HP Services: Watch out, Big Blue

Summary:The Compaq merger will bump up the standing of Hewlett-Packard Services, says the unit president--putting HP in prime position to challenge market leader IBM.

Once the merger with Compaq Computer is complete, Hewlett-Packard will have a services organization that will rival those of giants like IBM, its head services executive said Monday.

The acquisition of Compaq will vault HP into the No. 3 position in the services market, Ann Livermore, president of HP Services, said at the Banc of America Securities Technology 2002 conference in San Francisco. Currently, HP and Compaq are No. 5 and No. 7, respectively. IBM and Electronic Data Systems are, respectively, No. 1 and No. 2.

"We will have about 65,000 IT professionals, and we will have critical mass in about 160 countries," Livermore said. "We believe that large corporations are eager for an alternative to IBM."

To bolster her position, Livermore told the audience that in the midst of the merger, HP landed a three-year, $260 million services contract with Nokia in HP's fourth financial quarter. Under the contract, HP will take over the day-to-day management of Nokia's Microsoft Exchange systems, its Lotus Notes systems, and its file and print operations in seven operation centers in Asia, Europe and the United States.

As part of the deal, HP is running Linux servers that underlie wireless services for Nokia's telecommunications business, said Martin Fink, general manager of HP's Linux Systems Operation.

Livermore said HP took on about 340 employees from Nokia as part of the agreement.

The HP-Compaq services group will hold No. 1 positions in several specialty areas, including Microsoft Exchange, printing and imaging, and SAP's complex business software for accounting, inventory management and other corporate tasks, according to Livermore. In addition, she said the combined companies will have particular expertise in setting up and maintaining computer systems for manufacturers, telecommunications companies, financial institutions and government operations.

All told, the merger will give HP the critical mass to take on IBM, she said.

Pumping up the profits
Transforming HP into a services powerhouse has long been the overriding goal of HP CEO Carly Fiorina and one of the principal drivers behind the merger with Compaq, not to mention an attempted acquisition of PricewaterhouseCoopers in 2000.

Unlike hardware, services can provide fairly consistent revenue streams--even in difficult economic times--and often higher margins, Livermore said. She pointed out that HP Services grew 15 percent in the company's fiscal 2001 before adjusting for currency fluctuations, and revenue from outsourcing contracts grew by 23 percent before such adjustments. International contracts are affected by changing exchange rates because customers pay in local currency.

But services aren't immune to downturns. HP's consulting and systems-integration practice--the group that designs global storage systems and takes on other think-tank projects--saw slower growth than the outsourcing group or the customer-support group, the other two groups that make up HP's services arm. Consulting saw revenue grow by only 2 percent in HP's fiscal fourth quarter, before adjusting for currency, because large corporate customers delayed major consulting projects.

"The business that was hit hardest by the economy was the systems-integration business," Livermore said.

Consulting and systems integration often provide higher margins than outsourcing and customer support, the more mundane business of managing help desks and repairing PCs for large companies. Nonetheless, Livermore noted that customer support is profitable and provides ancillary benefits. Consumer satisfaction with customer support can be one of the most pivotal factors in winning or renewing large, multiyear contracts, she added.

"Customer support is a beautiful business," Livermore said. "It provides a large, predictable revenue stream. It delivered a double-digit net profit. It is the basis of the customer experience."

In the next quarter, both HP and Compaq will break out revenues and operating profits for their respective financing businesses.

News.com's Stephen Shankland contributed to this report.

Topics: Software

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