In 2008, HP (now part of the newly split-off HPE) bought Electronic Data Systems (EDS) for $13.9 billion, a massive amount for what at the time was one of the biggest IT services players in the market space, behind IBM. This was whilst HP’s services division languished in fifth place, behind both Accenture and Fujitsu.
At the time of the deal, it was said that it was too big a merger: a little bit like a whitebait eating a whale. The power of the deal was obvious. HP as an IT services player was catapulted to second place in revenue. It was generally thought to be a good deal, as the majority of the heavy lifting to transform EDS had already been done by the management team led by Michael Jordan.
However, it was not long before the cracks in the deal started to show. EDS was no longer the powerhouse it had been in the latter half of the 1990s. It already had a bad record for delivery. (It was a well-known joke in IT service circles that “EDS” stood for “everything delivered slowly.”) HP had inherited a company mired in legal battles caused by late, sloppy delivery of work; some of the lawsuits even accused the company of fraud. Within months of the deal’s closing, HP had to pay British company BSkyB a £200 million ($300 million) fine.
Four years later, HP was forced to write off over $8 billion in value. Why was this the case? It could be argued that it was mainly due to post-acquisition “cost savings” from laying off thousands of staff, from both HP Technology Services and EDS.
Other issues included cultural changes in HP Technology Services. Prior to the acquisition, HP had a very good reputation among its customers for good service and delivery. In fact, a large number of its clients were customers that had moved to HP from EDS because EDS had failed to deliver. Those customers were very upset when HP started to act like EDS after the merger. HP hemorrhaged contracts. By 2014, it had lost its spot in second place to Fujitsu, and Accenture was rapidly catching up.
Fast-forward to May 2016. The newly formed HPE has just sold its Technology Services division to CSC for $8.5 billion, an effective loss of over $5 billion in eight years. HPE as a company will now focus on its core skill sets in software, server systems, networking, and storage systems. It will, however, retain a 50% stake in the resultant merged CSC/HP Technology Services company. Therefore, it will benefit if the venture is successful, and it can safely divest itself of the equity if it is not.
CSC, however, must be jumping for joy. As a result of the deal, it has catapulted to number two in the ranking of global IT service companies, jumping above players like Capgemini, Oracle, Accenture, and Fujitsu. Does any of this sound familiar?
CSC will need to look to history so that it does not suffer exactly the same problems that HP did when it acquired EDS. HP Technology Services is still at its core EDS, with all the problems that were inherent in the original company. The Technology Services division did not inherit HP culture, but rather subsumed EDS processes. This is why HP never delivered on its initial promises of creating an agile powerhouse of a services division. Once again, a whitebait is attempting to devour a whale.
The marketplace is a completely different beast today than it was in 2008. Waterfall methodologies will no longer cut it. Bimodal and ITIL are already outdated. DevOps and the brave new world are with us.
I wish CSC good luck with its new toy, but sadly, all I can see is history repeating itself.