AMR Research looks at what has become arguably the largest outsourcer in the marketplace and details the ramifications of the deal everyone’s talking about.

by Phil Fersht

The HP/EDS merger makes sense for the combined entity’s business process outsourcing (BPO) business. The BPO market leaders, Accenture and IBM, have been aggressively pushing their combined portfolios of F&A and HR BPO services, with increasing emphasis on “bundling” these services with their application outsourcing services. Several prospective BPO engagements are being negotiated in the marketplace from enterprises that are rolling out major ERP implementations.

EDS and HP have been struggling to compete for many of these deals because:
• EDS lacked a strong F&A BPO offering ever since it lost its BBC renewal to Steria (Xansa) in 2006, with its Mphasis acquisition lacking competitive teeth in the marketplace. EDS was a likely contender to acquire F&A BPO specialist vendor Genpact to add this critical BPO component to its portfolio, but a merger with HP would similarly bring this capability to the table.

• HP never made inroads into HR BPO, beyond a contract with Nestle in Europe, which was a “tie and run” contact center support engagement to an SAP implementation. Moreover, the firm has been looking to partner with an HR BPO provider to complement its own offerings, so a merger with EDS’s “ExcellerateHRO” offering, a joint venture with Towers Perrin, makes sense, especially considering the significant investment made by EDS to build and deploy an HR BPO platform. The combined entity is likely to retain the existing ExcellerateHRO business and infiltrate existing HP customers interested in expanding into HRO. HP already has a strong HRIT services capability, so the added BPO capabilities are a natural extension of its offering.

HP has been enjoying a strong performance in its F&A BPO business over the past two years, picking up significant client wins to complement its inception client P&G. New clients include Nestle, Molson Coors, and Tribune Group, helping the firm pick up a 12 percent share of deal value in 2007. At HP’s recent analyst conference, the company was showing increased focus on BPO and this merger cements its position as one of the leading vendors on the market that can cater for all the major BPO towers.

In addition, EDS has a $1 billion call center outsourcing business, which HP does not have. With more than $50 billion in annual expenditure on call center
outsourcing services, this merger further bolsters the companies’ strengths. The added delivery infrastructure gives the merged entity the option of incorporating BPO or IT services from these call center locations. The combined entity also has the opportunity to rationalize its delivery centers globally and invest in more lucrative delivery locations, such as Latin America and China, and divest itself of centers in locations with high attrition and wage inflation. The Mphasis Bangalore facility EDS acquired in 2006, for example, could be divested in favor of the larger HP facilities in India.

The new delivery resources, HR BPO, and call center capabilities fill HP’s portfolio gaps in the BPO market and position it strongly against Accenture, Capgemini, and IBM and a multi-function BPO vendor on a global basis, when you consider the combined business process and IT services scale and depth.

From a pure F&A BPO perspective, there is some added operational scale to compete against the lower cost offshore providers; namely, Genpact, Wipro, and Infosys, but the new HP should have an extra competitive edge with clients who want some HR processes added to the mix.

ACS is likely to be an acquisition target as the firm slips farther behind the competition and becomes a target for IT services firms looking to bolster their BPO capabilities. We also anticipate a move from one of the Indian global firms, most likely Infosys, to consider an acquisition of Genpact, as it seeks to gain a stronger foothold in the global BPO market. Even Accenture or IBM might seek new acquisitions as they look to add more capacity to cater to the ongoing demand for their BPO services.