PALO ALTO, Calif. — By many measures, it has been a tough year for employees of Electronic Data Systems.
After Hewlett-Packard bought the computer services company last August for $13.9 billion, it immediately began hacking the work force. Led by a master cost-cutter, Mark V. Hurd, H.P. laid off 25,000 E.D.S. workers, and cut the salaries of some by more than 20 percent. Mr. Hurd even stripped the E.D.S. brass of their plush offices and corralled them into 6-by-6-foot cubicles.
But despite the risk that disgruntled employees and customers would walk out the door, the acquisition has paid off big for H.P. — so well, in fact, that an important rival has decided to strike a similar deal. Dell announced Monday that it was paying $3.9 billion for Perot Systems, the Texas computer services company started by H. Ross Perot after he left E.D.S.
Plenty of employees have complained about H.P.’s tactics, but the company says it has persevered through the turmoil to keep most of E.D.S.’s customers. Last quarter, H.P.’s operating profit margin on services hit 13.8 percent, the highest in a decade. And the combined company’s services division is H.P.’s biggest business in terms of revenue — a remarkable metamorphosis for what has long been viewed as a slow-growth PC and printer maker.
On Wednesday, H.P. will take another big step toward full integration of E.D.S., extinguishing the 47-year-old company’s name. The new name, H.P. Enterprise Services, reflects the union of the services operations at the two companies.
“I acknowledge that we have done a lot of hard stuff, but this is all about getting H.P. in a position where we can compete and win,” said Ann Livermore, an executive vice president at H.P. who heads its services and data center products businesses.
In talks with E.D.S. employees, executives have put it more bluntly. At one meeting in August, Andy W. Mattes, who runs H.P.’s services business in the Americas, said that the deep salary reductions and broad cost cuts were for the good of the remaining employees.
“Just letting things go on will result in much more bleak and horrible scenarios,” Mr. Mattes said, according to an audio recording of the meeting.
The bloodletting pains Mort Meyerson, who served alongside Mr. Perot at E.D.S. and Perot Systems for many years. “It’s sad to see this happen because of the decades of work the men and women of E.D.S. put into the company,” he said. “But that’s what happens in business.”
H.P. executives concede that the company’s aggressive pruning comes with costs, as workers fret about their futures and the overall business endures some disruption.
But they say that tough actions were needed to bring E.D.S. in line with competitors like I.B.M., Infosys and Wipro Technologies.
By common business yardsticks, the Hurd touch on E.D.S. appears to have worked better than investors and analysts had expected.
When H.P. announced its intent to buy E.D.S. in May 2008, H.P.’s share price sank. E.D.S. had developed a reputation as a bloated has-been that had burned investors in the past through bad deals, accounting issues and an overreliance on services contracts with the government and automakers.
And while E.D.S. received high marks from customers for its role in taking over their technology operations, it required far more people than competitors to accomplish the task.
“It was almost, the closer you were to E.D.S., the more concern you had about the acquisition,” said Shannon Cross, an equities analyst with Cross Research.
E.D.S.’s own efforts to lower costs had stalled, particularly since the company lacked the financial resources to undertake a major reorganization, according to Joe Eazor, a former E.D.S. executive who is now a senior vice president and general manager of services at H.P.
Investors were also worried about change-of-control provisions in contracts that would allow customers to renegotiate or cancel long-term deals with E.D.S.
But H.P. has held onto 199 of the top 200 accounts at E.D.S., according to Mr. Eazor. Some of the deals have been reworked, but H.P. points to its improving operating margins in services as evidence that any reductions in revenue have been minor.
Meanwhile, as sales of printers, PCs and data center gear have plummeted during the recession, H.P. has used services to bolster its overall revenue and profits. “The deal has really helped insulate them from the downturn,” said Ben Reitzes, an analyst with Barclays Capital. “Without E.D.S., things could have been a lot worse.”
According to analysts, H.P. may have engineered the deal at just the right time. The down economy gave H.P. time to perform its painful restructuring and primed the company to grow when the good times returned.
Historically, E.D.S. promoted computing gear from H.P. rivals like Sun Microsystems, Xerox and Cisco Systems. But Mr. Eazor says that more of H.P.’s own hardware is slated to go into deals that are currently up for bid.
H.P. has been criticized by some analysts and derided by competitors for declining to detail the value of the services deals it has signed, as is industry practice. During a meeting this week with analysts, H.P. plans to reveal that it recently closed 32 deals valued at more than $100 million and that its customer service scores rose over the past year.
Niall Quinn, the director of commercial management for Aviva, an insurer, said that H.P. had held up well under the pressure of the acquisition. In March, Aviva picked H.P. over I.B.M. for a $1 billion, 10-year outsourcing contract in Britain.
But, while Aviva has committed to H.P. for the long haul, Mr. Quinn said he had short-term concerns.
“Mark Hurd is a bit focused on hitting numbers on a quarterly basis, and some of the things he’s done, people in Europe find quite amazing,” Mr. Quinn said. “The layoffs are a concern because what you’re buying is tremendous expertise.”
H.P.’s critics, including current and former employees, warn that the company has done away with too many high-salaried, veteran executives. Jeff Kelly, who had run the E.D.S. business in the Americas, left the company in March, leaving a gap in the company’s most crucial region. His successor, another E.D.S. veteran, Mike Koehler, left in May. Now Mr. Mattes, who came from the H.P. side, is in charge.
The heads of finance, human resources, sales and software services left E.D.S. earlier this year as well.
Current and former employees, who requested anonymity because they signed nondisparagement agreements with H.P. or are afraid of being fired, complain that H.P.’s tactics work better for a product company. In the services realm, customers depend on their long-standing relationships with executives and sales team leaders.
In addition, morale has dipped, particularly in the United States, where most salary cuts have taken place, these people say.
I.B.M., H.P.’s biggest competitor in services, contends that customers have been complaining about disruption in their H.P. accounts.
“In the services business, if cost-cutting and price are the only levers you have to compete, it’s not sustainable,” said Dave Liederbach, the general manager of I.B.M.’s outsourcing business. “The chaos that results in a client situation will be severe.”
H.P. paints a much different picture, saying that for the first time, it has enough salespeople and services expertise to go up against I.B.M. for some of the largest, most lucrative contracts.
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