A huge story in the IT world this week was the announcement of the acquisition of Electronic Data Systems by Hewlett-Packard. Information Week reported that the deal is the largest in the outsourcing sector’s history, and that it is the second largest ever in the IT industry overall (It’s second only to HP’s $19 billion buyout of computer maker Compaq in 2002).

Cnet says that the sheer size of the deal is daunting. The deal represents the combination of the largest number of people that the IT services sector has seen, and HP faces serious challenges when it comes to integrating two very different companies. As Cnet reports, the track record of deals like this is not very good.

However, this deal may be necessary for HP to compete with IBM, which is the most comprehensive IT services provider. Unfortunately, HP has struggled to grow its services business internally. Despite publicly stating its intention to become a leader in the outsourcing market and investing accordingly, the company often found itself behind competitors like IBM, Accenture and EDS when big deals were handed out.

With the combined resources of HP and EDS, the CEO of EDS-HP said that the company will have “the capability to serve our clients–whatever their size, location or sector–with one of the most comprehensive and competitive portfolios in the industry.”

One challenge related to the merger, pointed out by Justin Scheck on a NYtimes blog, is that the new EDS-HP will need to boost profits. Competitors have done that in part by outsourcing to places like India. However, EDS-HP may try to do this through automating functions now performed by people. HP has already started a big automation push, as the company has acquired several software-based automation companies over the last few years.

Another concern with the merger stems from the fact that EDS was technology neutral, buying from several vendors, including Sun Microsystems, Xerox, Cisco Systems, Microsoft and SAP. HP is expected to push its own hardware, which may upset delicate relationships with EDS partners like Sun.

EDS-HP will have 7% of the IT services market; however, this will still be second to IBM, which has 10% of the market. It will be interesting to see how well EDS-HP is able offer a comprehensive services portfolio similar to IBM as well as cut costs in order to complete with smaller competitors.