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The real reason for HP’s woes (and no, it’s not Autonomy)

The best quote out of the Hewlett-Packard analyst call Tuesday came from chief executive Meg Whitman who noted: “We haven’t done anything stupid in the last four years, and we don’t intend to do anything stupid in the future.”

While she didn’t specify what stupid thing HP did, most assumed she referred to the company’s 2011 purchase of Autonomy. That $11.1 billion move was engineered by her predecessor, short-timer chief executive Leo Apotheker, and led not only to Apotheker’s ouster but an $8 billion write down, accusations of fraud, and lots and lots of legal fees.

But, if you really want to see what set HP (HPQ) on its current trajectory, you should go back further to 2008, when HP finalized its $13.9 billion buy of Electronic Data Systems, the IT services company founded by H. Ross Perot.

Mark Hurd, who was HP chief executive at the time, wanted badly to compete with IBM’s (IBM) big IT services business. HP had earlier sought and dropped an $18 billion bid for PriceWaterhouseCoopers’ consulting business. IBM subsequently picked up PwC consulting in 2002 for a mere $3.5 billion, a fact that may have piqued Hurd’s desire for EDS.

Unfortunately for HP, things didn’t work out well on the IT services front and the company is struggling under the load at a time when large outsourcing deals are shrinking. Oh, and by the way, the EDS acquisition led to its own $8 billion write-down in 2012.

On Tuesday’s analyst call, HP execs said they plan to offshore 60% of HP Enterprise Services by 2018. Why? It’s cheaper that way. Currently 40% of those jobs are offshored. HP Enterprise Services is the outgrowth of that old EDS business.

So now, as HP chief executive and chairman Meg Whitman is trying to drive a bifurcation of the company into two independent, publicly traded companies, she has to deal with the anchor that Enterprise Services has become, hence the layoffs (another 30,000 or so coming!) and offshoring.

As usual, Whitman played up that HP’s hybrid cloud business will bring in $3 billion in 2015 and projected a 20% growth rate going forward. But, as is the case with legacy IT companies, what constitutes cloud is fuzzy. Does that number include HP hardware and legacy software deployed to support that work?

HP, like Microsoft (MSFT), IBM, and other long-timers, hope that business customers want hybrid cloud that lets them keep some applications and data in a company-maintained cloud and others in a public cloud where infrastructure is shared.

HP had better hope so. In the latest Gartner public cloud survey from March, Amazon (AMZN), Web Services, which claims to be $5 billion-a-year business, continues to dominate the public cloud space, with Microsoft, and Google (GOOG), coming up just behind. But HP, which had planned to mount a challenge in public cloud, fell off the leader board completely. Per the report, distinguished Gartner analyst Lydia Leong wrote:

While HP continues to operate its cloud IaaS offering (HP Public Cloud), it now only actively seeks to market and sell this offering as part of a hybrid solution. It no longer has sufficient market share to qualify for inclusion in this Magic Quadrant.

For more on the proposed HP spinoff, check out the video below:

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