HP Layoffs to Hit Former EDS IT Service Business Hardest

HP Layoffs to Hit Former EDS IT Service Business Hardest

Tech giant HP (NYSE:HPQ) yesterday confirmed the rumors that had been swirling for the last week -- the company will lay off 27,000 employees, an 8 percent workforce reduction. CEO Meg Whitman characterized the HP layoffs as a business process re-engineering, and HP executives said that the company will be investing more in research and development (R&D) and will likely also shift some of the savings to the company's bottom line.

CFO Cathie Lesjak told Bloomberg that the enterprise services division, the former EDS that HP acquired for $13.2 billion in 2008, would take the biggest hit when it came to job cuts, although she did not quantify the cuts there. However, Bloomberg reported that sources "familiar with the matter said the company plans to reduce its services workforce by 10,000 to 15,000 people."

Services revenues for the second quarter fell by 1 percent year over year. Sales of printers and ink fell by 10 percent, and sales of servers, storage devices and networking equipment fell by 6 percent.  PC sales remained about the same.

So while services revenues fell by just 1 percent for the quarter, HP plans to make most of the job cuts in that division of the company. And much of the cost savings will go to reinvestment in HP's R&D and other areas.

Tech Giants Jump into Services

When HP acquired EDS, it was widely viewed as a play to get into the more profitable services business as the hardware business continued to become commoditized.  Indeed, the move mirrored that of tech giant IBM (NYSE:IBM) which ended up selling its PC division and putting a greater focus on services. And other companies have since followed HP's lead with Dell (NASDAQ:DELL) acquiring Perot Systems and Xerox (NYSE:XRX) acquiring ACS. (Dell also announced quarterly earnings this week, and they were disappointing. Lenovo's announced quarterly earnings painted a brighter picture for PC sales.) What did all these deals have in common? Tech giants with a legacy in hardware looking to get into the higher-margin services business.

Is HP giving up on that, or is it moving more of that opportunity out to the channel and MSPs?  How HP's go-to-market strategy will change following the job cuts remains to be seen.

In a conference call with analysts, HP executives were careful to cast the planned re-engineering in a positive light. Meg Whitman told analysts:

"Our restructuring is really about three things -- we've got to better align HP's cost structure with our revenue portfolio, we've got to position the company to take advantage of some of the biggest shifts that I've seen in technology in my 30-year career in business, and then we've got to streamline our operating model."
Changes to Go-To-Market Strategy

Whitman also talked about changes to the company's go-to-market strategy and about combining the sales operations from the enterprise and consumer businesses. That's a move that could mean more opportunity for the reseller channel as HP looks to gain efficiencies through sales force job reductions.

We'll be keeping a close eye on HP to see how these job cuts materialize and what it will mean for HP partners and MSP opportunities.  Stay tuned.
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