So… who’s got the bottle to buy HP’s BPO services business?

One of our great technology and business services firms is in real trouble 

If you want to read another diatribe of HP’s woes, its second colossal multi-billion dollar acquisition write-down of the year, its revolving-door or leadership with very different ideas, then you’ve come to the wrong place, as we see little point dredging up the past to bemoan HP’s current predicament.  And as a stark reminder of how quickly a great brand can disintegrate in the face of disruptive competition, just look at Sony, which was downgraded to junk status by Fitch.  HP could soon follow down Sony’s depressing path, if  a radical overhaul of its businesses doesn’t happen soon, as we have our own versions of Apple and Samsung turning the legacy enterprise services industry on its head.

It’s time to stop dwelling on the past and look to the future.  In today’s commodotizing market for IT and business services, HP’s services business can only really look to defend what it still has against the encroaching competitive bite of the likes of Accenture, Cognizant, Genpact, IBM, TCS etc.  Defending what you have is no solution in today’s market, or you’ll end up in the junk pile of other once-great brands such as the Sonys, the Nokias, the Unisyses…

However, there is one option that could revitalize its legacy:  merge with one of the market leaders.  Most great brands find new homes when the market conditions demand a change – and HP’s situation is no different.  But remember, services firms are very different beasts from product firms – and HP is also very, very big: noone’s going to buy the whole thing, so it has to sell off some of its portfolio businesses that can add real value to market competitors.

Assuming that HP’s true DNA is as a technology products innovator, the logical step is to strip off its services businesses, which are still profitable, with an immense portfolio of enterprise customers on long-term contracts, and a stellar pool of talent to service them.  However, wait too long, and these services business will continue this inexorable decline and much of its talent, whose CVs are currently flooding the marketplace, will have gone.

There are two jewels in HP’s services portfoilio – it’s SAP development services and BPO services businesses.  Let’s focus on its BPO services today…

Why acquiring HP’s BPO Services would propel several possible suitors into a market-leadership position

While HP’s BPO revenues have been slowly declining in recent years, it’s still likely to net $2.6bn in revenues this year – a similar size to that of Accenture, and only dwarfed by the two traditional BPO pure-plays: Xerox ($6.2 bn) and ADP ($10.5 bn) .  This BPO division includes a large global portfolio of horizontal services that incorporates a huge billion-dollar CRM BPO business inherited from its EDS acquisition, a solid finance and accounting business grounded on marquee clients such as P&G and Molson Coors, a large healthcare business of medicaid services supporting a multitude of US States, and a strong public sector presence in many countries.  In addition, HP has renowned SAP-enablement skills, servicing a multitude of enterprise clients processing their global payrolls and accounts on SAP.  There are a host of BPO providers which woud benefit significantly from HP’s global client portfolio, its onshore presence, and its client delivery talent.  Acquiring this business would potentially transform the fortunes of several providers currently scrambling to tackle the BPO space head-on.

So… which providers should seriously consider buying HP’s BPO business?

The main contenders

1) IBM:  Degree of fit: 9/10.  Likelihood of happening: 7/4.

IBM has demonstrated, with its recent bumper CEMEX deal, that is has the appetite to bounce-back from the high-profile loss of its British Petroleum F&A contract and re-assert itself at the helm of the BPO industry.  HP would be an obvious fit and would likely be a much less complex integration – both culturally and structurally, should such a merger occur.  The addition of HP would not only bolster IBM’s (already) strong public sector businesses, but place IBM at the forefront of CRM BPO – an area where IBM has clear ambitions.

IBM has the capital, management experience and track record to pull this off.  However, the larger issue here is that IBM would probably look to make a grander play to take on a larger portion (or all) of the HP IT services businesses, in addition to BPO.  It’s hard to see Big Blue not wanting to ingest HP’s application services business, if it’s going to absorb BPO. This is probably what would slow this down, as most of the incumbent services firms are still playing a “wait and see” game with HP to explore all feasible options.  Given IBM’s appetite to be either #1 or #2 in its chosen markets, HP would provide an obvious avenue for it to stamp its authority.

2) TCS:  Degree of fit: 8/10.  Likelihood of happening: 9/4.

A TCS-HP combo in services would make a potentially compelling and unique market proposition.  Should it occur, it would also represent the first major Cowboy/Indian services combination that we have been predicting for a couple of years’ now.

While TCS has performed admirably with its vertical BPO offerings, notably in banking and insurance, its has never really gotten its horizontal BPO business off the ground.  HP would give it immense horizontal capability, and a badly-needed front end of talent to work with clients and improve its notoriously weak sales and marketing capabilities.  TCS could claim a market leadership position in BPO with this acquisition – and it could probably raise the capital without too much difficultly.  It would also be refreshing to see one of the Indian services majors make a true global play in the space -and TCS is likely to be the most ready to pull something like this off, with its clear focus on hybrid IT-BPO services.

