Posted by Ben Worthen

H-P has been trying to boost its services business for years. The expected acquisition of outsourcing giant EDS could do that in a big way.


Look out IBM. H-P is (almost) nipping at your heels.

Businesses are increasingly turning to outside firms to provide information-technology work – anything from software development and management to running a data center. There are two interrelated reasons for this: Most businesses realize that they don’t gain a competitive advantage from, say, monitoring their corporate network, and it’s cheaper to have someone who monitors 100 networks do it than to do it themselves.

Tech companies, of course, see dollar signs. IBM – the industry’s 400 pound gorilla – now derives more than half of its revenue from services. Only $16.6 billion of H-P’s $104 billion in its 2007 fiscal year came from services, however. EDS has revenue around $20 billion a year and has a roster of giant clients including General Motors and Royal Dutch Shell. EDS typically does higher-end (and hence higher-margin) work for these customers like designing the systems that are used for product development and manufacturing, in addition to managing mainframe computers and other tech infrastructure.

One other note: EDS isn’t exactly an avant-garde choice. It’s often held up as the epitome of the old model of outsourcing, where an army of contractors would come to the client. Nowadays, the race is on to perform tech services in countries like India and China where the people cost less. (EDS has been aggressively globalizing, too of course.) Usually this saves customers money; it definitely helps the service providers’ margins. It will be interesting to see how H-P expands EDS’s global operation over the next several years.

Still, buying EDS instantly would make H-P’s services business bigger than Accenture, which had revenue of $21 billion in 2007. And while that isn’t quite nipping at the heels of IBM’s services group, which had revenue of $54 billion in 2007, H-P’s looking to be a lot more of a competitor than it looked like yesterday.