In August 2008, Hewlett-Packard (HPQ) bought Ross Perot's first company, Electronic Data Services, or EDS, in a deal worth $13.9 billion. It then proceeded to slash thousands of jobs. Now that deal is paying off in spades for HP. On Monday, Dell (DELL) announced that it would pay $3.9 billion for Ross Perot's second company, Perot Systems (PER). Michael Dell would do well to learn from HP's CEO Mark Hurd about how to make his latest deal pay off.

The reason? HP claims that its services operating margins have improved since the deal closed and it has held onto 199 of EDS's top 200 accounts, according to the New York Times.

And it's getting new accounts. HP, which said on Wednesday that it would rename its EDS unit HP Enterprise Services, recently closed 32 deals worth over $100 million and its customer service scores rose since the deal closed. HP is even beating competitor International Business Machines (IBM) to the punch -- winning a $1 billion outsourcing contract for British insurer, Aviva.

How did HP do it? Hurd led a brutal cost cutting campaign. He eliminated the jobs of 25,000 EDS workers, cut salaries by at least 20 percent; and moved EDS executives from their comfortable offices into six-by-six-foot cubicles.

And despite the grumbling from employees who stress the importance of management continuity, HP is winning new business because its lower costs make it competitive with India-based competitors. With the lower costs, HP can make a profit charging lower prices. And it's using those lower prices to win new deals.

And with EDS, HP now has the breadth of sales and technical staff it needs to compete with IBM for the biggest deals. Not only that -- EDS is more likely to recommend HP hardware to clients than it did before it was part of HP.

So what should Michael Dell take away from HP's success? Here are three ideas he should keep in mind:

  • Get competitive on costs. Price matters for winning technology services deals. You can't have a competitive price if your costs are higher than those of your competitors. So figure out who you'll be competing with and lower your costs at least to their level -- if not lower.
  • Focus on customer retention. Find out who the most profitable customers are, meet with their executives and find out their concerns and hopes for the acquisition. Do what's necessary to keep those customers comfortable during the acquisition integration period.
  • Boost customer satisfaction. Cost cutting can lead to changes in staff so be prepared when you cut people to put a competent replacement in place to maintain client satisfaction levels. And once staffing stabilizes, push your people to pinpoint sources of customer dissatisfaction and eliminate them.

This may sound easy and obvious but it remains to be seen whether what Mark Hurd so nicely pulled off is something that Michael Dell can emulate.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.


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