HPE offloads Enterprise Services to CSC – jettisons traditional outsourcing

HP announced on Tuesday this week that it intends to spin off HP Services to US supplier CSC, The new company will be headed by CSC chairman, president and CEO Mike Lawrie. In the new organisation HPE’s leader Meg Whitman will have a seat on the board, with the other directors nominated 50:50 by HPE and CSC. HP acquired EDS in 2008 for around $13.9 billion (see my Figure for the combined revenues of EDS, CSC and HP Services). HPE claims it will save around $1b in the first year following a schedule which should see the deal completed in a year or so. You’ll want to learn more about the background history.
Traditional outsourcing looks very different to other services businesses such as HP’s Technical Services, which it is retaining. Contract lengths are longer (typically 3 to 5 years), with profits from each customer coming towards the end of that period, which makes renegotiating contracts impossible, difficult and/or expensive for customers. Other outsourcing experts, such as IBM, are managing a slow conversion of traditional to cloud-based outsourcing – not so HPE, which has decided to be a cloud builder and private cloud services supplier rather than open its own data centers from which to run general purpose IaaS and PaaS for customers. Customers often find the inflexibility of traditional outsourcing problematic in an IT world in which new opportunities get addressed by newer forms of op ex offerings: consequentially outsourcing revenues are declining more than most other services areas.

Viable IT businesses are not always new, small, hyped and growing rapidly – some have big, but declining revenues and reasonable profits. Not all IT services are about ‘transformation’ either. HPE’s decision to offload HP Services shows that it wants to swim faster rather than deeper in our evolving industry. CSC has quite an interesting recent history. It delayed its financial reporting so they coincided with HP’s this week. It split off its US Public business into a new company called CSRA back in November last year: it might make sense to divide the incoming HP Services business into both sides of the company. Problems with its contract with the UK national Health service (NHS) contract had led to big losses in 2011.

The offload looks a bit like HP’s decision to spinoff its test and measurement business into Agilent in 1999 – its business moved slower and paid its execs less than the burgeoning IT business at that time. It looks as if traditional outsourcing has become another style of business it wants to offload in the hopes of tying itself to the new style, wave, transformation businesses it spends so much time talking up. I don’t expect this will be the end of organisational change at the 2 new HP companies: in particular selling (rather than splitting) is probable for various businesses. I’ll be following the deal and the fortunes of CSC and HPE closely over coming quarters as always.