Can HP rival IBM in global technology services?

Big Blue has at least an eight-year head start. Still, Hewlett-Packard is hoping to use its pending acquisition of EDS to position itself as a viable competitor.

Nobody knows exactly when Hewlett-Packard's $13.9 billion acquisition of EDS will close, but it may already be too late for the tech giant to take a run at IBM's leadership in global technology services.

Eight years ago, then-CEO Carly Fiorina looked into acquiring PricewaterhouseCoopers to expand HP's services business, but it ultimately balked at the deal. IBM scooped up the consulting firm for $3.5 billion just two years later, a move that accelerated its famously successful repositioning as a services company.

HP Chief Executive Mark Hurd Hewlett-Packard

Now HP Chief Executive Mark Hurd is trying to do what Fiorina failed to do eight long years ago--eons in today's ultrafast-pace technology world.

When analyzing this kind of strategic move, I always try to find a good analogy. To me, this looks a lot like when FedEx decided to go after UPS in the ground service business by acquiring Caliber System in 1998. Nine years later, and growing steadily all the while, FedEx still has only 17 percent of the U.S. ground services market, compared with UPS' 54 percent.

It's tough to gain on an entrenched competitor in its bread-and-butter market.

I think HP faces similar challenges, even if it is successful in integrating HP and EDS. On top of all the usual merger integration issues and pitfalls, there's also the fact that, operationally speaking, EDS is not your typical services company. Operating margins are surprisingly anemic, and top-line growth has stalled for the past four quarters.

That said, Hurd--operations guru supreme--was able to whip HP into shape, making believers out of everyone who said HP couldn't be fixed without carving itself up into pieces. And yes, that included me.

In any case, if you ask yourself where HP goes from here, the answer inevitably comes back to services. IBM ex-chief Lou Gerstner figured out long ago that it's the key to enabling the integration of relatively diverse IT product lines and core technology into a growing, cash-generating machine.

So Hurd's on the right track. But how long will HP remain a distant second to the leader in global integrated services? Well, the answer to that question is the same as the answer to this: How long does it take to gain significant market share on an entrenched competitor with outstanding fundamentals and at least an eight-year head start?

Just ask FedEx. Even in a best-case scenario, it'll be a very, very long haul, indeed.

 

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