HP’s managed services (outsourcing) business grew 21% in its most recent quarter compared to a year ago, but the operating margin of the overall services business fell to 6.7%, its lowest level for a number of years and miles away from the 11.9% margin it managed in the fourth quarter of its fiscal year 2003.
Last month, Hurd told analysts that the reduction was primarily caused by the new way it accounts for the company bonus scheme, which he said heavily impacts HP’s Services margins given the headcount intensity of the business.
However, analysts feel that the company has put winning market share in outsourcing above profitability in the past, and at a Citibank analyst conference this week, one analyst said he thought HP had taken low single-digit operating margins on some of its major outsourcing contracts to win reference accounts.
In his reply, Wayman admitted: We did take some deals to make a statement or two in certain industries, and that’s playing out as we speak. Between 2002 and 2004, HP won major outsourcing deals with Bank of Ireland, BT Group, CIBC, Ericsson, Nokia, Proctor & Gamble, and WestLB, all of which were more valuable than the largest deal it has signed so far in 2005: a $342m contract with the UK government’s Foreign and Commonwealth Office.
According to Wayman, what appears to be a reversal of a policy to put revenue growth ahead of profitablity, is in fact all part of how it had planned to attack the outsourcing market from the start.
It was planned that we would see accelerated growth as we took on some of the marquee deals and then that growth rate would fade off, so the sequential movement in growth rate is what was planned. We did not expect to drive 30% and 40% in revenue growth for a sustained period of time, he said.
We made 21% revenue growth [in the last quarter] and that will continue to come down a little bit. Right now we want to get profitability back up to a more acceptable level before we consider any dramatic change in the way in which we attack the market place.
