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Massive layoffs at HP make for IT outsourcing identity crisis

Stephanie Overby | May 25, 2012
It's been more than three years since HP acquired IT services provider EDS, and the long-term direction of its bigger--if not better--outsourcing business is no more clear than it was on the day the deal closed.

The reduction in force may be an attempt to align supply with demand. "HP is like a number of other tier-one providers that are realigning their service offerings to be more 'cloud'-like, and is challenged with reconciling the balance between technology and people," says Pinto.

HP is working with McKinsey & Company on its restructuring plan. "[McKinsey] has likely found that that the enterprise services organization is not in line with their expectations from a cost/profitability standpoint and is suggesting necessary changes," says Brian Robinson, research director for business and IT services strategies at outsourcing advisory firm HfS Research. . But rationalizing its outsourcing business the way it has with its printer and PC division is a mistake, says Pace Harmon's Rutchik: "Applying the same philosophy to services will hurt HP in the long term as it is the area with the greatest opportunity for margin-to-margin expansion."

IBM has undergone rounds of layoffs in its global services unit in recent years, according to its employee watchdog groups. Although Big Blue is tight-lipped about its staffing strategy, most industry watchers see the company increasing its hiring offshore. And IBM has made its case as strategic business partner clear to CIOs. Accenture, which also positions itself as strategist-provider, may have undertaken similar steps, though its public relations group keeps a tight lid on layoff talk. Turnover in the CEO role may have delayed HP's examination into what the industry refers to as "rightsizing" their services staff at a time when, observers point out, most outsourcers are now growing.

The outsourcing industry has evolved in the years since HP bought EDS. The number of multi-tower, single-sourced deals have diminished, the number of providers offering contract and services flexibility has increased, and virtualization and cloud-based offerings have multiplied. "Given those trends, it is increasingly difficult for providers within the IT outsourcing space to offer differentiated services," says Robinson. That could mean that some IT service providers, like HP, will simply need fewer bodies to stay in business, says Robinson.

But it could also mean real trouble for HP. "HP has been late to the game with respect to new service offerings that enable greater flexibility to buyers. Their competitors--both large and small--have been moving in this direction for some time," Robinson says. "Some of the legacy EDS staff [are] less capable or willing to incorporate the necessary blend of services into their client offerings."

Existing HP customers are most likely to feel the first effects of the mass exodus. "If HP has been over-delivering on service levels, you can expect them to reduce support staff to only achieve [standard] service levels," says Mark Ruckman, an outsourcing consultant with Sanda Partners. "In staffing reductions of this size, whole departments will be cut and the remaining HP staff will be unsure where to turn for internal support. The confusion will last for a few months." Service levels and project delivery could suffer. Longer term, customers must find out what kind of provider HP intends to be and whether that works for their sourcing needs.


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