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October 4, 1998

CAN DEC HELP COMPAQ FULFILL ITS SERVICES AMBITIONS

By CBR Staff Writer

In November 1997, Robert Palmer, CEO of troubled systems vendor Digital Equipment, addressed disgruntled investors at the company’s annual shareholder meeting at New York’s World Trade Center. I am confident that this is the year Digital will begin to grow again, he boldly announced. The primary driver behind this growth, he said, would be the company’s services arm. Despite Palmer’s confident assertions, calls for his resignation continued – investors were not convinced that the moribund services arm had sufficient muscle to achieve this goal. In fiscal 1997, services revenues actually shrank by 5.7%, compared to an average growth rate of 21% among the large IT services companies. Ironically, it was Digital’s services business that ultimately ensured that Palmer’s predictions of a renaissance at Digital did not come to fruition. Barely two months after the shareholder meeting, Compaq, the PC and server giant, announced it had reached agreement to buy the company. And the primary target driving the purchase, according to Compaq CEO, Eckhard Pfeiffer, was Digital’s services business. The purchase of Digital was the latest foray in Pfeiffer’s crusade to make Compaq an enterprise-wide systems vendor. Compaq has been selling bigger and bigger systems into the enterprise, although there have been persistent criticisms over its limited ability to install and service the machines. Prior to the acquisition, Compaq’s IT services capability was limited. The majority of its annual services revenues came from maintenance contracts for its PC products and support fees from its reseller network. Now – in theory – it can handle complex IT projects on a global basis. And that is not just good news for its customers, but also for its shareholders. For most systems companies, services is a growing and profitable business.

No-show to top-tier

With the acquisition of Digital, Compaq was catapulted from a no-show in the services industry to a top-tier provider overnight, says Julie Horkan Meringer, an analyst with market researcher Forrester Research. Digital, she says, has brought with it a broad range of services, encompassing network systems and integration services (NSIS), operational management services (OMS), and a range of traditional multi-vendor integration services. Importantly, it gives Compaq an ability to take on service contracts even where no Compaq hardware is involved. Compaq’s plans for its new services business are ambitious. Our goal is to be a $15bn, tier one service provider by 2002, says John Rando, a former Digital executive who was named senior VP and general manager for Compaq services shortly after the acquisition was announced. By the year 2000, according to Rando, more than $5 out of every $10 spent by IT organizations will be on services. Already, the impact of Digital’s services business is apparent. A year ago, Compaq reported second quarter services revenues of $110m. For the second quarter of this year, that number jumped to $460m. Furthermore, with a services headcount of 25,000 people in 550 locations, Compaq is now – potentially – a major force in this market. In 1997, Digital’s services revenues were $5.8bn. But Compaq will face fearsome competition. The IT services industry, worth approximately $146bn, is led by two formidable companies, IBM Global Services and Electronic Data Systems (EDS). IBM Global Services employs 110,000 people in 164 countries, and in 1997, accounted for 22%, or $19bn of the systems giant’s $78.5bn revenues. EDS also employs approximately 110,000 people and reported sales of $15.2bn for its 1997 fiscal year. Can Compaq/Digital, compete with these giants? Analysts have learned not to be too skeptical about Compaq but, even so, it faces some major challenges.

End-to-end

Compaq’s stated aim is to provide large corporate customers with end-to-end enterprise IT services, especially those in targeted markets such as telecommunications. Customers want a single source of accountability, and with Compaq services and our broad network of channel partners, they will get it, says Pfeiffer. Rando is similarly bullish: We will cover everything from Year 2000, EMU, deployment of distributed applications, ecommerce and implementing web business. The practice is not so easy, however – Compaq is not yet able to deliver on its promise of a comprehensive IT services portfolio. Forrester Research is advising clients seeking an end-to-end infrastructure and application services provider that, for the next nine months at least, IBM Global Services or EDS are better placed to fulfil their demands. It is clear that Compaq still needs to fill some gaps in its portfolio. For example, it will need to increase its focus on network integration and outsourcing; according to Meringer, these account for just over a third of Compaq/Digital’s revenues. It will also need to expand its application implementation capability and build up its management consulting arm. This is a weakness which, prior to the Compaq acquisition, caused Digital to lose out to competitors such as Andersen Consulting. All of this suggests that Compaq is likely to be making further acquisitions. Digital was already looking around for acquisitions before it was purchased by Compaq, according to Rando, and he has hinted that these plans may be revived. Ultimately, analysts believe Compaq’s size and influence will give it the leverage it needs. Compaq’s got deeper pockets and the money to move forward with services, says Ellen Carney of Dataquest. But it will need to move fast – competitors such as IBM have a big lead and strong growth in this market will not last forever.

Computer Business Review.

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