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HP move cloaks IT service weakness

Hewlett-Packard takes $1 billion charge as it preps to pare 9,000 workers and retool its IT services business.

Hewlett-Packard Co.'s latest reorganization will probably do what the company says: produce more efficient, less manpower-intensive data centers for use by customers and the company itself. But suspicion abounds that the move -- which includes plans to lay off 9,000 employees over an unspecified period -- could also be a flight to lower-cost offshore employees and to a more direct sales focus worldwide.

As the latest in many HP shakeups, the reorg was disclosed Tuesday and, for some, shows that HP has not got its services business humming on all cylinders. This is a huge concern, because HP bet big on its services business when it bought EDS, a consultancy, for $13.6 billion two years ago. Much of EDS' work was mainframe-intensive and relegated to huge Fortune 100 companies, including Ford, that are struggling.

Since the acquisition HP has slashed 25,000 EDS jobs. HP, which claims to be the largest IT supplier in the world, employs about 300,000 people in total.

HP cuts bloat
Some IT pros say the truth is simple: HP has to get down to fighting weight and eliminate huge redundancies.

"HP is really big these days," said an IT executive at a large Midwestern financial services firm. "They added about 150,000 people with EDS, 3Com and Palm [acquisitions]. There's lots of overlapping overhead." HP still fields many different sales teams and in EDS -- now known as HP Enterprise Services -- there's a "lot of fat to trim," he said.

The independent EDS was a services giant, but he and others also noted a shift in the services business as corporate customers want smaller, less costly engagements. "There are fewer big contracts to fund big sales teams," he wrote in an email. Now "it's more like smaller shorter deals that focus on real improvements for the customer. [That is] not what EDS was configured to sell or deliver -- gotta fix that sooner or later. Looks like sooner."

An integrator source close to HP said it has to be agile in reconfiguring services offerings on the fly. In his view, HP is not satisfied with the growth of the services business. "They have to grow in that industry, and there are a lot of white spaces they're not getting into on the service side -- and they see the success IBM is having -- they have to react," he said.

While HP led its press release with news of a $1 billion investment in IT services, it is actually taking a $1 billion pre-tax restructuring charge to cover severance and other costs related to this reorganization for "a multiyear period."

IT services prove tricky for HP
On its last earnings call two weeks ago, HP said its services division revenue rose just 2% year over year and all that growth was more than offset by currency fluctuations. By contrast, HP's lower-margin PC sales grew more than 20% in the same period.

Many say that the vendor is competing for hard-to-win mind and market share from IBM's gigantic services arm. But that's not all the competition it faces in an admittedly sluggish market. Hardware archrival Dell jumped into the services pool, snapping up Perot Systems last September.

HP also treads a fine line. It has to balance its own need for service revenue with a need to feed thousands of hungry value-added resellers (VARs) and systems integrators that want the higher-margin services money. To that end, it has allowed its VARs to resell "units" of HP services as needed. That can help smaller VARs with limited geographical coverage to serve companies with far-flung offices, said Rick Chernick, the CEO of Camera Corner/Connecting Point, a longtime HP partner in Green Bay, Wis.

Plans for a rehire
In response to a question on a conference call, Ann Livermore, executive vice president of HP Enterprise Business, said HP would cut by half the 100 data centers it now runs for customers.

HP will also rehire 6,000 of the 9,000 affected workers for customer-facing, sales jobs and for "global delivery centers," according to Livermore.

Chernick said it makes sense for HP to put more feet on the street, but that the skills of internal data center people might not translate. "They're making them re-apply for their jobs and will hire a bunch back to do sales or sales support, but you can't make a quarterback into a running back. A technical person working with servers all their life might not be the best sales person," he noted.

Barbara Darrow is the Senior News Director for Write to her at

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