February 15, 1999, Issue: 721
Section: Top Of The Week
Compaq's Net Play -- The System Vendor's Enterprise
Strategy Will Hinge On Internet Computing And
E-Commerce Solutions
Mary Hayes with Martin J. Garvey
With nearly $32 billion in sales last year,Compaq has already met its goal of
becoming one of the world's top three computer vendors by 2000. Now, the
company is embarking on a new challenge-it wants to become the industry
leader in products and services for advanced Internet-based networks. But
there's a catch: Compaq's competitors are moving in the same direction.
Can Compaq deliver more? With its vast line of PCs and Windows NT, Unix,
and high-availability servers, it has the products. It has also further beefed up
the large services organizations it gained through its acquisitions of Tandem
Computer and Digital Equipment, to 27,500 people. Yet 56% of its own
business customers don't think the company has effectively communicated its
strategy since the acquisitions, nor is Compaq the first vendor to come to their
minds as a strategic E-commerce supplier, according to a survey by
InformationWeek Research (see charts, opposite).
This week, Compaq will go to work to change those perceptions. It will
introduce planning and implementation services for building "next-generation
networks," those that support unified voice and E-mail messaging, voice over
IP, and videoconferencing, for example. This is part of a broader push to
deliver what Compaq executives call "global business ecosystems"-flexible,
mixed-media environments that scale and don't fail. "We're issuing our next
goal: Internet leadership," says Compaq chairman and CEO Eckhard Pfeiffer.
Expanding its existing network, systems integration, and outsourcing services
to include such Internet programs is critical if Compaq is to succeed as an
E-commerce provider, says Dataquest analyst Ellen Carney. Few companies
have the expertise to implement such advanced capabilities on their own, she
says.
Compaq is boosting its product line to support the push. In the coming
months, Compaq will deliver Windows NT server-management software that
increases system availability. It will also introduce low-cost server appliances
based on its Alpha chip for applications such as Web caching.
Compaq isn't new to E-commerce, company officials point out. John Rando,
senior VP and general manager of services at Compaq, says the company has
provided 1,000 Internet-type networks over the past two years and is a
system supplier to some of the largest Internet service providers. That
experience, says Rando, can be applied to Compaq's business customers.
"Every CIO manages an ISP," Rando says. "It's just that their community is
defined by their company."
The Canadian Imperial Bank of Canada is relying on Compaq as its
E-commerce provider. The bank, an old-line Tandem customer that still runs
Himalaya systems as well as Compaq servers behind its ATMs, is working
with Compaq's services division on a pilot project to integrate its ATM
network with the Internet. They're building an HTML interface and back-end
integration with the bank's new E-commerce partners to let customers order
everything from flowers to theater tickets, as well as perform bank
transactions, at CIBC's ATM machines or over the Internet.
"One of the issues with the Internet is whether you get the same level of
stability that you got with traditional computing routes," says Terry Davies, VP
of self-serve banking in CIBC's electronic-banking division. "That's Compaq's
challenge, and they're doing very well." CIBC expects all its 5,700 ATMs to
have the interface a year from now.
Howard Roundy, director of IT for the New Hampshire State Liquor
Commission, is impressed with Compaq's implementation of a
voice-over-frame-relay network that substantially cut long-distance phone
costs for the 73 liquor outlets managed by the commission. Compaq won the
contract in October, and it set up the network in a way that will allow a
smooth transition to voice over IP at a later time, says Roundy. "Theoretically,
I'd end up using the Internet as the network, and we wouldn't pay any
long-distance charges," he says. "If what Compaq did for voice over frame
relay is an example of what else the organization can do, then it's a very good
one."
Standards-Based Solutions
High on Compaq's agenda is an effort to convince customers that its strategy
for standardizing on Microsoft's Windows NT platform is in line with their
E-business needs. Compaq is betting heavily that Windows NT-and its
successor, Windows 2000-will provide the underpinnings of many
Internet-enabled business networks. "Customers are looking for simple,
standard solutions," says Pfeiffer.
But Compaq hasn't convinced most IT managers that it's the right company to
build these networks. Last week's InformationWeek Research survey of 100
IT managers who are Compaq customers reveals that only 37% consider
Compaq a strategic provider of E-commerce solutions, well behind Microsoft
(62%) and IBM (45%).
"Compaq has something worthwhile to talk about, but I wouldn't put them on
par with IBM," says Carney of Dataquest. IBM grossed $7.1 billion in its last
quarter from its services businesses, while the combined Compaq-Digital
services revenue totaled $1.7 billion over the same period. "IBM and
E-business are as synonymous as tissues and Kleenex. Compaq's image as a
PC company will stick with it for a while," says Carney. "It has to reinvent
itself."
As the survey shows, Compaq must also convey its sales pitch more clearly.
"The name of the game is solutions selling, or having the products, services,
and consulting to solve customer problems," says Eric Rocco, a services
analyst at Dataquest. "Compaq has the capabilities to offer this, but the
challenge is to gain the momentum to win major deals."
That momentum is building-but slowly. Most of Compaq's large U.S.
E-commerce customers were germinated at Tandem or Digital prior to the
acquisitions. New Hampshire State Liquor Commission is an exception; so is
Barnes & Noble. Compaq began working with Barnes & Noble early last
year on a project to expand the bookseller's E-commerce site,
barnesandnoble.com, from 300,000 online customers to 1.5 million, and from
1 million book titles to 8 million. Compaq's close relationship with Microsoft
and its acquisition of Digital, which occurred in the middle of the project, have
helped forward the effort, says Barnes & Noble CIO Gary King.
