HP Merges Services, Enterprise Systems Units

UPDATED: CEO Carly Fiorina announces that HP is folding its services and enterprise systems units into a single group.

Hewlett-Packard Co. is folding its services and enterprise systems units into a single group, reducing the number of business units from five to four.

HP Chairman and CEO Carly Fiorina made the announcement on Tuesday at a meeting with financial analysts in New York. The new unit will be called the Technology Solutions Group and will encompass services, software and enterprise servers—including the companys high-end Itanium-based Integrity systems—and storage devices. The other three units are the Personal Systems Group, the Imaging and Printing Group and the Financial Services Group.

The move brings together one of the Palo Alto, Calif., companys stronger units—services—with its embattled Enterprise Systems Group. That group, headed by Executive Vice President Peter Blackmore, had sustained five consecutive losing quarters since HPs May 2002 acquisition of Compaq Computer Corp. until the fourth quarter of this year, when it posted a $106 million profit on $4.07 billion in revenue.

In contrast, HPs Services unit earned a $393 million in the fourth quarter, garnering $3.23 billion in revenue.

Creating the new Technology Solutions Group will enable HP to break out software revenue in its financial reports for the first time, as well as services and enterprise hardware revenue, according to company officials. Ann Livermore will take over the group as executive vice president, while Blackmore will lead the units sales force.

A source close to the company said that HP has been working on this for about six months, creating a task force to look into the move. The goal is to present a more unified face to enterprise customers, the source said. The two business units have been working closely together over the past month, and customers have begun asking for a single source of contact.

In addition, HP has been working to bolster the Enterprise Systems Group since the $19 billion buyout of Compaq. In May, the company realigned its three hardware divisions into a single business unit. The business critical systems, industry standard servers and storage units divisions were combined into a single unit called Enterprise Storage and Servers.

At the time, Blackmore said the move was to accelerate revenue and market share growth. The goal was for the hardware businesses to present a unified message to customers.

However, one analyst questioned whether bringing the two groups together is the right move.

"HP is reproducing a strategy that failed at [Digital Equipment Corp.] … and was tried and failed at Compaq," said Richard L. Ptak, principal at Ptak, Noel & Associates, in Amherst, N.H.

"The strategy offers bundles of services, systems and software at a reduced cost. The idea being that really, really low hardware margins are offset by the margin in services. The problem becomes pricing of services. It is very difficult to competitively price and deliver services. It is difficult to accurately track the actual cost of services; and easy to fool yourself into thinking you are making money when you arent, which is what happened at DEC," Ptak said.

"HP services lack the breadth and depth of experience to consistently and effectively win against IBMs Global Services; HP lacks the cultural discipline and corporate DNA of no frills, hyper-low cost focus to run a volume-based, razor-thin margin operation like a Dell [Inc.]," Ptak continued. "I think HP is in for another bad year."

At Tuesdays meeting, HP also announced more than $1 billion in new services contracts.

Paula Musich contributed to this story.

Editors Note: This story was updated to include information and comments from analysts.