HP+EDS: Now what?

Now that Hewlett-Packard and Electronic Data Systems have decided to tie the knot, where does that put them -- and us? A few first thoughts:

It's a good time for HP to buy EDS's infrastructure-management business. With the economy sliding, outsourcing IT operations to cut costs seems like a no-brainer, and that's a big part of what EDS does.

Trouble is, outsourcing IT operations has seemed like a no-brainer ever since Y2k, but EDS hasn't been able to capitalize -- its revenues have basically been flat for years. One likely problem: EDS is a technology company, and the hot sector has been IT/business consulting a la Accenture. HP+EDS doesn't overcome that difficulty.

It's a terrible time for HP to buy EDS's big-custom-technology-project business. Big custom technology projects fail a lot, and EDS's record is no exception to that. At a time when packaged software and agile development are the way the corporate IT world is going, EDS's software development side is a dinosaur in a tar pit.

One bright side: Federal government IT projects are stuck with dinosaur-oriented procurement procedures, so there's still some business for EDS to do. And for federal projects, a U.S. company like EDS will still have an advantage over offshore vendors.

EDS is about to get a lot smaller. Mark Hurd says much of HP's existing services group will be added to EDS. EDS's workforce is already almost the size of HP's. Result: Right after the merger, EDS will have about half of HP's total employees and generate about 30% of its total revenue. That wouldn't stand for long even if Hurd wasn't so hatchet-happy when it comes to headcount.

For corporate IT, there's one less giant independent outsourcer to choose from. No more "EDS: We're not IBM." Then again, not being IBM hasn't been a real advantage for EDS for years. And HP+EDS still won't have the product line to go after IBM's mainframe and related services business -- unless, of course, EDS still moves a lot of hardware for HP's biggest competitor.

So what's Hurd's plan? Digestion. Based on the numbers and the business climate, it looks like Hurd thinks he can eliminate a third of EDS's employees without losing significant business, and somehow absorb the rest into HP. Good luck with that, Mark.

For current corporate EDS customers, it's gut-check time. There's no special reason to believe the services you get from EDS will go downhill -- or drop off a cliff -- immediately. But with layoffs and Hurd's penchant to push automation, you need to be prepared for changes in what EDS offers that you won't have much control over.

On the other hand, if EDS feels pressure from customers who are looking at other options, you may be able to cut a better deal when it comes time to renew.

Just don't take anything for granted when it comes to HP+EDS. The sooner the old EDS is gone, the happier Mark Hurd will be.