Sizing up The New HP

That was the old-style Kremlinology. Ironically, this year's May Day marked the consummation of the merger between Compaq and Hewlett-Packard. What it meant for VARs was initially as unfathomable as the inner workings of the Kremlin,not because of any cult of secrecy, but because so many issues remained unresolved.

"We hear one thing one week and a little different [thing the next week, and we'd be surprised if anyone had heard anything precise from them," says a senior vice president from one of the top 50 companies in the VARBusiness 500, who requested anonymity. "But we are a big customer of both HP and Compaq, and we assume that we will have the same great relationship that we always had."

Basically, the merger takes the sixth and eighth entrants on the VARBusiness 500 list of leading VARs, and creates a new No. 3 entrant with revenue of close to $15 billion, trailing only IBM Global Services, with $35 billion, and EDS, with $21.5 billion (see "Squeezing In," page 44). Analysts estimate it will take the new HP anywhere from two months to up to nine months to formulate and communicate its message to the VAR community. But all agree that, in the meantime, forward-thinking solution providers will want to make sure they are well-connected with those people smiling and waving atop the mausoleum.

"Going forward, I think the new HP is seeking to be the true leader in IT services, and to the extent that it can leverage its VAR relationships to that end, it will do so," says Eric Rocco, vice president of the services research group at Gartner, Stamford, Conn.

HP is pinning its hopes for long-term growth on professional services and outsourcing, as opposed to hardware, according to Doug Chandler, an analyst at Framingham, Mass.-based market research firm IDC. A strong indication of this is HP's expected concentration on five integration fields: infrastructure management, cross-industry applications, manufacturing, telecommunications and financial- services applications (see "Refined Focus," left).

"Outside of printers and some other isolated areas, like mobile products from Compaq, [the managers at the new HP are looking at their product set and not seeing areas of high growth or margin," Chandler says. "So they are looking at services to get into high-growth/high-margin business."

But for HP to grow its services business, it will have to look beyond its own product set. "That has been a challenge in the past for some other firms that were product firms," he says. "Most get 10 to 12 percent of [their revenue through services, mostly on their own products. If [HP wants to get above that to 20 or 30 percent, it must do something else, like consulting, integration and management outsourcing. Those are different services and require different skillsets, and the personnel has to be paid and retained differently."

HP will also have to overcome the credibility issue many hardware companies face when starting to offer services, notes Tom Rodenhauser, head of Consulting Information Services, Keene, N.H. "Your services are perceived as technical support or a kind of sales platform," he says.

Facing Competitors

Any expansion will surely put the new HP services entity, headed by executive vice president Ann Livermore, in direct competition with the industry's heavyweight, IBM Global Services, which most analysts agree has built the model that most other product manufacturers are striving to emulate. "IBM is considered strong because it has a practice in each major vertical industry," Rodenhauser says.

So where will HP fit in? Rodenhauser describes a ladder of services, with outsourcing at the bottom, systems integration in the middle and strategic business consulting at the top. "HP has not even approached this ladder yet," Rodenhauser says. "HP has a huge task ahead of it, in an industry where it takes years to build up credibility."

That's where HP hopes the channel can help. "The simple fact is that no one company can do it all," an HP spokesperson says. "Partners continue to provide a competitive advantage and expanded market."

But if its VARs are going to help, they need to know what's going on. Initially, that hasn't been easy. "The challenge is knowing who's on first," says Janet Waxman, an IDC analyst.

In the meantime, EDS isn't concerned. "[HP's services business revolves around servicing its own products," says John Clendening, director of business and industry relations at EDS. "We are not tied to any particular hardware or software, meaning we are free to deploy the best solution for our client. We don't see the combination of HP and Compaq as a major competitive threat. Neither has the scale nor scope in their services division to be competitive globally in outsourcing, and neither provides high value-added consulting."

Clendening says it will take HP "a business lifetime" to compete with EDS on a global IT project. "But they are also important suppliers, and we value our relationship with them," he adds. "Co-opetition is how we look at it,there are many firms that we work with and compete with at the same time. We don't expect any changes there."

In fact, co-opetition will play a major part in working with HP going forward. "Resellers and integrators really need to look at and understand their new roles," Gartner's Rocco says. "HP needs them to sell products and deliver services, but it is also competing with those services. HP has shown that it wants to leverage certain partners to provide certain skills, but that does not mean it won't compete for the same business."

More Mergers?

If HP intends to play ball with the likes of IBM Global Services, more mergers may be in its future.

"To compete, HP must come in with a credible solution and a technology-agnostic approach, just like IBM," Rodenhauser says. "The reason IBM was successful was that it nurtured its consulting operation for 10 years, letting it be agnostic rather than a sales driver, giving it time to shake off client suspicions that it was a sales platform. Today, 70 percent of the solutions it recommends are non-IBM. But HP doesn't have 10 years."

HP's best move? Change the situation overnight by going out and buying yet another company, Rodenhauser indicates. Except this time it needs to buy a full-service consulting company in the next six to 12 months.

"If it is serious about being in the consulting business, it will go out and acquire a consulting firm," he says. "The reason that HP wanted to buy PricewaterhouseCooper's management consulting business [in 2000 was to have credibility in the higher-end consulting business%85In the meantime, if I were a client and someone came in with an HP business card, I would be expecting them to sell me HP hardware." n