HP-EDS Deal Bumps Up Against IBM Global Services

The HP-EDS combination will undoubtedly create more competition for IBM Global Services, Armonk, N.Y., and particularly for its Global Technology Services division that provides strategic IT outsourcing and other technology services. (Global Business Services, IGS's other wing, focuses on business consulting services.)

IBM declined to make IGS executives available to comment on the HP-EDS deal. A spokesman said IBM isn't worried.

Should it be? At a time of decreasing hardware sales, services are an increasingly large part of IBM's revenue stream -- and its net income. IBM Global Services revenue has been growing at double-digit rates and now exceeds $50 billion annually, making it the company's biggest sales generator. In comparison, the collective services businesses of HP and EDS generated more than $38 billion in sales last year.

In 2007, Global Technology Services sales increased 12 percent to $36.1 billion and Global Business Services sales increased 13 percent to $18.0 billion. That growth accelerated to 17 percent in the first quarter ended March 31. IBM said that at the end of the quarter, the estimated backlog of services -- including global business services and maintenance, integrated technology services, business transformation outsourcing and strategic outsourcing -- reached $118 billion.

An acquisition to counter HP's EDS acquisition apparently isn't in the cards: The spokesman said IBM is focusing its acquisition strategy on "high value assets" that combine software and services -- the company's 2006 buyout of Internet Security Systems for $1.3 billion is an example. ISS is now part of IBM Global Technology Services.

The EDS acquisition could provide IBM with an opportunity to sow some marketplace doubt about EDS' reputation as a multivendor IT equipment supplier. Now, IBM could position EDS as a branch of HP and an extension of its product sales rather than an independent (read: unbiased) service company.