around having ‘IBM centric’ hardware platforms (including Lenovo Thinkpads), retaining all the marketing benefits of hardware without actually having it,” says Strichman.

At the same time, if HP technically rids itself of its computer business, it could give customers who may be wary of an outsourcer that pushes its own hardware the impression that it is now vendor-agnositc, adds Strichman.

“This is HP’s ‘necessary correction’ in the industry, getting out of markets where it’s getting a hiding and focusing on the enterprise clients who want alternatives to IBM,” says Phil Fersht, founder of outsourcing analyst firm HfS Research.

Increased investment in software—such as HP’s recently announced plans to purchase Autonomy for $10.2 billion—may or may not benefit HP’s outsourcing clients. “It really depends on the type of software upon which they focus,” says David Rutchik, partner with outsourcing consultancy Pace Harmon. “If they continue to build their enterprise capabilities in IT service management and related areas, then their focus should be very positive for enterprise IT outsourcing customers. If they start competing more directly in areas such as CRM and ERP, they may damage their strategic relationships with the SAPs of the world.”

HP’s CEO Leo Apotheker has said that the company is taking “bold, transformative steps…to drive creation of long-term shareholder value through a focus on fewer fronts, thereby improving its ability to execute, invest in innovation and drive a higher-margin business mix.”

But real transformation in the outsourcing industry requires more than simply shifting dollars from hardware to software. “Saying that HP is going to focus on software and services does not necessarily mean that the future of those areas becomes especially enhanced,” says Strichman. “It is a way to point the conversation away from the reality that the hardware business is going to move faster toward an undifferentiated commodity. It is all about marketing spin.”

Apotheker, who recently removed HP veteran Ann Livermore from her role as head of enterprise services and replaced her with John Visentin, formerly of IBM, “has a massive task ahead to restructure the business,” says Fersht. “They’ll need to take a close look at beefing up their consulting, service integration and offshore operations next.”

While Big Blue is clearly the target, HP faces formidable competition from offshore rivals with lower cost structures. “It’s one thing to go after IBM, but another to fend off the aggression of the rampant Indian IT services firms, such as Cognizant, Infosys, HCL, TCS, Wipro and the newly-merged iGate/Patni,” says Fersht.

HP owns a majority stake in Indian IT services provider MphasiS and could consider rolling it fully into its outsourcing business, says Rutchik.

“A smart acquisition or two to bolster its enterprise services presence, a well-executed management and business reorganization, a cohesive and clear marketing plan, and we may yet just see this company start to fulfill some of its potential,” says Fersht.

HP’s outsourcing customers, however, shouldn’t wait around to see if HP delivers. “They should insist on getting more visibility into future plans and a commitment that HP will execute upon them,” says Rutchik. He points out that earlier this year Apotheker indicated total commitment to its hardware business, and the company invested heavily in a tablet it has since scrapped.

“All of these are signs that the company is grasping to determine its future identity and ultimate focus,” adds Rutchik. “IT outsourcing customers, who are typically in multi-year agreements with a great deal of dependency on their provider for long-term success, need much greater comfort that this is not just another attempt to get HP’s growth and share price on an upward trajectory.”

Fersht agrees. “The time has come for smart outsourcing customers to get closer to the strategies and plans of their providers,” he says. “[For] an increasing majority of clients today, needs are getting more complex, and providers are being asked to take on more challenging tasks. Clients need to know what is under their provider’s hood and need to make sure they have the contractual terms that enable them to renegotiate their agreements in light of acquisitions that could directly impact their existing relationships.”