CPQ/Networking article #12:
[VARBusiness interview of Alan Lutz, head of CPQ's
networking division...Lutz references ASND]:
11/15/97 VARBUSINESS 185
1997 WL 7700382
VARBUSINESS
Copyright 1997 CMP Publications Inc.
Saturday, November 15, 1997
1320
Interview
Casting Compaq's Net
--
Lutz takes Compaq's networking into prime time
Cassimir Medford
Compaq Computer Corp. has spent the past year in the throes of an
identity crisis. The company must decide on a current and future
identity. Is Compaq a desktop/server company? Is it a systems company?
Is it a channel company? Is it an end-to-end systems supplier?
The company's purchase of Tandem Computers Inc. suggests that it is
training its sights on the glass house. If so, Compaq must also redefine
its relationship with the channel. How much of its business will it take
direct? How will it employ the channel in the face of competition from
direct sales companies such as Dell Computer Corp?
A year ago, Compaq hired industry veteran Alan Lutz to help fix a
major segment of the company's portfolio: networking.
Compaq's networking unit is a montage of acquired companies and
lackluster products. Lutz and his team have examined, torn down and
rebuilt Compaq's networking franchise. Today, the Communication Products
Group, which Lutz heads, reports directly to the very top of the
company's management structure. VARBusiness technology news editor
Cassimir Medford caught up with Lutz and talked to him about Compaq, the
networking company.
VARBusiness: What were your thoughts after first examining Compaq's
networking business?
Lutz: When I assessed the state of affairs that I inherited, I found
we had a NIC business that was built largely on TI technology. The key
to making that a success was and is to increase the attach rate of
Netelligent NICs to Compaq PCs and servers.
In the hub space we had good technology in 10/100 autosensing
Ethernet. But it had been sometime since the hub product line had been
refreshed, so on the product side, the first thing we focused on was
refreshing the hubs. We had no switch products. We had to redirect our
router investment into switching. The result was the introduction this
year of three new switch products.
The next thing was to decide whether we liked our positioning in NICs
from a product standpoint, and to get the Compaq distribution channels
specifying Compaq NICs when we sold Compaq PCs and servers. In fact, the
internal proposition was called the "Burgers and Fries" strategy. We
didn't think that the technology foundation of that business, as it
stood, would take us into the future, and that was the initial reasoning
behind the Intel alliance that we made. The alliance got significantly
expanded during the course of the discussion, but the initial contacts
were based on selecting NIC technology.
VB:Why commit to one vendor [Intel]? Why didn't you leave your NIC
options open?
Lutz: Well, we had two choices, Intel or 3Com, and the process of
formulating a strategy was heavily centered on market research. I've had
several outside firms assisting us with the research during the course
of this year. Customers don't believe that the NIC is a sophisticated
edge device as 3Com does. They believe that something that cost $50
should be inserted in the machine when built; it should work when turned
on and never fail. Their belief is that it can't be that complicated if
it costs only $50. 3Com talks about it as being the edge of the network.
They talk about applications requesting the edge of the network and RMON
being done from the edge of the network. The customers that we
researched, and we did research a lot of them, say, "All we want this to
be is an interface to the network. Don't try to make our lives
complicated with the sale of an edge device." They see that strategy as
tying them to that vendor.
The fundamental reason we chose Intel is that we think its
technology-single chip 10/100 Ethernet tech-is better. I also think that
the financial prowess of Intel with respect to investing in continual
silicon development is significantly greater than the other potential
partner. And, in fact, we compete with the other potential partner. So,
if you're going to do a dance, you've got to figure out on which days of
the week you're a competitor and which days you're a collaborator.
VB:But doesn't that also apply to Intel? On some days Intel is your
competitor.
Lutz: We compete now in PCs and servers. Intel provides chips and
boards to clone manufacturers. Now our lives would be a lot easier if
they didn't do that, but, frankly, we understand the relationship with
Intel that's evolved on that basis. We like Intel's silicon. We make
NICs, modems-most people don't know that, but our Presarios and Armada
product lines all contain Compaq modems that we design and
manufacture-and remote access servers. When we look at the market, the
company that keeps flashing on the screen as the largest potential
competitor, frankly, is 3Com. It's in NICs, modems, RAS, hubs, switches.
3Com is on the radar screen. The practical reality is that there is no
reason to abdicate the networking space to 3Com. We think we can do very
well in accumulating market share.
VB:Compaq has been experimenting with alternative distribution
channels such as the industrial distributors. Will this affect your
networking division?
