HP-EDS and the effect on Canada’s CGI

I was out of town and off-duty when HP bought EDS for US$13 billion last week, and the first person I thought of was Serge Godin.

The chairman of CGI, along with his longtime associate Michael Roach, has built up Canada’s most successful technology outsourcing and services firms. After about three decades of focusing on the local market, Godin and Roach have taken CGI Stateside, buying up smaller firms and creating niches in insurance and other vertical markets. They keep racking up new customers and renewal agreements, and what they may lack in name recognition is made up for by revenues. In short, CGI is doing almost everything a company in IT services should be doing if it wants to be a major player.

And then HP changes the game completely.

The EDS acquisition was an admission by HP that you can’t compete with IBM’s Global Services by organic growth alone. It’s also a message to customers who have been watching it buy data centre automation firms and enterprise business application providers that it is bringing on board the kind of expertise to ensure smooth deployments of its expanded product line. For a company like CGI, however, it may be a signal of a bigger shakeout in the services space that could drastically affect its future business plans.

Like IBM, CGI could enjoy a honeymoon period while the HP-EDS merger plays out, offering a more stable (and less distracted) choice of provider to enterprise customers that want to farm out work. In the longer term, though, CGI may find itself increasingly going head to head with competitors who can not only match its competency in IT service delivery but who actually own the products that customers want. Its success or failure will be a measure of how healthy the market for a pure-play outsourcer/service company remains.

Of course, CGI’s not the only one. For some time now I’ve been waiting for Dell, which needs to boost its own enterprise services business, to buy out Computer Science Corp. (CSC), or someone of that ilk. CSC, however, has been mired in the kind of legal muck that once plagued EDS a few years ago, recently settling a case alleging kickbacks to the U.S. government. There’s also Accenture and PricewaterhouseCoopers, but those are more consulting firms than the kind of outsourcing service providers that EDS and CGI have become.

Godin’s entrepreneurial approach makes me sceptical CGI will entertain any takeovers by a major vendor, and its corporate culture is so deeply entrenched it would be difficult to imagine an appropriate match. What it might do, short of developing its own line of servers and software, is to consider a different kind of service offering. IBM is vying with Google and others to dominate the emerging cloud computing market, and so far HP, Dell and the other major outsourcers have stayed out of it. But perhaps a CGI-run cloud would be a compelling extension of the company’s reputation for managing enterprise IT infrastructure, creating a more neutral territory for on-demand type of services. Sure, it would mean building out a lot more data centres. But that would be a lot easier for CGI to do than to build a company that can go up against HP and EDS combined.

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