Canceled Deal Takes Bite out of HP's Outsourcing Aspirations


I'm coming off "Shark Week" on the Discovery Channel, during which my 7-year-old son and I view as much shark-related programming as possible. The more gruesome, the better. Not surprisingly, many of the shows incorporate clips from the movie "Jaws," leading to our annual debate over whether he's old enough to watch it. (Not yet, honey.)

He doesn't know the movie spawned three sequels. My parental decision on those should be pretty easy, since it won't revolve around protecting him from disturbing violence, but from disturbingly bad film making. Actually, Jaws 2 wasn't half-bad. It has one of the greatest movie tag lines ever: Just when you thought it was safe to go back in the water.


So involved was I in Shark Week that I thought of that line when I read about Deutsche Post's decision to halt a multi-billion dollar outsourcing contract with HP. Outsourcing is safe, right? No need to worry about cost savings or a business case, just dive right in. While you hear about occasional outsourcing disappointments, that kind of coverage tends to get lost in the ocean (last shark reference, I promise) of more positive coverage.


Back in January, reports InformationWeek, Gartner cited the deal as a sign of stepped-up outsourcing activity in a research note titled "HP-Deutsche Post Agreement May Herald Fresh Outsourcing Wave." (I am not making that up, I swear.) But a July 21 e-mail from Stephen McGuckin, the company's IT services managing director, informed Deutsche Post employees that the deal isn't going to happen, largely because its internal IT Services department improved its performance to the point that it would be tough for HP to deliver the expected cost savings.


Wrote McGuckin:

Simply put, during the six months of the evaluation, our improving cost position made HP's job that much harder and their cost reduction target that much more difficult to achieve.

McGuckin positions the cancellation as a "vote of confidence" in the internal IT department rather than a knock against HP. Perhaps the threat of outsourcing inspired internal staff to new heights of achievement, but it seems a bit odd to cancel over cost factors six months into a deal.


The improved internal performance wasn't the only factor in Deutsche Post's decision, notes the article, citing information from unnamed sources that HP was unable to get competitive pricing from competitor IBM, another Deutsche Post supplier. Deutsche Post employees slated to move over to HP in the deal also apparently expressed concern about HP's compensation packages.


Under the deal, HP would have operated and managed data, infrastructure, networks and software running in Arizona, the Czech Republic, Malaysia and other regions.


The two companies will continue to work together on transformation projects, says an HP spokesperson, and will revisit the idea of outsourcing "if and when appropriate at a future time."


The cancellation has to be a big disappointment to HP, which hopes that its purchase of EDS will step up its services business. HP shareholders, U.S. regulators and the European Commission all recentlysigned off on the acquisition, which was first announced back in May, reports ZDNet's Larry Dignan. EDS and HP have also settled five shareholder lawsuits over the deal.


EDS is trying to quell rumors that it plans to lay off up to 20 percent of its U.S. workforce, notes Dignan, who attributes the rumors to "jitters" over the merger. Still, given the overlap in the companies' services business, some layoffs will likely result.


HP has a long way to go if it hopes to catch IBM in the services business, and some, including CNET's Steve Tobak, are unconvinced it can do so