Lutz: In networking, 20 percent of the product goes direct-some of it
to end customers and a lot of it to telecom equipment suppliers such as
Lucent, Nortel, Alcatel and so on. Forty percent goes indirect through
the channels that also sell PCs and servers and those are the channels
with which Compaq already has an extremely strong reputation. Another 40
percent moves through the channel that has grown up selling networking
equipment only, such as Anixter, for example. The first thing to do is
to make sure the channel partners we already have strong relationships
with are actively engaged in selling networking. That's the focus we've
taken in the first eight months of this year.
The second thing is to play in the other 40 percent of the market.
That means recruit additional channel partners that have been
predominantly in the networking space. We are actively working that now.
That's the phase we're entering. We do OEM a little to other equipment
manufacturers. I'm interested in channel sales.
VB:What are Compaq's differentiators? Why would a VAR want to go with
Compaq over 3Com?
Lutz: My answer has to be segmented. Let's focus on the small and
medium businesses. They want the network to disappear. They don't want
to be bothered with the network. What they want are PCs, applications,
e-mail access and Internet access. They go to a VAR that has the
capability to provide that service, and what we do for that VAR is put
it all together and shrink-wrap it. We make it easy to install and easy
to boot up. We allow you to manage the network through the same
management schemes that you run your PCs and servers on. Our job is to
demystify networking.
We're enormously excited about the remote access market-both servers
and concentrators. We see ourselves bringing NT-based platforms to that
space. We see 56K flex access and eventually some form of ASDL. We see
it as a very rapidly growing marketplace when measured by the number of
ports that Compaq has had to add to support its own users.
Why Compaq? What's in it for the distributor? You can't just go in and
drop low-priced equipment in the hands of the distribution partners and
expect them to do anything with it. You have to convince their
engineering people that there is no risk in recommending the Compaq
networking solution. We've got to train their sales folks. We've got to
do the basic things like providing lots of product samples, making sure
that our products are reviewed, etc. We have to deal with support. We
have to deal with level-one service, which we want the channel to do. We
have 7x24 level-two and level-three services available.
It's not the same kind of business as selling a PC and supporting it
over an 800 number. But our partners have to make a profit at the end of
the afternoon and that will be driven by the discount structures we
present to them. We negotiate individual agreements with individual
channel partners and we do that because different partners provide
different levels of support and capability, and they need to be
compensated for it. At the end of the afternoon, we want our partners to
make a little more money with us than they do with our competitors.
The Compaq cost structure allows us a great deal of flexibility if we
need it. Our cost structure is better than most of the networking
companies. The second thing is our brand name. Mike Hile has steered the
Compaq ship to the No. 1 position in consumer PCs in the United States,
and certain networking segments are approaching retail as a source of
supply. The shelf space that is given to us on the basis of that
reputation can be expanded to include NICs, modems and small hubs.
So we see ourselves being able to use the strong Compaq brand name in
a variety of ways. Our distribution partners are seeing that in order
to sell server farms you have to be able to interconnect servers. That
means that Fast Ethernet or gigabit Ethernet backbones are enormously
important to them. That gives us an opportunity to tune the network
performance of Compaq servers to present a faster solution. We can do
this better than our competitors while still using standard technology
and standard protocols. We're doing something new. People think of
Compaq as a PC company, and we're trying to change that. We would like
to be a computer and communications company. I think we're making
progress. I'm very excited by the feedback we're getting from our
partners.
VB:Other systems companies such as IBM and Digital have had no better
than modest success in networking. Why do you think Compaq will succeed?
Lutz: For us this is a very natural evolution. In the U.S., 85 percent
of PCs connect to some kind of network. One hundred percent of all
servers connect to a network. One hundred percent of workstations
connect. That is a great change from the way things used to be. That's
why we're here. We can't see a good reason for giving all of that
business to someone else.
VB:Has anything surprised you since you've embarked on your mission?
Lutz: We've been surprised by the large number of small, innovative
companies that have come to us with product or technology proposals on
the basis of the distribution strengths they perceive Compaq to have.
They want to be a part of that sales and marketing engine. There is an
awful lot that we see, touch, evaluate and modify that we don't have to
invent ourselves. That gives us an enormous R&D leverage. The reason why
we wanted to do the Intel deal is we have no desire to invest in
silicon.
The Intel deal and the number of small, innovative companies offering
us product allows us to run on a lot lower R&D percentage than our
competitors. I now have a couple of opportunities: I can either take
that increased margin to the bank or I can price aggressively. That has
a lot to do with the strength of the brand name and the strength of the
individual partner as they move into particular market segments.
