Services Industry Will See Continued Consolidation

Ann All

HP last week announced it was officially changing the name of EDS, which it acquired last year, to HP Enterprise Services. According to an HP announcement, it "marks the next major step in a year-long integration of EDS into HP and emphasizes the growing global role of enterprise technology services in HP's portfolio."

 

There seems little doubt as to the overall "growing global role of enterprise technology services," based on two deals that bookended HP's announcement. A few days beforehand, Dell said it was buying Perot Systems. Now this week, Xerox revealed its plans to purchase Affiliated Computer Services.

 

Hardware traditionally has tighter margins than services, and in a down economy, the hardware business tends to suffer more quickly and in larger measures than services. So these purchases should help protect the acquirers from economic bumps by diversifying their businesses. As IT Business Edge's Mike Vizard noted last week, HP and Dell (and now Xerox) are trying to follow the lead of IBM, which effectively transitioned itself from being a hardware company to a services company. If a company like IBM or HP helps IT organizations revamp their processes, chances are good that they'll sell some hardware and software as well. Writes Vizard:

 

What's really happening here is that technology vendors have collectively become tired of waiting for customers to figure out how to become more efficient using IT. Instead, they are investing massive amounts of money in services organizations whose primary mission is to drive IT-enabled change that in turn will drive more product sales.

 

The consolidation is a sign of an intensely competitive industry and one that has undergone a major shift in the past decade, said Mark Mayo, an analyst at outsourcing advisory company TPI, when I spoke with him on Friday. Before Y2K, competition for services deals was largely confined to IBM, EDS, ACS and CSC, he told me. Following Y2K, services providers from Europe (T-Systems and Capgemini) and Asia (Wipro, Infosys, Tata Consultancy Services) emerged, effectively transforming what had been mostly a North American services market into a global one. In fairly short order, the Indian companiesbegan taking market share from the so-called Big Six: HP, Accenture, IBM, EDS, ACS and CSC.


 

More acquisitions are coming in the services industry, predicts Mayo. He's not the only one. Plenty of other observers (including me) thought HP's purchase of EDS would trigger similar buys. Mayo thinks both multinationals and up-and-comers like the Indian companies will be shopping for services firms that serve attractive verticals. Few verticals are more attractive right now than health care, which may help explain the Dell and Xerox acquisitions. Both Perot Systems and ACS possess deep health care expertise, and health care is a bright spot in otherwise sluggish IT spending forecasts.



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