P&G outsourcing deal to put HP ‘on the map’

Like many companies these days, P&G has looked to outsource its IT infrastructure and services to reduce costs and benefit from the expertise and innovation the consumer goods company likely couldn’t provide on its own. Last week, the company announced that it was in final negotiations with HP for a managed services contract that would be the biggest in HP’s history.

Procter & Gamble knows consumer products – everything from diapers to toothpaste to potato chips. Networks, data centers and help desks fall somewhere down on the company’s list.

Not that IT isn’t important to P&G.

“We just looked at all the things that we’re trying to do with our IT organization and shared services organization, and we felt tapping into an external partnership would give us greater access to IT innovation,” says Damon Jones, spokesman for the Cincinnati company.

Like many companies these days, P&G has looked to outsource its IT infrastructure and services to reduce costs and benefit from the expertise and innovation the consumer goods company likely couldn’t provide on its own. Last week, the company announced that it was in final negotiations with HP for a managed services contract that would be the biggest in HP’s history.

Experts say the deal marks a shift in the outsourcing market, which IBM and Electronic Data Systems (EDS) have dominated, analysts say. According to Gartner’s latest figures, IBM leads the IT management market with 14.4% market share, followed by EDS, which holds 10.6% of the market. HP, on the other hand, ranked seventh with a little more than 1% of the market.

“This is a huge win for HP,” says Andy Efstathiou, program manager at The Yankee Group. “The size of the deal puts them on the map.”

It’s not that IT executives don’t consider HP when it comes to outsourcing, it’s just that the company has been better known for its servers and printers.

“The legacy companies [Compaq and HP] were primarily product-oriented,” Efstathiou says.

“They thought, ‘If we invent a better box, the world will be wonderful for us.’ . . . But there has been a change in terms what people think of as the basis of competition in high technology. Services are playing a much higher profile,” Efstathiou adds.

HP has focused on its services business, which doubled to be a $13 billion operation with more than 65,000 employees worldwide after the merger with Compaq last year.

A long road

HP still has a ways to go to catch up with market leaders EDS and IBM, though. EDS reported $21.5 billion in revenue last year and employs 137,000 people worldwide.

“Since the merger we’ve closed over 200 managed services deals,” says Juergen Rottler, vice president of marketing, strategy and alliances for HP Services. “HP is now clearly established as a Tier-1 player and as the one viable alternative to IBM. We believe that IBM is beatable.”

Customers are beginning to think so, too. P&G considered IBM and EDS before settling into final negotiations with HP. A definitive agreement, which includes the transition of about 1,850 P&G employees from 50 countries into HP Services, is expected in May.

Ericsson also is close to a deal with HP to have the company manage its IT infrastructure. Ericsson announced last week that it had signed a memorandum of understanding with HP. The deal is expected to be finalized by the end of the second quarter, says Eva Sparr, director of Ericsson corporate communications.

Sparr wouldn’t say what companies the mobile communications company considered in addition to HP, only that “there have been other negotiations.”

Cost concerns

Cost was a key concern because the outsourcing deal is part of Ericsson’s efforts to cut costs across the business, Sparr says. Flexibility was another issue.

“When there are changes in the industry and in our operations we want to be flexible both in terms of costs, but also when it come to the kind of scales that we need. . . . HP was the best when it came to meeting our requirements,” she says.

HP’s Rottler says the ability to adapt to a customer’s changing needs are a priority for HP in its outsourcing deals. The deals make use of utility computing that will ensure that customers only pay for the resources they need, he says.

Utility computing has been a focus for hardware vendors such as HP, IBM and Sun and is part of IBM’s e-Business On-Demand initiative.

“A large outsourcing arrangement becomes the ultimate utility,” Rottler says.

Customer are looking for a contract and a relationship with an outsourcer that can “bend and flex with changing business needs.” n