July 04, 2001 03:18
Compaq Tries to Shape New Identity
By Tom Fowler, Houston Chronicle
Jul. 4--Compaq Computer is taking a lesson from the competition as it looks to shake its reputation as just another PC maker.
The Houston-based tech company is reshaping and re-emphasizing its 38,000-person Global Services division to mirror that of IBM, the world's largest technology services company with nearly 150,000 employees.
Since the beginning of the year Compaq has been downplaying its personal computer business and focusing attention on its more powerful servers and technical services capabilities, a move similar to the transformation IBM undertook in recent years.
While changing from a hardware company to a services company cannot be done overnight, Compaq is having to pick up the pace of change. With technology spending continuing to slow and profit margins on computer hardware shrinking, transforming into a technology-services company has become a priority.
A broad-ranging reorganization plan outlined by Michael Capellas, chairman and chief executive officer, in a June memo aims to bring Compaq Global Services to the forefront in the company's work. Compaq has set aside $500 million to acquire smaller services firms to add to its roster; plans to aggressively pursue services work in new industries such as retail, biotech and entertainment; and is combining customer services, professional services and financial services into one group.
All of these moves are designed to lessen the company's reliance on hardware sales and make services account for one-third of all revenues, up from the 16 percent it represented in 2000.
Compaq's emphasis on services makes sense, analysts say. It means the company can offer customers more than just a server here and a few PCs there, but rather a wide range of tailored packages of hardware, software and services.
But the services push is also risky, pitting it head-to-head with IBM and dozens of other companies that have been deeper into services for many more years.
"It's probably a good strategy, because with computer box makers there will only continue to be diminished opportunities," said George Ball, chairman of Houston investment banking firm Sanders Morris Harris. "But is it high risk? Yes. If they succeed, it will be a great move, but it will be absolutely crippling if they fail to execute."
The technical services business has changed since the days when Ralph Lipizzi first found himself on the road selling powerful computer systems and services to clients for Digital Equipment more than a decade ago.
Back then, clients just wanted companies to sell them the hardware or software to solve their business problems, Lipizzi said.
"It was all about speeds and feeds," said Lipizzi, who is now vice president and general manager for Compaq Global Services in the south-central United States.
Today customers want the companies that sell them hardware to be an adviser, Lipizzi said, not just a salesperson.
"They want you to understand their business, to relate to what they're going through and help them make technology solve those problems," he said.
Mark Elliott, general manager for IBM Global Services in the Americas, said that shift first started in the 1980s as customers began to mature and ask for hardware and software that came unbundled from the services.
"So customers started buying the hardware and would pay for maintenance separately if they needed it," Elliott said. "They could buy it from vendors or from the big accounting firms, which started offering integration services at that time."
IBM and other hardware and software makers started to turn those engineers who used to deploy new systems into service consultants, collecting billable hours. IBM's services group grew quickly, as did Digital's, which made it particularly attractive to Compaq, which purchased the company in 1998.
Compaq had a services practice in the past, but Peter Blackmore, executive vice president of sales and services at Compaq, said the group needed to expand its breadth of expertise.
Telecommunications and financial services have been two traditional strong points for Compaq Global Services, Blackmore said. The company wants to expand into six other key areas: retail, government, healthcare, biotech, entertainment and manufacturing. Some of that expansion will come through natural growth, but much of it will come through acquisitions.
Compaq's failed bid earlier this year to acquire Proxicom, a 950-person services firm, was an attempt to fill some of those niches, particularly retail, automotive, manufacturing, and entertainment. That deal fell through when another company offered a higher price for Proxicom, but Blackmore said there are many more deals being considered.
The technical services industry has seen tough times in the past year, with dozens of firms either going out of business or cutting staff significantly. Even IBM's global services announced plans to cut 1,500 services workers this week after hiring as many as 10,000 workers in the first five months of 2001.
Despite the tough landscape, Compaq's Global Services has some advantages.
The company is already strong in financial services, with Compaq hardware and services running 14 of the 15 largest stock exchanges in the world, including the New York Stock Exchange and the Nasdaq Stock Market.
Telecommunications is also a strength for Compaq, with clients such as San Antonio-based SBC Communications and cell phone maker Ericsson of Sweden. The 100,000-person company outsourced its internal information technology systems to Compaq.
"Systems integration is a $250 billion business. Outsourcing is worth hundreds of billions each year," Blackmore said. "There's just so many areas we're tapped into that have great potential."
Jay Williams, chief technology officer with the Concours Group, a Kingwood-based technology strategy and planning company, said Compaq actually has a bit of an advantage over IBM when it comes to being specialists in Microsoft Windows-based systems and Intel processors.
"A lot of people thought that Microsoft would never be able to deliver an enterprise-class operating system, but Compaq did, and that puts them in a good position now," Williams said.
Compaq's existing services capabilities also put it ahead of Dell Computer, which has not developed or acquired much of a services business, Williams said.
"Dell has always been perceived as a cost leader, but they're not who you'd call for mission-critical server applications," Williams said.
While investors may be calling for Capellas' head based on its recent stock price performance, analysts give him more credit for making the best of a difficult industry. Jim Cramer, a columnist and analyst for TheStreet.com, gives Capellas high marks for making tough choices.
"People tell me I'm crazy for still working at a dot-com, but I tell them at least I'm not working for a PC company," Cramer said. "It's a very tough space right now, and Capellas is doing everything he can right now."
Modeling itself on IBM's services model is a good move, Cramer said, but he still isn't a Compaq investor.
"It's still a `show-me' company," he said. "I need to see something really good happen."
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