Will HP/EDS prove worthy of its services billing?

HP's EDS acquisition puts it No. 2 in the services market behind IBM. Accounting for $38 billion in revenue per year, customers should demand the best

On Monday, Mark Hurd, chairman of the board, president, and CEO of Hewlett-Packard, laid out for industry analysts how HP will bring EDS into the family. I am writing this before Hurd's briefing, which puts what he had to say to potential HP services customers into a perspective untainted by hindsight.

EDS, of course, had at least one highly publicized outsourcing debacle with a U.S. Naval contract that initially lost the company almost a half billion dollars. On that basis alone, one should evaluate very closely how HP will incorporate EDS and how that will, in turn, changes HP's delivery of services going forward.

What you need to have heard during Hurd's address is a clear, no-waffling message about HP as a services company.

Spending nearly $14 billion to acquire a company like EDS is certainly a declaration that HP is putting a stake in the ground from a services perspective, says Dane Anderson, Gartner research vice president. But Hurd needs to add some more color along those lines.

Just a few short years ago, HP was considered a product company with a long tail of services. Services revenue was about $16 billion last year, but half of that came from product support. While an $8 billion services company is nothing to sneeze at, it is still significantly less than IBM's take at $55 billion, Accenture at about $20 billion, and some Japanese firms in the double digits as well.

Perhaps it is looking at the glass as half empty, but EDS has shed well over 15,000 employees on the road to acquisition -- closer to 20,000, I suspect. How does that affect its ability to deliver services in a savvy and timely manner?

EDS is also very strong on government contracts. But those lucrative contracts preclude it from leveraging labor arbitrage by way of offshoring. So while EDS is strong in outsourcing, its overseas relationships are not as robust as its competitors. The work has to be done here, in West Texas, Tennessee, and Oklahoma, for example, where there may indeed be lower labor costs but nothing like the $22 per hour for a developer versus, say, $125 per hour in the States.

From an HP services customer perspective, the glass is also at least half full.

HP clients engaged in a services contract can look forward to improvements in service management and service delivery, Anderson says.

"EDS is more mature and robust in methodology, practices, and tools from a services perspective," he explains.

In addition, HP adds another partner and platform option to EDS's list of alliance partners, which include the likes of Sun, SAP, Oracle, Microsoft, and EMC.