Chronicles of a Wandering Mind

This week HP has announced to acquisition of EDS for $13.9 billion. Naturally, the acquisition of such size got fair bit of attention in financial circles, talking heads analyzing the numbers and speculating what it may mean for two companies in very broad terms.

With this acquisition, HP becomes an IT services behemoth, second largest only after IBM, and going forward, competition between IBM and HP is expected to be fierce, especially for large outsourcing deals. Obvious enough.

Yet this deal will likely to have massive impact on IT industry in general, not just outsourcing sector. Following IBM closely, as a strategy, HP has just created the second vertically integrated one stop IT shop for customers, providing everything from hardware to software to services. To appreciate the importance of this acquisition, I believe we need to consider this deal along with other acquisitions HP made recently (Mercury Interactive, Opsware, Peregrine,Trustgenix,Tower Software, SPI Dynamics, Bristol, etc.)

With these acquisitions along with already substantial Openview family, HP has a large portfolio of IT management software and now a large services organization that can deliver solutions using these tools. Naturally, HP services organization will still have to collaborate (when it has to) with 3rd parties to meet the requirements of their customers and not just push HP software, just as IBM professional services do, at least in theory.

In practice, experience suggest that it’ll become increasingly harder for other vendors to compete with internal HP products. Projects will have to justify why they need to use 3rd party products instead of internal ones and often the path of least resistance will be to use internal ones unless the customer explicitly dictates otherwise.

I think this is a major problem for any player that is not a one stop shop IT services provider. Software companies without substantial IT services organizations as well as independent IT services companies and systems integrators may find themselves cut off from significant portion of the market.

HP has a large and effective ecosystem. The mutually beneficial relationships HP has with its channel and integration partners has long played a significant role in HP’s success in the IT management market. With this move HP is no doubt jeopardizing its relationship with its ecosystem. It is not surprising however that HP thinks the risk is worth it, and the gains that will come from becoming a one stop shop will more than compensate for the loss of business it generates through the ecosystem.

Enterprises have long been working on reducing the number of suppliers and work with handful of preferred ones and the allure of one supplier that is responsible for everything seems to be too hard to resist for many.

The impact of loosing the channel may be greater than anticipated. Independent services organizations that partner with software companies acquired by IBM in the recent years have been finding themselves competing with their old partners and some of them have been making moves to alternatives. With HP adding a large services organizations, it also becomes a competitor for any services organization that may previously be a partner that sells and implements software products from HP’s or IBM’s portfolio of products.

BMC CEO was quick to move in to take advantage of the coming conflict and characterizes EDS acquisition as “declaration of war” by HP to its ecosystem. BMC also has been in an acquisition binge lately, acquiring BladeLogic, Emprisa Networks, RealOps and Proactivenet within the last year but BMC does not have a large professional services organization so it makes to position itself as the supplier of choice for professional services companies that will be alienated by the HP EDS acquisition. CA may also make a similar move having assembled a solid set of tools through acquisitions (Concord, Aprisma, etc.).

However, if HP’s strategy works out and HP software products starts to gain marketshare, it will not be surprising to see further consolidation in the market in the form or pairing between services organizations like Accenture and software companies like EMC, CA and BMC.

IT market is more and more looking like a Highlander movie. There can be only one a few.