TCS has proven to be incredibly risk-averse with acquisitions over the years and is unlikely to change now, despite the obvious value this one would have for the firm’s ambitions.  However, it has proven it has the appetite to take on really large, complex assignments when it really wants to, and surely recognizes the value in what HP would bring to its table.  In addition, TCS is showing signs of starting to diversify some of its management control outside of India, and there’s nothing like a major acquisition to force through some much-needed change.  A move like this would also be a massive statement intent from the Indian services industry that its leading firms intend to become truly globalize their businesses.

3) Accenture:  Degree of fit: 6/10.  Likelihood of happening: 11/4.

Accenture has benefitted considerably from its consulting synergies and client relationships, and its unique ability to elephant-hunt major client deals is likely to see it break the $3 billion dollar barrier with its BPO business in the coming months. Today, it has the size and scale not to need to buy new client footprints, and has persisted with an effective “tuck-in” acquisition strategy in recent years, picking up the likes of Ariba’s managed services, Zenta, and, more recently, Octagon Research Solutions, to add industry domain expertise.

Accenture would likely consider picking up some of the client contracts from HP, but is unlikely to have the appetite to buy up its whole BPO pie.  There is simply too much duplication of resource and unneeded scale for this to make financial sense.  Moreover, HP’s strengths are largely in horizontal processes, as opposed to industry-specific domains, which is where Accenture has openly declared it wants to grow its business.

4) Cognizant:  Degree of fit: 7/10.  Likelihood of happening: 10/1.   

Cognizant has proven to be one of the smartest of the Indian-heritage firms when it comes to acquisitive growth and has savvy Stateside leadership unafraid to make bold moves to maintain its stellar growth trajectory.  The firm has shown appetite to grow its BPO business – in patches – by picking up UBS’ captive, CoreLogic and its recent ING deal, but has not shown much desire to muscle its way into horizontal process markets, such as F&A, procurement or CRM BPO.

Cog is more likely to cast its eyes over some of the HP app services business, however, it is likely going to be out of its price range.  In addition, Cognizant isn’t in a place, in its current market position today, where it needs to to anything radically different – this would represent too much of a risk for a firm which has worked to hard to get where it has so rapidly.

5) Infosys:  Degree of fit: 5/10.  Likelihood of happening: 12/1.

Infy is clearly at an inflection point in its growth journey as it figures out how to move beyond the old-world model of outsourcing – and it is not alone with this predicament.  Like TCS, adding HP would be an incredible move for the firm, however, Infosys needs to decide what it wants to be when it grows up – a market leading BPO provider, or an IT services firms with some BPO services to support clients, when called upon.  One suspects IT is really at the DNA of the firm, so this acquisition would likely be too disruptive.

Moreover, Infy is likely too consumed with ingesting its recent Lodestone acquisition, and its leadership would have to go through the unprecedented change of not having “all roads leading to Bangalore”, were it to contemplate such a massive acquisition.

6) The long shots

Xerox: 33/1.  After it’s recent ingestion of ACS and workforce correction, HP’s BPO business is likely to represent a bridge too far.

CSC: 50/1.  Having dabbled with ACS’ business a few years ago before Xerox swooped, it could see picking up (parts of) HP as a way to revitalize its own fortunes.  HP offers some real offshore strength, BPO skills and added public sector depth, so it’s not the worst fit in the world.  Likely be out of its price range.

Huawei: 50/1.  Likely to reach $35 bn in revenues this year and could be the first Chinese major to make a global play into IT services.  Where better to start with HP – and what a statement it would make to the rest of the world.  Stranger things have happened.

Wipro: 100/1.  It’s more likely we’d see HP try and buyout Wipro.  Premji likes a big acquisition once in a while, but never anything on this scale.

Dell:  100/1.  Having had a sniff at the filthy lucre to be had in the services business with its Perot acquisition, Michael D may see a broader services play as the Holy Grail to revitalize his flagging hardware business.   In addition, Dell has hired some savvy ex-Wipro guys (Suresh and Ashutosh), which is a sign that the Austin-based outfit is serious about this business.

Fujitsu: 500/1.  Has occasionally talked a big game, but have never really got further than being an “IBM for the mid-market”.  However, the large Japanese dollars behind the firm mean there’s a gnat-in-hell’s chance of this one.

