Merger Could Give Services A Jump-Start

The combination of Compaq's and HP's service organizations could generate the kind of growth both companies hoped to achieve through other failed acquisition attempts.

When Compaq Computer Corp. acquired Digital Equipment Corp. and its successful services operation, executives crowed that services for Compaq would become a $15 billion business in a few years.

With the proposed merger between Hewlett-Packard Co. and Compaq, that prediction will come true-if all goes as planned.

The combination of the two services organizations could generate the kind of growth both companies hoped to achieve through other failed acquisition attempts.

But the deal was not built on either companys services aspirations.

"Theyre taking two services organizations that have been the tail on the hardware dog," said Traci Gere, group vice president of services research at International Data Corp. in Framingham, Mass. Both services operations contribute 19 percent of each companys total revenue and represent lower growth businesses for their companies, Gere added.

Compaq Global Services, which has seen a modest uptick in growth in the past two quarters after several disappointing quarters, will do little to help to meet HPs services goal of moving up the value chain to help customers make business process and change management decisions.

CGS, as a part of its growth strategy, has been retrenching around core technology implementation strengths and moving away from strategic applications engagements. Its aim is to supply the infrastructure and implementation services for such applications.

In HPs failed bid to acquire PricewaterhouseCoopers IT consulting practice, HP had hoped to gain the expertise and relationships necessary to provide business process and transformation consulting services. Its professional services business today is largely focused on implementing technology platforms-primarily its own.

CGS, with a broader set of implementation skills across multiple platforms, can expand HPs range, Gere said.

"If they can take a product-focused organization like HP thats focused on HP products and combine it with a Compaq organization better versed in integrating multiple platforms, they could potentially drive the idea of a unified IT infrastructure for many customers," she said.

With both Compaq and HP emphasizing their ability to partner, the combination of the two services organizations could make them a more appealing partner to the Big Five. Both companies already have established relationships with some of those firms, including Accenture, PricewaterhouseCoopers and KPMG.

"It could be they see a real opportunity to go to the Big Five and other companies strong in business process re-engineering and vertical apps and say, We are your alternative to IBM Global Services," said Stephen Lane, research director for IT services at Aberdeen Group in Boston. "At the end of the day, somebody has to install the servers, configure and tune them, and reach appropriate availability levels. And thats not a strength of the Big Five, in spite of their outsourcing and systems integration."

Big Blue wannabe

Indeed, HP and Compaq have their eye on IBM Global Services. Compaq CEO Michael Capellas claimed that the merger will create the third largest IT services firm. But that still wont put it on a par with the services behemoth, said Bill Martorelli, vice president of services and outsourcing at The Hurwitz Group in Framingham, Mass. "This entity will not be comparable in size to IBM Global Services," he said.

"Everyone else is just an IBM wannabe," echoed HP customer Norm Weiner, CIO at Duane Morris, a Philadelphia law firm with 450 lawyers and 20 offices. Weiner said he is concerned that the merger could hurt the excellent technical service that HP has provided-and that Compaq failed to provide years ago. That failure of service pushed Duane Morris into HPs fold, where Weiner has been happy ever since.

"Service with HP has been excellent. They have a wonderful server support team. I have someone to talk to whenever issues come up," he said.