The reality is being the lowest-cost producer in the market is the
position of greatest strength. You have lots of options as to what to do
with that leverage. With regard to influencing the channel partners, I
feel very fortunate that I can call the top 10 channel partners in the
U.S. and ask for a meeting to discuss strategy, and I have absolutely no
problem getting the meeting. The relationship between Compaq and its
channel partners is very good. In the networking space, we're clearly
not trying to go any other way than through the channel. That's
strengthening an already strong position.
VB:How much autonomy do you have to pursue acquisitions?
Lutz: This activity is blessed right at the very top as a strategic
direction that the president himself really wanted to do, so it wasn't a
matter of justifying our existence each and every week. It was a matter
of defining the primary elements of our strategic plan; rapidly building
an organization that could tactically execute against those tenets. The
Microcom acquisition, for example, was not a contentious matter at all.
I may have been more careful, frankly, than others because I wanted to
make the first acquisition on my watch go well. We got to know an awful
lot about Microcom before we moved on it. The corporation and the board
have been enormously supportive, and our ability to grow is limited by
the capacity of the executive team and the communication products group
to define what it wants to do, and then execute it.
VB:Where are you now in terms of integrating the companies you
acquired?
Lutz: The integration of the acquired networking companies has been
largely completed. I've spent a great deal of time interacting
personally with the engineering managers. We've done everything that we
said we were going to do. We have got capital expansion going on for
more space, we doubled the sales force the third quarter over the second
quarter and are getting ready to double it again in the fourth quarter.
We have a large number of open requisitions to augment the engineering
staff. I'm particularly pleased that former Microcom employees have come
back after the acquisition. We have had some executive changes there.
The chief executive, Lou Burden, is not there and one or two others
chose not to get on the train. But the knowledge base of that
organization is highly motivated and onboard. You'll see new product
come out later this year as a result of that acquisition.
VB:It's good that you're thinking innovation at a time when many
people think the networking market is strictly a commodity market.
Lutz: At the end of the day, it's nice to have a lot of money in the
bank, but the only thing you can depend on for your competitive
advantage is the capability of the people in your organization. When we
purchased Microcom, it was enormously important to keep the technology
base, to keep the sales organization in place along with the top 20
movers and shakers. We didn't want Microcom, a great technology
provider, to consider itself an OEM company. We wanted 25 percent of the
RAS market. And that meant that we were going to put in place the plans
and assets that would allow us to compete with the likes of Ascend,
Cascade and USR/3Com. The goal was a dominant market position. It was
not in being able to say we provided leading-edge modem technology to
someone else. People became enthusiastic. One common element in American
culture is that people like to win, and when they saw we were bellying
up to the bar and putting our money on the table as we said we would,
the spirits rose to rather high levels.
VB:Telecom seems to be your most glaring missing piece. Are you
looking at, perhaps, acquiring a telecom company?
Lutz: Telecom is something I would like to do. One of the keys to
success for any organization is to focus on a limited number of goals
and execute against those goals. We have long-term plans that include
telecom, but for now we will try to get the business we already have in
place for 1997. I will be more than willing to talk more about that next
year. We've got some real definite ideas. I haven't forgotten the
telecom stuff. Tandem also brings us an entry into the world of the
RBOCs. They have been making CPE equipment for some time now.
VB:What is the goal for Compaq's networking business?
Lutz: People talk about being No. 1, but you have to be perceived to
be dominant in the marketplace, and others bestow that respect upon you.
In 1998, we are trying to turn on the marquee and say, "Compaq is in
this space." We're going to work actively to get to the point where
people think of Compaq as a dominant player in this space. Compaq has a
chance to be an enormous corporation without networking, but it is my
goal to broaden the marketplace in which Compaq plays and make it an
even stronger force.
---
At a Glance
Compaq Computer Corp.
Houston, Texas
(800) 345-1518
www.compaq.com
Founded: 1982
Business: Compaq is one of the world's leading suppliers of desktop
PCs, notebooks and servers
1996 Worldwide Sales: $20 billion
Major Products: PCs, servers, portables, workstations, networking
devices, monitors, handhelds and remote access
Management: Eckhard Pfeiffer, president and chief executive; Michael
D. Heil, senior vice president and general manager, Consumer Products
Division; Alan Lutz, senior vice president and general manager,
Communications Products Group
Key Partners: Microsoft, Novell, Intel, SAP, Oracle, SCO, Sybase
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