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Reading tea leaves is tricky. Late last year I went out on a limb and made a bold prediction. In the Forecast Issue of this Journal, which appeared January 1, I predicted the merger of HP and Compaq would be a significant event in the IT outsourcing (ITO) world. I told reporters from the Wall Street Journal and the New York Times the same thing when they called.

I felt the new company had the expertise and the critical mass to launch itself into Tier 1 territory. Compaq was an expert in the services business; it had experience in helping customers access their information. HP brought data center experience to the outsourcing offering. It knew how to manage that information. I felt being able to offer services, hardware and software was a very compelling platform.

Many disagreed with me. They felt the different corporate cultures of these super powers would never meld. (Could Silicon Prairie work with Silicon Alley?) They predicted the internecine warfare that preceded the merger would poison the atmosphere afterwards. They felt the new entity would not be able to convince the marketplace of its strengths and therefore not be able to attract an ITO mega deal.

Fortunately for the outsourcing world, I was right. The new HP is indeed a player. On April 11, Proctor & Gamble (P&G) announced a $3 billion, 10-year managed services contract with HP. The contract covers P&G's global operations in 160 countries. I call that a mega deal.

On the same day, HP signed a letter of intent with Ericsson to outsource its IT infrastructure. On April 14, the Bank of Ireland awarded HP a seven-year ITO contract worth $600 million. Two days later, HP inked a deal with the government of Sweden. HP, with seven other service providers, will provide desktop and portable PCs to Sweden's public authorities in a $709 billion deal. HP will provide 40 percent of the hardware.

Four mega deals in a five day period. HP is on a roll!

HP had an extraordinary April. But the momentum's been building since June, 2002. Look at this list:

• Canadian Imperial Bank of Commerce (CIBC). This is a $1.5 billion, seven-year contract for IT services.
• Microsoft. This multi-year contract provides centralized end-user support to 61,000 Microsoft employees in 68 countries.
• Telecom Italia. This five-year, $244 million agreement provides desktop services to the company's 90,000 users.
• DirectTV. The digital satellite television service has been an HP customer. It renewed its contract in December. The new five-year agreement provides billing support to the company's 11 million customers worldwide.

Joe Hogan, vice president of marketing for HP, which is based in Palo Alto, California, says "it's a very exciting time to be at HP right now." He says buyers are attracted to HP's attitude of "guiding our customers into the future instead of optimizing the past."

Why Buyers Are Signing UP

Damon Jones, manager of external relations for P&G's Global Business Services, explains why the company selected HP. First, P&G was impressed with the way HP "offered a collaborative approach." It was a good cultural fit. P&G is very customer focused and so is HP, the P&G executives discovered. "We called their customers, who gave them very high marks," Jones reports.

Innovation was a critical goal of the outsourcing endeavor. "We were impressed that HP invested billions in HP Labs," Jones continues.

Since several thousand P&G employees were moving to the HP payroll, P&G wanted "an industry leader in compensation and benefits." He points out both companies are on the Fortune 100 "preferred employer" list. "We knew our employees would find a good home at HP," he notes.

Finally, Jones says P&G was excited about HP's recent string of successes. Its forward momentum was attractive. "I predict HP will become an industry leader in the future," he says.

I'll add that the new HP has a fairly healthy balance sheet, compared to its Tier 1 counterparts. At the end of the first quarter, HP had $13 billion in cash on its balance sheet.

What This Means for Buyers

I believe HP's successes will have significant implications for the ITO marketplace. That's good news for buyers. Other service providers, like ACS, have been purchasing smaller competitors, shortening the play list. Now there's a formidable new kid on the block giving large buyers more choice.

Other service providers will be forced to increase their value propositions to match HP's offerings. HP will put pressure on prices. Buyers will benefit.

Now it's a lot easier to predict that HP will become a strong force in the IT outsourcing space.

Lessons from the Outsourcing Journal:

• HP has been able to attract mega deals. It signed three in one week. This momentum is one reason buyers are interested in this service provider.
• The new supplier will put pressure on prices and force other service providers to upgrade their offerings.
• Large buyers now have more choice in selecting a service provider.
• HP's expertise and its close cultural match made it a good outsourcing partner for P&G. Other buyers should look for traits like these to achieve success in an outsourced relationship.

Publish Date: May 2003

Copyright © 2003 - Everest Partners, L.P.

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