Service charge?

With Hewlett-Packard Co.’s pending $13.9 billion acquisition of EDS Corp., the vendor is poised to become an instant player in the global IT services arena. But integrating an army of some 210,000 global service employees, the combined services rosters of HP and EDS, with HP’s enterprise-oriented service providers and then avoiding the inevitable conflicts between EDS direct and the channel is a challenge solution providers say the vendor should not underestimate.

“It’s a good move for HP because HP has been sitting on the sidelines while IBM’s global services has been going gangbusters,” said Mark Melillo, CEO of Melillo Consulting, an HP enterprise partner in Somerset, New Jersey. “But I do have some concerns with more conflict with HP in accounts around services. HP is very direct-centric.”

He noted that HP has more sales reps and that HP software reps now have services quotas, which has fueled a tendency to take more services deals direct, he said.

Those concerns are the same ones voiced by IBM Corp. business partners over the years as they have struggled to team with the vendor’s global services organisation. IBM’s global services has sometimes poached or attempted an incursion into accounts already being served by business partners.

The problem for IBM, and one that must be avoided by HP, is that IBM services often had no idea who the business partners were and what services capabilities they brought to the table.

Everything Channel (CRN U.S), in a conference call with HP CEO Mark Hurd and EDS CEO Ron Rittenmeyer following the announcement of the pending acquisition, asked what would be the impact on HP service-authorised enterprise partners and
how they would integrate with the new EDS services organisation.

“It’s good for HP so I think it will be good for our channel partners,” said 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 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 [see] anything but goodness.”

HP, for its part, has pursued a services strategy that pushes midmarket services maintenance accounts to the channel with the hopes that solution providers would provide better coverage in both services and HP product sales to those midmarket customers.

But those services tend to be low-end, break-fix, not the high-margin consulting and integration services many HP enterprise partners aspire to.

As one HP solution provider, who asked not to be identified, noted, “All the heavy lifting is in the midmarket. Many of us are already selling services into enterprise accounts and HP needs to deal with that.”

But some solution providers believe there is enough stratification between the EDS services business and those engagements the channel will pursue to avoid most conflicts.

“Without knowing the terms or details, I think I would be encouraged,” said Dave Butler, president of Enterprise Computing Solutions, an HP enterprise solution provider. “When IBM bought PricewaterhouseCoopers a few years ago, it was a shot in the arm for professional services. Today, we see IBM out there promoting its strategic services. My hope is that this would be an accelerator for HP to get to the next level of services. HP has been pursuing this for years.”

This should not result in more competition to the channel, “Assuming that HP can work out the channel issues,” Butler said.

Larry Holzenthaler, executive vice president of sales and marketing at Total Tec Systems Inc., an HP enterprise solution provider, agreed that HP has a good shot at avoiding services conflicts. “It’s good for HP to have a strong professional services practice to support its hardware business with the same model as IBM’s,” he said. “We really operate for the most part in a different space than the C and I [Consulting and Integration] group does. We never see EDS and we never see C and I.”

But working out the channel issues could be a challenge. Mont Phelps, president and CEO of NWN Corp., a HP solution provider, noted that the EDS/HP merger creates an IBM look-alike. “If they are modeling themselves after IBM, IBM has not been the greatest partner; they tend to step on us,” he said.

He said that today he sees little competition from EDS, but notes that he does bring HP’s services organisation into some of his accounts as an enterprise services partner. As EDS morphs into HP’s services organisation and solution providers tap EDS’ services resources, he’s concerned about bringing a potential competitor into his accounts.

Other solution providers shared his concerns. Don Richie, CEO of Sequel Data Systems Inc., an HP enterprise solution provider in Austin, Texas, noted that EDS sells products as well as services, creating a potential conflict with HP’s existing VARs. “Partners need to hold on to their seats and guard their customers,” he said. “I guess now HP is a full-fledged VAR [with the EDS acquisition]. We will keep doing what we do best, but this certainly is not good news for the partner community.”

EDS’s Rittenmeyer noted that EDS would complement HP’s services business. “The overlap [in customers is] not very extensive,” he said. “We have customers in the same space, but those are few and far between. From our point of view, we will continue to offer the best solutions for the best value. HP is a part of that and will continue to be part of that. They will add to our portfolio from a technology standpoint.”

HP’s acquisition of EDS is expected to close in the second half of 2008 and to more than double HP’s services revenue, which was $16.6 billion in fiscal 2007. The combined services businesses at the end of each company’s fiscal 2007 amounted to $38 billion, with 210,000 employees doing business in 80 countries, Hurd said in the conference call.

Once the acquisition is complete, the new company will be branded EDS – an HP company. EDS will remain headquartered in Plano, Texas and EDS CEO Rittenmeyer will head the new organisation and report to Hurd.

The outsourcing business within HP’s Technology Solutions Group, headed up by Ann Livermore, will move over to EDS, Hurd said.

Livermore will retain responsibility of HP’s enterprise servers and storage, software and technology services, which consist primarily of break-fix, Hurd said.

Hurd noted that EDS would be a multivendor services organisation and not just focus on HP technology. “In HP services today we work with all kinds of different customers’ IT infrastructure,” he said. “In the services industry, you have to be able to work with all infrastructures in customers’ IT architecture and it’s is pretty disparate. There is no real change in that perspective.”

Meanwhile, HP’s strategy to move more midmarket customers over to solution providers could mesh well with a potential EDS acquisition that would strengthen HP in enterprise services.

HP said last month that it is about a third of the way toward its goal of migrating 750 midmarket direct maintenance contracts over to solution providers and expects to complete the transition by year’s end.

Referred to internally as the Atlantic Project, the plan called for HP to turn over in excess of $25 million worth of HP direct maintenance contracts in midmarket accounts to the channel in hopes that solution providers could better serve the customers.

“Most of these customers’ only relationship with HP was the maintenance contract,” said Jo Ann Redding, vice president, HP services sales for channel partner accounts.

“There was really not anyone selling to them,” she said. “[By turning these accounts over to the channel] this will give us better coverage in products and solutions.”

“So far in the last four months we’ve seen about 12 opportunities [maintenance contracts] come our way in excess of $1 million,” said Marc Sarazin, executive vice president of sales and marketing at AdviseX Technologies LLC, an HP solution provider in Independence, Ohio.

Mark Melillo of Melillo Consulting added that the acquisition of EDS could end up being good for solution providers because it strengthens the HP brand in services. “But it all depends on how they execute,” he said.

Joseph F. Kovar contributed to this story.