Last week, Hewlett Packard Enterprise (HPE) said it would spin off its Enterprise Services arm and merge it with CSC in a yet-to-be named IT and business services company with annual revenues of $26 billion and a substantial presence in Europe and the UK. According to IDC estimates, in Western Europe, the entity will have total revenues of about $9 billion, putting it third behind IBM and Accenture in IT and business services. CSC CEO Mike Lawrie will be chairman, president and CEO of the combined company. Mike Nefkens, head of HPE Enterprise Services, transfers over and reports to Lawrie as his deputy.
What it means:
- This is a bold move that brings scale to the new entity. Scale is good, but acquiring it by merger/acquisition carries its downsides, and scale by itself cannot guarantee success for the new entity. This deal will depend on near-flawless execution by Lawrie and Nefkens, who are respected as leaders who combine strategic vision with tough execution abilities. But it’s by no means guaranteed to succeed.
- Although the new entity will resell HPE products and services for three years, it will not be shackled exclusively to HPE, and we suspect the new company and the mainstream HPE ES organization will very quickly begin to compete in the market. This competition will be good for clients, and will counter the effects of reduced customer choice created by this major consolidation of IT outsourcing vendors. Bear in mind, though, that HPE will own almost 50% of the shares in the new entity so will have an interest in the success of both companies.
- The immediate concern will be to ensure that existing and potential customers are not left uncertain about the effects of the merger on the relationships they current have – and the offerings they currently consume – from the two organizations. Competitors will do their best to inject FUD (fear, uncertainty and doubt) into the minds of clients, and the sooner the two sides lay out their detailed roadmap for the new organization the better for their clients.
- The new company will have a heavy outsourcing bias, essentially focusing on services that run its clients’ existing IT estates. But clients need to be challenged and inspired, not just obeyed. Faster-growing competitors such as Accenture and Capgemini have a stronger focus than HPE Enterprise Services and CSC on services that transform and indeed replace those IT estates. Nailing the legal, logistical and personnel mechanics of the merger will take maybe 18-24 months. After that, Lawrie and Nefkens are in a race against time to build a strong, transformation-oriented projects business that can match that of (say) a Capgemini.