PALO ALTO, Calif. — At a technology services company, much of the company’s value comes from its workers and their relationships with customers. If the employees become unhappy, they can stroll out the door and take their expertise to a competitor down the street.

So Hewlett-Packard rolled the dice last August when it bought Electronic Data Systems for $13.9 billion and immediately began hacking and pruning the work force like a mad gardener determined to tame an overgrown yard. HP laid off 25,000 people and cut the salaries of some EDS workers by more than 20 percent. Mark Hurd, the master cost-cutter, even stripped the EDS brass of their plush offices and corralled them into 6-by-6-foot cubicles.

Plenty of employees have complained about HP’s tactics, but the company says it has persevered through the turmoil to keep most of EDS’ customers. Last quarter, HP’s operating profit margin on services hit 13.8 percent, the highest in a decade. And the combined company’s services division is HP’s biggest business in terms of revenue — a remarkable metamorphosis for what has long been viewed as a slow-growth PC- and printer-maker.

On Wednesday, HP took another big step toward full integration of EDS, extinguishing the 47-year-old company’s name. The new name, HP Enterprise Services, reflects the union of the services operations at the two companies.

“I acknowledge that we have done a lot of hard stuff, but this is all about getting HP in a position where we can compete and win,” said Ann Livermore, an executive vice president at HP who heads the company’s services and data center products businesses.

In talks with EDS employees, executives have put it more bluntly. At one meeting in August, Andy Mattes, who runs HP’s services business in the Americas, said the deep salary reductions and broad cost cuts were for the good of the remaining employees.

“Just letting things go on will result in much more bleak and horrible scenarios,” Mattes said, according to an audio recording of the meeting.

The bloodletting pains Mort Meyerson, who worked alongside Perot at EDS and Perot Systems for many years. “It’s sad to see this happen because of the decades of work the men and women of EDS put into the company,” he said. “But that’s what happens in business.”

Explaining HP’s tough actions

HP executives concede that the company’s aggressive pruning comes with costs, as workers fret about their futures and the overall business endures some disruption. But they say tough actions were needed to bring EDS in line with competitors like IBM, Infosys and Wipro Technologies.

By common business yardsticks, the Hurd touch on EDS appears to have worked better than investors and analysts had expected.

When HP announced its intent to buy EDS in May 2008, HP’s share price sank. EDS had developed a reputation as a bloated has-been that had burned investors in the past via bad deals, accounting issues and an over-reliance on services contracts with the government and automakers.

And while HP received high marks from customers for its role taking over their technology operations, it required far more people than competitors to accomplish the task.

“It was almost, the closer you were to EDS, the more concern you had about the acquisition,” said Shannon Cross, an equities analyst with Cross Research.

EDS’ own efforts to lower costs had stalled, particularly since the company lacked the financial resources to undertake a major reorganization, according to Joe Eazor, a former EDS executive who is now HP’s general manager of services.

Investors were also worried about change-of-control provisions in contracts that would allow customers to renegotiate or cancel long-term deals with EDS.

However, HP has held onto 199 of the top 200 accounts at EDS, according to Eazor. Some of the deals have been reworked, but HP points to its improving operating margins in services as evidence that any reductions in revenue have been minor.

Keeping HP afloat

Meanwhile, as sales of printers, PCs and data center gear have plummeted during the recession, HP has used services to bolster its overall revenue and profits. “The deal has really helped insulate them from the downturn,” said Ben Reitzes, an analyst with Barclays Capital. “Without EDS, things could have been a lot worse.”

According to analysts, HP may have engineered the deal at just the right time. The down economy gave HP time to perform its painful restructuring and primed the company to grow when the good times returned.

Historically, EDS promoted computing gear from HP rivals like Sun Microsystems, Xerox and Cisco Systems. But Eazor says that more of HP’s own hardware is slated to go into deals that are currently up for bid.

HP has been criticized by some analysts and derided by competitors for declining to detail the value of the services deals it has signed, as is industry practice. During a meeting last week with analysts, HP planned to reveal that it has recently closed 32 deals valued at more than $100 million and that its customer service scores have risen over the past year.

HP’s critics, including current and former employees, warn that the company has done away with too many high-salaried, veteran executives. Jeff Kelly, who had run the EDS business in the Americas, left the company in March, leaving a gap in the company’s most crucial region. His replacement, EDS veteran Mike Koehler, left in May. Now Mattes, who came from the HP side, is in charge. The heads of finance, human resources, sales and software services left EDS earlier this year as well.

Current and former employees, who requested anonymity because they signed non-disparagement agreements with HP or are afraid of being fired, complain that HP’s tactics work better for a product company. In the services realm, customers depend on their long-standing relationships with executives and sales team leaders.

In addition, morale has dipped, particularly in the United States, where most of the salary cuts have taken place, these people say.

IBM, HP’s biggest competitor in services, contends that customers have been complaining about disruption in their HP accounts.

“In the services business, if cost-cutting and price are the only levers you have to compete, it’s not sustainable,” said Dave Liederbach, the general manager of IBM’s outsourcing business. “The chaos that results in a client situation will be severe.”

HP paints a much different picture, saying that for the first time, it has enough salespeople and services expertise to go up against IBM for some of the largest, most lucrative contracts.