Is HP Committed to IT Outsourcing?

HP had little to offer in the way of good news last week. The company reported an $8.9 billion loss —the largest in the company’s 73-year history —driven by a $10.8 billion write-down related to its 2008 acquisition of IT service provider EDS and severance costs associated with recent layoffs.

It may not have come as a shock to current customers who have absorbed a steady stream of unsettling news from the $127 billion company in recent years, from executive turnover to the planned layoffs of 15,000 professionals in its enterprise outsourcing division.

“The problem here is not the individual developments. It’s the compounding effect of all the developments over several years now,” says Bryan Britz, research director in Gartner’s ITO and Support Services group. “The only constant has largely been uncertainty. Uncertainty and risk are not desirable qualities in IT outsourcing.”

HP’s prioritization of cost-cutting and shareholders over service delivery and customers has already caused some outsourcing clients to jump ship. “It feels a bit like HP is so focused on their internal financial profile and stock price that they’re forgetting about the customer-centric focus that got them [and EDS] to a leadership position,” says David Rutchik, partner with outsourcing consultancy Pace Harmon. “The pure-play Indian providers, in particular, are picking up many of these disaffected HP customers as the Indian providers are showing a much greater willingness to be flexible in meeting specific end customer concerns.”

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

“We talk to HP customers all the time and their main concern is the direction the firm is taking, not the current performance managing their day-to-day IT and business services needs,” adds Phil Fersht, founder of outsourcing analyst firm HfS Research.

Wait … There’s More

Things could get worse for HP and it customers before they get better. The company’s pushback of its big analyst summit to October could mean more executive layoffs and cost-cutting in the short term, says Fersht. The move may signal “fear of having nothing positive to say, and the analysts throwing HP under the bus,” says Fersht, adding that HP recently let go some members of its analyst relations team.

While the hit HP is taking on its $13.9 billion EDS buy is huge, that shouldn’t be the biggest worry for the company’s IT services clients. It “sounds like a big deal, but it ultimately just says they paid too much for EDS,” says Rutchik. “That’s an issue for yesterday and not particularly relevant for their market position moving forward.”

The biggest customer concern is HP’s ability to manage through its workforce reduction and retain the talent needed to deliver on outsourcing customer expectations. “This is especially true in light of HP’s desire to improve profitability in its IT outsourcing (ITO) business. They have put safeguards in place to minimize the risks of losing key personnel to early retirement without effective knowledge transfer,” says Britz. “At the same time, the simple fact remains that the employee base at HP has endured several years of difficult conditions due to the seemingly constant uncertainty. I’d be concerned about HP’s ability to develop and retain the next generation of workers that it will need to successfully deliver a next generation of ITO services.”

[Related: Outsourcing Challenges at Kimberly-Clark]

The good news, if there is some, is that HP’s leaders know they need to make big changes, says Britz. But whether those changes will placate ITO customers —just one business in HP’s portfolio—remains to be seen. “HP needs to make choosing HP a safe and solid choice in ITO,” Britz says. “HP needs to focus on the fundamentals of service delivery and consistently execute a services-oriented strategy across all of HP, especially in cloud and analytics, so IT leaders can have confidence that they know what to expect from HP.” The recent appointment of EDS veteran Mike Nefkens to acting head of enterprise services may be a step in the right direction, says Britz.

HP’s admission that its ITO accountability had been too dispersed is also a positive sign. “This has been a problem for HP since it acquired EDS,” says Brtiz. “If HP is, in fact, putting greater accountability and authority for ITO delivery clearly in the hands of a defined individual to act as a true general manager for that account, that could be the most positive ITO-related news coming out of HP in quite some time.”

In the meantime, HP’s outsourcing customers should take a hard look at how HP’s enterprise services roadmap meshes with their own requirements. “Not everything fits into the ‘strategic enterprise services’ HP is placing emphasis on,” says Britz. Offerings like network and desktop outsourcing could be phased out, for example. “Existing clients should really take the time to understand how well the services they rely upon HP to deliver fit with the strategy HP is laying out,” says Britz. “Clients need to determine not just how well HP fits with their strategic direction, but also how well they fit with HP’s. That requires deep, transparent, and meaningful discussions on both sides.”

HP has also been hard at work figuring out which customers fit within its own profitability goals. “In many cases HP has been declining to pursue opportunities that are competitive, declining to meet client requirements in order to retain business, and generally moving away from customized solutions required to meet Fortune 500 companies’ needs in favor of standardized solutions that can drive higher HP margins,” says Rutchik.

Customers committed to retaining HP as a delivery partner should ask the following questions:

• How does HP view the profitability on my account?

• What are the key profitability enhancing actions that HP would like to make in each service line?

• How might those changes impact service delivery quality for my account?

• Is my HP account team as proactive and responsive as we need them to be?

• What goals does HP have for my account team, and how well are those aligned to my priorities?

• What is HP’s technology roadmap?

“The biggest concern should be HP’s long-term commitment to the outsourcing services space,” says Rutchik. “They will be a player in cloud solutions, software, and print —but will they provide the solutions to compete with IBM going forward? This was the premise behind the EDS acquisition, and they have not achieved the desired results.”

Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, on Facebook, and on Google +.