Editor’s note: On Wednesday, Hewlett Packard Enterprise said it would spin off software units in an $8.8 billion deal that it says will help it focus on faster-growing businesses. The groups include big data, security for big companies and IT operations management units. They will merge with U.K. software company Micro Focus International PLC. So what’s next for HPE? Technology Business Research analyst Kevin Collupy takes a look.

HAMPTON, N.H. – Hewlett Packard Enterprise (HPE) Services, which includes Enterprise Services (ES) and Technology Services (TS), remains on track with its transformation to adapt to the New Style of IT. HPE is continually adapting its business to meet shifting client demand. With the announced plans to spin off its ES segment with CSC and “spin-merge” its noncore software assets, HPE Services is returning to its technology roots. HPE’s TS segment, focused on support and consulting around Enterprise Group products and solutions, will be HPE’s primary services arm.

HPE Services, currently comprising ES and TS, reported revenue of $6.5 billion for CY2Q16 (FY3Q16), down 5.6% year-to-year. HPE ES’ margin improved 260 basis points to 8.3% year-to-year, exceeding its goal range of 6% to 7%. We believe the results infer that HPE is incrementally reducing delivery costs while balancing low-value account runoff. The impending collaboration with CSC will accelerate investments in strengthening HPE’s predictably profitable TS segment.

M&A investments provide insight into both HPE’s and CSC’s post-merger go-to-market strategies

In early 1Q16 HPE purchased Switzerland-based Trilead, bolstering its data protection and virtualization security software, and in August HPE announced its intent to acquire California-based high-performance computing hardware and software provider SGI. HPE is focusing on in-demand technologies such as cloud, digital, cybersecurity and analytics, as is CSC, the future inheritor of HPE’s ES organization. However, we expect each company will approach investments in these focus areas in differing ways.

We believe IT service vendors with specialization will be best suited to successfully navigate a changing IT market. As clients grow increasingly cost-conscious and value-oriented in regards to IT spending, having scale, low-cost delivery resources and industry experience are critical components to winning clients.

India-based IT vendors including TCS and Wipro pressure pricing with established low-cost resource delivery capabilities while vendors such as IBM and Accenture are creating innovative solutions and services, requiring investments in IP to establish differentiation.

Localized solutions and regional partnerships support HPE’s expansion into APAC

IT vendors have historically faced hurdles unseating local vendors and navigating government regulations to win large-scale comprehensive IT contracts within a given region or country. HPE has not been invulnerable to these impacts, as APAC represents HPE Services’ smallest contributing geography. HPE has been investing in the region to build out its portfolio of localized solutions tailored to the specific needs of regional clients. During the quarter HPE launched an e-commerce platform for New Zealand-based SMB resellers. Earlier this year, HPE sold a majority stake of its H3C Technologies to Tsinghua Holdings in China.

TBR believes Tsinghua’s majority stake in the combined entity will drive pull-through opportunities for HPE hardware, software and services, enabling it to compete better with regional vendors such as Lenovo and Huawei.

(C) TBR