7) Just plain stupid, but you never know…

Genpact:  1000/1.  Bain Capital may decide it has a few billion to burn and slams G and HPQ together to create a weird BPO monster.

SAP: 5000/1.  The German giant may be fed up with partnering with IBM and others and opts to own its own services channel.

Deloitte: 10000/1.  Paranoid of a Flat Tax being introduced, the global consulting firm decides it’s time to jump back into outsourcing.

Oracle: 50000/1.  No strategic reason for this whatsoever, except Larry likes to buy stuff and occasionally surprises us with an oddball acquisition.  This one’s way off even his reality scale.

US Government:  1000000/1.  Having saved the US auto industry, the newly-reelected President sees his chance to save the flagging US IT industry.  His unbridled confidence knows no bounds…

The Final Word:  The fate of HP could reshape the whole direction of the services industry, but is anyone prepared to take a massive gamble?

As we recently discussed, the heady days of 20%+ growth are now over and we have moved from a short to a long game in the services industry. We’re finally arriving at the point where the IT services gravy train is slowing down and business transformation capability is emerging as a critical differentiator for those service providers looking to move higher up the corporate value chain.  We’ve also been swimming in a pretty stagnant market since the 2008 crash, and we’re only now just seeing several enterprises begin to pull the trigger on new transformation initiatives.

The main questions here are:  Is TCS the one Indian major to break the mold and really become a global force, as opposed to being rooted in India, or will we see HP become subsumed by the usual suspects?  Will one of the other ambitious Indian-centric providers seize the opportunity?  Or will everyone shy away, leaving HP to limp along in its seemingly-endless purgatory?

However which way we look at this, HP offers a rare jewell of potential for many providers – the likes of which will not come around again… Something has to give.  Has to give…

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17 Comments

  1. Tim
    Posted November 23, 2012 at 9:20 pm | Permalink

    Phil,

    Brilliantly done! Not sure about your future as a bookie, but as an analyst you are first class :)

    Tim

  2. Bryan
    Posted November 24, 2012 at 8:15 am | Permalink

    Phil – loved this piece – one of your best.

    Has to be IBM, however the Chinese angle is interesting.

  3. Alan Christopher
    Posted November 24, 2012 at 10:33 am | Permalink

    Phil,

    I would agree HP needs to sell off its services divisions, however I doubt many of the firms you mention have the stomach to raise the level of capital required. Having said that, it’s been a long while since we had a large merger in the services space and (as you point out) companies are starting to get focused again after years of stagnation,

    Alan Christopher

  4. Eric
    Posted November 24, 2012 at 2:21 pm | Permalink

    Great blog. HP has little choice but to sell off its “sale-able’ units and BPO is one of those. Interesting list of contenders – would be interesting of one of the Indian majors went for it, but I agree IBM is the most likely to bite, if a merger was to occur.

    Eric

  5. Vishal Pandey
    Posted November 25, 2012 at 4:26 am | Permalink

    Super article Phil; highly insightful. It is only a question of time before HP decides to unlock some value off its services business to stay afloat. In my opinion Cognizant would be the front runner as demonstrated by its amazing hunger for growth.

    Vishal

  6. Rudi De Roeck
    Posted November 25, 2012 at 4:45 am | Permalink

    A Phil Fersht Grand Cuvee’!

  7. Anand Ranganathan
    Posted November 25, 2012 at 6:11 am | Permalink

    Thorough analysis..!!
    If this happens, this will be a big Merger in BPO space and can change the competition attributes in the industry.
    BPO has still the captive piece and 3rd party handled separate and the integration effort does not seem to have worked within HP. Plenty of Opportunity if both Captive and 3rd Party business are merged before M&A.

  8. Posted November 25, 2012 at 6:53 am | Permalink

    Very interesting opinion piece but I think you are missing a few key points:
    1- HP has no track record and no appetite for selling businesses. I think that we have now established that they do not know how to buy but selling is also a risky business. So I could see a sale by apartment but only once a larger predator or PE firm would have acquired HP.
    2- I do not see IBM as a buyer as there would be far too many situation in which an IBM-HP would be market dominant, take Europe as an example.
    3- I do not see any non US buyer credibly acquiring the services business due to “national security” issues. If the US blocks Huawei hardware can you imagine the uproar if flood insurance were now in Chinese hands?
    4- last but least, HP has lost a huge number of smart, experienced and well-connected services talent over the last 3 years. All the names you list can acquire HP business one chunk at a time, just the all fashioned way. HP is currently pushing out many accounts due to a perceived lack of profitability and have made that position public. Why pay when you can win the business and get paid for it?

