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In what has generally been a tug of war between services behemoths Electronic Data Systems Corp. and IBM Global Services, the battle for outsourcings so-called megadeals now sports a new player.
Hewlett-Packard Co.s HP Services is making serious inroads, signing agreements in recent weeks leading to three large contracts worth $4.6 billion—including a $3 billion, 10-year deal with Procter & Gamble Co.
HPs success comes as EDS suffers from its missteps, troubled contracts, a Securities and Exchange Commission investigation into its accounting, and a shakeup in leadership. Still, insiders say EDS shouldnt be counted out yet. The Plano, Texas, outsourcer last week snagged a two-year, $258 million contract to upgrade the Pentagons communications infrastructure, and it closed two megadeals with ABN AMRO Bank N.V. and Bank of America Corp. in the fourth quarter of last year.
“I tend to think of [HP Services] more in the infrastructure outsourcing area. Were trying to bring the whole EDS proposition to the table. They dont have a leg up there. They have to partner for the rest,” said Jeff Kelly, president of Information Technology Management Services at EDS. Kelly said that HP—thanks to the resources it acquired with its Compaq Global Services acquisition—does have an advantage in the IT infrastructure outsourcing arena.
In addition to the P&G deal, HP Services recently signed a memorandum of understanding for an IT infrastructure outsourcing contract with Telefon AB LM Ericsson, worth about $1 billion, and another memorandum with the Bank of Ireland for a $600 million IT infrastructure outsourcing contract.
But the Bank of Ireland deal could be derailed before fruition. Union workers at the bank, which plans to transfer some 500 employees to HP, voted to strike to thwart the deal.
At least one industry insider wondered whether that would have happened if IBM had won the deal and pointed to HP Services lack of experience at the negotiating table as a possible contributor to the strike vote.
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Still, what HP lacks in experience and breadth of professional services, it seems to be making up for in aggressiveness. “HP is still a relatively new player in the game—small and hungry. They have 800 outsourcing customers. Thats a tenth of what IBM and EDS have. They want to make a splash in the market, which could lead P&G and others to think theyll have more influence over HP as a result—because they need to create a good track record. Thats value that customers like P&G can exploit,” said Dean McMann, CEO at The Ransford Group, in Houston.
HP Services size can be misleading. Although it became a $15 billion services organization with the Compaq Computer Corp. merger—putting it at the No. 3 spot for total IT services—it is a distant seventh in the IT management outsourcing segment behind IBM, EDS, Computer Sciences Corp., Fujitsu Ltd., Siemens AG and Deutsche Telekom AGs T-Systems, according to Bruce Caldwell, an analyst for Gartner Inc., in Stamford, Conn.
So, how did HP Services—not even a dark horse in the running last year—come to win the P&G deal, when EDS last summer was the sole contender for the contract? Some industry watchers say they think HP Services won the deal by being the lowest bidder. But HP and P&G officials countered that. “All of these deals are profitable in the first year,” said Juergen Rottler, senior vice president of marketing strategy and alliances for HP Services, in Palo Alto, Calif. Rottler said HP Services also agreed to give significant architecture control to P&G.
P&G officials attributed the award to price, service levels and a similarity in culture. “HP had a very solid financial proposal. We felt good about the level of services. We also felt HP would be a good place for our IT employees,” said Damon Jones, P&G spokesman, in Cincinnati.
“When we started the process two years ago, the [business process outsourcing] industry was growing much faster than it was last fall. So many market dynamics made things keep changing. We felt it was a less risky proposition to go slower and rely on multiple partners,” said Jones, who conceded that EDS troubles were a factor in splitting the contract up.
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