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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.

Clients that are relatively satisfied with HP's performance and price points may not be too worried, says Engel of Sylvan Advisory. "[But] if a client has entered into an onerous relationship where HP is enduring engagement-level profit margins that are deemed to be sub-standard--less than 30 percent gross profit--they would be well-advised to have plan B."

For customers sourcing new IT work, it may not make as much of a difference as it should. They may rely more on the company's size and history than current uncertainty. "Historically buyers don't care as much about the financials and performance of their providers as we, the so-called experts, think they should," says the outsourcing consultant. "They get caught up in the heat of their decisions and are so hyper-focused on their own deal terms and conditions that they're not thinking about the state of their provider in five years. But it should be something they consider."

There are a number of potential benefactors if HP stays on its current course. "HP has gotten to a point of actually avoiding the deals if, for example, they must compete for the business or there isn't an architecture component to the transaction, even for existing customers," says Pace Harmon's Rutchik. "This level of over-indexing deals is causing HP to leave billions of dollars on the table, and Indian providers that previously didn't play in infrastructure are now recognizing opportunities by aggressively pursuing HP's castaway business and reaping their lost profitability."

HP's layoffs could also create a hiring opportunity for HP's competitors and CIOs looking for top talent. "In large cuts like this, HP is going to cut both under-performers and superstars," says Ruckman of Sanda Partners. "If I was another sourcing firm or considering insourcing, I would be preparing to add some unemployed superstars to my staff."



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