  9. Phil Fersht
    Posted November 25, 2012 at 9:10 am | Permalink

    @J-L: Good point about “selling” a business being counter to a culture. One can surmise that this is Meg’s main priority – to figure out what should stay and what should be sold. Practically writing off the whole of the Autonomy acquisition is a clear sign she is aggressively trying to clean up the mess and blame everything on the previous regimes. The reversal of the decision to retain the consumer business tells us where their priorities may be (if they have managed to agree on them), however, this may simply be a situation where they are trying to make the business divisions more profitable and attractive so they can command a better price.

    However, I would counter your argument here by adding that it will be harder to revitalize their services businesses in the current structure and market conditions, than to sell them off. I have argued for a while that it should look at a reverse takeover with one of the “modern” services firms if it wants to retain the HP services brand and have their global business aggressively restructured, so they can compete with the TCSes and Accentures. However, the most likely scenario is that HP continues to fester for a few more quarters, watches the continual decline of the business, until the pressure to sell forces the decision.

    I am also confused by your comment about IBM-HP being too “market dominant” – do you mean the monopolies commissions would block the move? In app services, there is still heaps of competition, so this wouldn’t add up, as is BPO, but there may be some issues with data center / IO services.

    However we look at this, it is a unique situation, but my take is they need to move more swiftly to redefine the business and strip off the non-core assets, while they are sill saleable, in order to reinvest in what they want to be their core. Services businesses can quickly become dying monoliths once they lose their talent and their brands become damaged. Noone wants to pay for a collection of unattractive contracts.

    Smart leadership is often knowing when (and what) you should sell, not who you should buy – and this is the test which will likely define Whitman’s leadership.

    PF

  10. SC
    Posted November 25, 2012 at 10:23 am | Permalink

    Wonderful write-up, Phil. Smart, insightful, takes a bold position – and funny.

    I believe this all boils down to leadership – does HP have the right managerial personnel to restructure and evolve out of its current crisis? Doubtful.

    Has Meg Whitman fully understood the strategic issues or is she simply an interim CEO to oversee a break-up of the firm? The latter.

    SC.

  11. Luke
    Posted November 26, 2012 at 4:16 pm | Permalink

    I think this is looking at things the wrong way round. As someone has commented already, HP is a company that acquires assets, not one that strips/sells them (Agilent being an exception). With that in mind, the question is, who will be HP’s next target?

  12. Phil Fersht
    Posted November 26, 2012 at 5:30 pm | Permalink

    @Luke – HP made $17bn in combined write-downs this year (EDS and Autonomy). Do you really think they have the appetite to keep on buying? Seriously?

  13. Fernando Ortiz
    Posted November 27, 2012 at 12:56 am | Permalink

    Excellent analysis, also giving insight on the Industry players beyond the potential acquisition itself.

    I wonder why Capgemini was not considered in the list though

  14. Phil Fersht
    Posted November 27, 2012 at 10:31 am | Permalink

    @fernando – thanks for the kind words. Capgemini openly stated to investors it was scaling back its major acquisitions for a while. While I am sure it will be evaluating adding niche competencies, such as its VWA addition, anything like HP’s BPO business is likely way out of its price-point at present. Having said that, there are a lot of similarities between the Capgemini and HP BPO organizations, such as strong Europe and Asia presence, SAP-enablement competency and consumer goods / manufacturing strengths. So too much duplication, and unrealistic price-points make this one a no-go, in my view. However, I have been wrong before….

  15. Fernando Ortiz-Chile
    Posted November 30, 2012 at 10:28 pm | Permalink

    Cristal Clear, thanks Phil

  16. Chayan
    Posted December 2, 2012 at 12:40 pm | Permalink

    Phil. Good article. However this article has not touched upon an important piece of the HP BPO story. MphasiS an HP Company which was MphasiS an EDS company is a strong offshore delivery arm for HP BPO. http://www.mphasis.com How does a potential sale auger for Mphasis ? Would MphasiS also be a part of the piece being sliced off by HP from their service business ? What do you think ?

  17. Phil Fersht
    Posted December 2, 2012 at 12:53 pm | Permalink

    @Chayan – if you read through to paragraph 6, you will come across “huge billion-dollar CRM BPO business inherited from its EDS acquisition”. This includes the Mphasis piece. If HP were to sell BPO, I’d imagine the minimum acceptable deal for them would be the whole BPO business, in its entirety, and not pieces of it. That wouldn’t make sense for them. The F&A and elements of the industry business are likely the most appealing to competitors, but a provider, such as IBM, has a CRM BPO business it would like to grow. CRM BPO has such potential in areas such as analytics and pushing more customer-centric BPO options. I can see some potential suitors wanting to take on the Mphasis piece.

    PF

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