HP Melds Services, Systems

HP announces it will combine its services and enterprise systems groups.

Hewlett-Packard Co.s decision to fold its services and enterprise systems into a single unit is being met with a mixture of enthusiasm and skepticism.

Chairman and CEO Carly Fiorina announced the move to combine one of HPs stronger departments—services—with its embattled hardware groups at a meeting with financial analysts in New York last week. The new unit will be called the Technology Solutions Group and will encompass services, software and hardware servers, and storage devices.

In a memorandum to employees, Fiorina said the move made sense for a number of reasons, including enabling HP to make its operations more transparent for investors.

"This more holistic grouping allows us to simplify our structure [and] more effectively deliver the Adaptive Enterprise," HPs utility computing initiative, Fiorina said in the memo.

HP, of Palo Alto, Calif., had been working on the reorganization for six months, creating a task force to oversee the move, according to a source close to the company.

Ann Livermore, executive vice president of the services unit, will head the Technology Solutions Group, while Executive Vice President Peter Blackmore, who led the Enterprise Systems Group, will direct HPs newly unified sales force, called the Customer Solutions Group.

The merger of the groups wont change what HP is selling, only how the products are sold, said Kevin Francis, president and CEO of IT outsourcer CenterBeam Inc., which uses HP blade servers. "HP is moving to a customer-centric organization focused on delivering the best possible value to its customers, and that is completely aligned with CenterBeams customer-first philosophy," said Francis, in Santa Clara, Calif.

However, analyst Richard Ptak said HP may be setting up a structure that didnt work for other technology companies in the past.

"HP is reproducing a strategy that failed at DEC [Digital Equipment Corp.] and was tried and failed at Compaq [Computer Corp.]," said Ptak, principal of 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."

HP has been working to bolster the Enterprise Systems Group since its $19 billion acquisition of Compaq in May of last year. The group sustained five consecutive losing quarters until last quarter, when it posted a $106 million profit on $4.07 billion in revenue. In contrast, the HP Services Group earned $393 million in that quarter, garnering $3.23 billion in revenue. At the meeting last week, HP announced additional services contracts worth more than $1 billion.