HP/EDS Deal: Upside for Big Partners, Smaller VARs Unaffected

Will Hewlett-Packard's planned acquisition of outsourcing IT services giant EDS impact HP's channel operations?  VARs around the country expressed no concern whatsoever that the deal would hurt their companies, and some saw a potential upside to the deal.

That's because EDS tends to work in very large enterprise accounts – ones where channel partners normally wouldn't play a role.  Rather, HP would handle those accounts directly anyway.

But there may be some trickle down to the midmarket, which could ultimately benefit some of HP's larger partners.

"In general, it will have a positive effect," says Rich Baldwin, president and CEO of Nth Generation Computing in San Diego, an HP solution provider. "We do have cases on larger engagements where HP has subcontracted to us in the past. This will create more opportunities and more engagements for HP, and we still have some top talent" that HP may want to tap for some of the EDS deals, he adds.

Meanwhile, HP CEO Mark Hurd offered his reassurance on the channel effect during a press conference announcing the $13.9 billion proposed deal today.

"It's good for HP so I think it will be good for our channel partners," says Hurd.  "Our commitment to channel partners is in the DNA of HP. I don't think there's going to be anything but goodness in the context of that. If you look at our outsourcing business today and what we do in consulting and integration, we try and make it very complimentary with our partners so I don't anything but goodness." 

John Convery, executive vice president of marketing and vendor relations for an HP solution provider was surprised when he read the news in the Wall Street Journal this morning, but he views the deal as a positive one for big HP partners like his company, Denali.

"We are all-in with HP as a partner," he says. "I was there through the HP/Compaq deal, and the vision was good but the integration was a challenge then. This deal has the potential to shrink cost and provide higher levels of service."

HP's move is widely viewed as a play to capture more of the lucrative services business at a time when the hardware side of the industry has become less profitable.  The deal, once completed, would also make HP more competitive with IBM in the services realm.

"HP has not been that competitive with IBM Global Services," Baldwin says. "This will put them in the big leagues now."

In its most recent quarterly report, HP reported that just over half its revenues, about 56 percent, came from business and technology services offerings, compared to its hardware offerings.  That compares to about 16 percent of HP's revenues coming from services, a number that will likely double once the company incorporates EDS's service offerings as well.

“Adding EDS (with revenues of $22.1 billion in 2007) would more than double the size of HP’s services business ($16.6 billion in revenues)," writes Phil Codling, an analyst with global consulting firm, Ovum, in a report issued today. While the combined services arm of HP would still be smaller than IBM's, "the merger would thus bridge this gap substantially and establish the merged entity as the clear number two in IT services."

However, the analysts expressed concerns about the challenges of integrating HP and EDS, and the battle for all such outsourcing companies to recruit the talent they need to compete.

Still, services have become an important business in an age when hardware has become more of a commodity.

"Services are a lucrative, profitable business," Baldwin says. "I'm always trying to sell our services businesses because of that, too. Selling hardware doesn't bring the same kind of profit.  Services can significantly increase the top and bottom line."

The IT Pros, a managed service provider that is big on Dell hardware, believes the move a smart one for HP, but the company planned to stick with Dell because of that Dell's recent strong moves in the MSP space. "…HP doesn’t even entertain that managed services business model," says Doug Ford, president and CEO. However, Ford views the acquisition as a smart one for HP. "I could see how the landscape of the enterprise service industry could change with HP’s acquisition of EDS," Ford says. "No one has ever really challenged Big Blue's global services division until now… But only time will tell how well [CEO Mark] Hurd can manage a massive acquisition of service business and resources from EDS.

And for those who serve the smaller side of the SMB space, the HP/EDS deal  is of absolutely no concern.

"We work in completely different market spaces," says MJ Shoer, president and virtual CTO of Jenaly Technology Group. "We serve the SMB market and EDS does not touch that space."