Capellas: We Will Become Leading IT Solutions Provider

Aside from a renewed push to increase the organic growth of its Global Services consulting unit, Compaq is still looking at acquisitions of smaller services companies as a major part of its plan to grow services and software revenue to more than one-third of the company's total revenue.

In fact, the company has up to $500 million lined up in its coffers to spend on the mergers and acquisitions front, according to an internal memo recently sent out to staffers by CEO Michael D. Capellas.

"We concluded that we needed to make fundamental changes in our strategy, our approach to the market and our organization," reads a portion of the memo, which was obtained by VARBusiness.

The move to increase services to more than one-third of its total revenue base comes as the computer manufacturer faces tough competition and shrinking margins in the hardware market.

"Customers see less and less differentiation in the core technology components," wrote Capellas. "Volume products like Internet devices, traditional PCs and industry-standard servers will continue to be highly strategic for Compaq, but customers' value will be created above the core components, in areas like solutions, software and services."

It appears as if the company's new strategy to become, as Capellas wrote in his memo, "the leading IT solutions provider," is taking a page directly out of the playbook of IBM, which successfully grew its services arm, IBM Global Services, into a key revenue generator. And it's clear that the shift will come both from internal restructuring and external sources.

"We have stated a corporate goal that we are ramping up to get services to be about one-third of the company's total revenue by about 2005," says Jeff Lynn, vice president and general manager of Compaq Global Services, number 7 on the VARBusiness 500. "That is going to mean continuing the organic growth of our services business, which we are now enjoying, but also acquisitions."

The plan to increase Compaq Global Services' revenue was hashed out for key partners earlier this year during the company's annual partner roundtable in Houston, in which executives from a number of worldwide partners convened to hear about the company's latest mission. There, top Compaq executives, including Capellas and senior vice president and general manager of worldwide sales and services, Peter Blackmore, set out a new target revenue breakdown for the company: 30 percent services, 30 percent enterprise, 30 percent access products and 10 percent software. The goal is to have the new revenue breakdown in place by 2005.

Currently, Compaq Global Services' revenue accounts for nearly 21 percent of the total revenue generated by Compaq in the first quarter of 2001. That percentage is up from last year, when it accounted for roughly 17 percent.

"We have been looking at our whole portfolio within Global Services, making sure it's as up-to-date as it possibly can be, and that all the parts are working together seamlessly," Lynn says. "We just did some internal tinkering recently to make sure that is true. And of course, the main theme going forward is growth."

Compaq, which has been facing reducing margins and stiff competition in the PC and equipment-manufacturing space, has been looking to ramp up services and software while also embracing a more 'solutions-oriented' set of offerings.

"The other sort of change you will see, both from the whole company and then with services as the lead supporting and driving it, is much more the business-solutions orientation, and therefore much more of an industry-vertical orientation," Lynn says.

According to the memo from Capellas, Compaq is prepared to spend up to $500 million in acquisitions of IT services and integration companies as a way of bringing in more vertical-specific skill sets and solutions.

Compaq threw its hat into the acquisition ring earlier this year with a proposal to buy services company Proxicom for $5.75 a share. But its plan was thwarted after Dimension Data made an offer of $7.50 a share, beating out Compaq. Though Lynn admits the loss of Proxicom to a higher bidder was "disappointing," he says the company has not slowed down in its search for other integration and services firms ripe for the picking.

"I'm spending a disproportionate part of my time right now on the acquisition side of the world to make sure we are getting that right," he says. "We were obviously disappointed to lose Proxicom to a higher bidder, but price is the right reason to lose an acquisition. Not chasing that bid was the right thing to do for us."

Lynn says that because there were a number of other companies lined up behind Proxicom as potential acquisitions, the company did not have to start from square one to find a new target.

"It wasn't a one-target-only process," he says. "We had done a very thorough screening of other candidates, and now we are actively engaged in conversations with other firms right now."