Compaq and Microsoft worked together to build an environment based on
Microsoft's SQL Server 7.0 database that would help Barnes & Noble
improve customer service. Compaq built a network that provides a fast link
between Internet-generated inquiries and the bookseller's database, improving
response time to customer inquiries. "If you look at the heritage of Digital
networking capabilities that Compaq acquired, there is some great real-world
experience," says King.
Customers who transitioned from Digital or Tandem to Compaq include the
U.S. Postal Service. Compaq inherited from Digital an Internet-based service
initiative that the USPS is running as a pilot in five cities, with plans for a
national roll-out this summer. PostOffice Online will allow small businesses to
order mailing services via the Web. Paul Courtemanche, manager of
PostOffice Online and shipping solutions with the USPS's Internet Business
Group, says the project was virtually unaffected by the merger. "It's been
seamless in terms of how work has been performed," he says.
But Optimark Technologies Inc. exemplifies a hard fact Compaq will have to
deal with as it attempts to compete as a services provider with companies like
IBM and Hewlett-Packard. Optimark runs an automated trading system that
the Pacific Stock Exchange began to offer investors last month. Behind
Optimark's system are Tandem Himalaya servers, which store customer
records, and Digital Unix servers, which handle transactions-all products the
company purchased in 1997, before Compaq's acquisitions. Bill Adiletta,
chief technology officer and executive VP of Optimark, is pleased with
Compaq's service, noting that support has been exceptional both before and
after the merger. Adiletta says Compaq has the resources and technology to
be a world leader in E-commerce. Yet IBM is already entrenched as
Optimark's services provider for its data center.
But Compaq is gamely pushing ahead. It plans to add 5,000 more service
employees this year. Pfeiffer points out that the company had service revenue
growth in the third and fourth quarters of 1998, and says the trend is
continuing in the current quarter. "Some customers weren't comfortable
placing a five-year outsourcing contract [before we bought Digital]," says
Pfeiffer. "With the acquisition, that concern is gone."
Memories Of Failure
Still, Compaq must contend with fresh memories of its last attempt to expand
beyond its expertise in PCs and servers. Compaq created a networking
products division in 1995 and invested heavily in it, along the way acquiring
three networking companies. But it dissolved the unit late last year. "They had
good products, but it was tough to break into a market dominated by Bay
Networks, Cisco, and Nortel Networks," says Jonathan Eunice, an analyst
with Illuminata.
Compaq now sells network products along with its server line. Cisco has
joined Compaq's list of service partners, which includes Computer
Associates, Ericsson, and Microsoft. This week, Compaq will add Nortel
Networks, PictureTel, Tivoli, and VocalTec, among others, to its list of
networking partners. "We restructured networking to be more solution-centric
than component-centric," explains John Rose, senior VP and GM of
enterprise computing.
Some analysts say the decision to dissolve its networking unit was a smart
move for Compaq. "It should have no effect on Compaq's ability to compete
with HP and IBM for network services," says Joe Barkan, an analyst with the
Gartner Group. "Success in this market is decided by how well you work with
others. It's more important for Compaq to work well with Cisco and 3Com."
But convincing customers it has the expertise to build IP-based networks is
only part of the challenge. The other is to convince customers the company
has the right mix of server solutions, and the long-term strategy to support
E-business.
Compaq currently supports myriad server technologies, based on eight
operating systems and two chip platforms. It's committed to offering its
Tandem NSK, Digital OpenVMS, and Tru64Unix operating systems for the
next five years. The long-term plan is to standardize on Windows platforms,
starting with Windows 2000. Addressing the low tolerance for downtime in
E-business, Compaq plans to reveal in April a road map for integrating
Digital's TruCluster and Tandem's nonstop kernel clustering into future
versions of Windows 2000.
Compaq's goal is to ensure a smooth transition to standards-based computing.
"We're the best opportunity to drive NT scalability and provide integration
with mixed environments," says Rose.
Compaq plans to be one of the first to market with a new breed of
management software for Windows NT systems. In April, the company will
deliver an upgrade to its Insight Manager XE, Web-based software for
remote server management. The upgrade will let administrators remotely
monitor not only components, but also the operating system and applications,
and pinpoint failures related to registry problems or other errors before they
occur. Insight Manager XE can be plugged into enterprise
system-management platforms such as CA-Unicenter, HP OpenView, and
Tivoli Enterprise.
IT managers should welcome such features, says Tony Iams, a senior analyst
with D.H. Brown and Associates, because Microsoft isn't providing much
help with system management. The goal for Insight Manager is to provide one
management platform for both NT and Unix, as well as for capabilities such as
security, file directories, and application extensions.
Analysts say Compaq's E-business strategy stands a chance. Indeed, it's
crucial if Compaq is to become the $50 billion company it wants to be in a
year. "E-commerce will be a huge marketplace, and it's too early to say
anyone has a lock on it," says Judith Hurwitz, president of Hurwitz Group Inc.
"The market is wide open."
Still, 1999 could be a make-or-break year. "Compaq has the potential to
succeed, but can it piece together the threads from so many different
organizations?" asks Hurwitz. "That's a question that remains to be answered."
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