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Summary

CSC and HPE (Hewlett-Packard Enterprise) surprised the market by announcing that HPE would spin off and merge its Enterprise Services unit with CSC, creating an as-yet-unnamed new IT services provider. This "spin-merger," expected to close by March 2017, will create a new $26bn services player, co-owned equally by CSC and HPE shareholders.

More consolidation for customers, a "new" competitor for services players

Coming less than a year after both CSC and HP split into two businesses looking for greater efficiency and agility, executives at both companies are painting this move as a logical conclusion of their corporate strategies. Whether planned or not, the result for customers is another consolidation in the IT services landscape that they will need to navigate (following the recently announced sale of Dell Services to NTT Data), while competitors are looking at a "new" pure-play contender in the field.

Calling this a marriage of convenience might be a step too far, but describing it as a marriage of equals, both with rocky pasts, is closer to the truth. Both CSC and HPE Enterprise Services have spent the last few years getting their financial houses in order, streamlining services delivery capabilities, revamping portfolios, and shifting delivery to more overseas locations (while cutting overall headcount), all to achieve cost efficiencies in an increasingly margin-squeezed services market. HPE Enterprise Services, in particular, has purposely jettisoned what it viewed as low-profit infrastructure services deals (which competitors have subsequently picked up) to focus on higher-value applications services, analytics, and digital transformation projects.

No matter the circumstances of how both companies arrived at this point, on its face the deal does bring some potential gains. CSC (which sold off its lucrative public sector business to SRA) has vertical strength in financial services, insurance, and healthcare, while HPE Enterprise Services brings expertise in telecom, media, and transport. According to CSC and HPE, there's only 15% overlap in revenue streams from their top 200 customers. To spur additional growth, the new provider will have a focus on cloud, security, application services, business process outsourcing (BPO), and most importantly digital transformation projects, among other areas.

However, any projected successes of the new provider will only materialize if the integration is swift and successful, and if customer communication is clear and on point. The new entity will have some 95 data centers to rationalize and consolidate, for example, if it is to deliver $1bn-plus in cost reductions as promised. HP, to put it mildly, has stumbled in some instances on integration in the past; the bungled EDS integration resulted in the loss of customers and in-house talent, and nearly collapsed HP's services business. The vendor, however, rebounded from that experience with several solid integrations via acquisition. In addition, both CSC and HPE appeared to handle their recent splits reasonably well, and a separation/integration team is already in place for this deal to avoid mistakes. Delivering regular and consistent benchmarks to its client base on pre- and post-integration plans will be essential if the new company is to avoid losing customers wary of the inertia and confusion that this kind of consolidation can bring.

Appendix

Further reading

"Are cloud and digital the saviors of big-ticket IT outsourcing?" IT0019-003540 (February 2016)

"Getronics relaunches Managed Cloud Services acquired from Colt," IT0019-003546 (April 2016)

Author

John Madden, Practice Leader, IT Services

john.madden@ovum.com

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