Hewlett-Packard said Friday it has won agreements in principle for two major deals that will provide a significant boost to its services unit. The larger of the two is a $3 billion, 10-year contract under which it will manage a broad range of IT operations for Procter & Gamble Co. The contract is expected to be signed in mid-May, HP said.
HP also has secured a memorandum of understanding for an outsourcing contract with Swedish telecom equipment maker Ericsson. That deal, terms of which were not disclosed, is expected to be formally signed by the end of June, Ericsson said. IBM and EDS also had been vying for the P&G contract, while IBM was a finalist in the Ericsson talks.
HP Services will manage P&G's IT infrastructure, data-center operations, desktop and user support, as well as network management and application development at the consumer goods company's operations worldwide. Additionally, some of the services HP will provide will be handled at its offshore locations in India and China. About 1,850 P&G IT staffers will become HP employees under the deal, which represents HP's largest services contract to date. "We're popping a few bottles of champagne around here," says Anne Livermore, executive VP at HP services.
Livermore says P&G was primarily impressed by HP's Utility Data Center capabilities, which provide computing resources to businesses on an on-demand basis to help minimize costs. She says she was also told by P&G officials that their decision was influenced by favorable reports from other HP services customers, including CIBC, as well as HP's No. 1 ranking in a recent InformationWeek survey of IT services customers.
The wins are no doubt welcome news at HP, which has been hit by the slump in the IT services market. In the first quarter, the company's revenue from services was $3.0 billion, down 3% from the fourth quarter of 2002. Its operating profit for services was $341 million, down 6% from the previous quarter. A bright spot during the period was its managed services business, which grew 11% from the previous quarter as more and more companies look to outsource basic IT operations.
HP's revenue from consulting and integration services shrank 12% sequentially in the first quarter, prompting some analysts to suggest that it needs to strengthen its business consulting offerings if it is to keep pace in that area with IBM, which last year acquired the consulting arm of PricewaterhouseCoopers following a failed bid by HP to buy the business.
One likely acquisition target for HP may be the consulting unit of Deloitte Touche Tohmatsu, among the last of the Big Five professional-services firms that continues to maintain business consulting and auditing services under one roof. It's a situation that, some analysts believe, represents a potential conflict of interest from which customers are now trying to distance themselves. "It's not a good idea to have your books audited by a firm that's also trying to sell you professional services," says Technology Business Research analyst Humberto Andrade. He notes that more than 50% of Deloitte's 50 largest consulting clients also use the firm's auditors. "Some of those customers are getting a bit skittish about that and may go in another direction," Andrade says. General Motors recently dropped Deloitte Consulting for that reason. The automaker continues to use Deloitte as its auditor. Deloitte officials were not available for comment.
Livermore says that, for now at least, HP isn't interested in making another bid for a consulting firm and says her company has not been at a disadvantage since its talks with PricewaterhouseCoopers fell through. "That obviously wasn't a hindrance for us in the minds of P&G and Ericsson," she says.
P&G's decision to tap HP as its primary IT services contractor also comes as a blow to EDS. Although EDS booked a number of smaller deals this week, the P&G contract is clearly the big one that got away. The companies were close to a comprehensive $8 billion deal late last year, but P&G ultimately scuttled the talks due to concerns about EDS's financial stability. At the time, P&G officials said the decision was based partly on an earnings warning issued by EDS in September.
Beyond basic IT outsourcing, P&G had been considering a business process outsourcing arrangement with EDS. Because there's no BPO component to its deal with HP, some observers suggest that P&G may still be shopping for a vendor to take on those services. P&G officials weren't available for comment.
HP said it would take over and manage Ericsson's worldwide IT operations, including its mainframe and midrange servers, desktop PCs, LANs, and help-desk facilities. Ericsson will transfer all its services staff to HP, though it didn't say how many employees are involved.
When Ericsson disclosed its intention to outsource its IT operations last year, it said the services unit employed about 4,000 people. The company has since fired 1,200 of those employees and has said it wanted to keep about 200 people for in-house work.