What now for HP services?

The prospects of Hewlett-Packard (HP) making a big acquisition anytime soon should be extremely slight. In the wake of its $18.6 billion dollar ill-fated acquisition of hardware maker Compaq, its stock hit a low of $10; nearly four years later, its stock is only slowly inching its way to the $30 mark.

Indeed, the fallout of the Compaq deal has already seen the demise of one CEO, Carly Fiorina, who departed as the technology giant failed to dominate its markets as anticipated. Surely, Mark Hurd, HP’s current CEO – brought in ostensibly on the basis of his operational expertise and leadership – isn’t about to make the same mistake?

It should be a ‘non-question’. But market watchers were caught out when in January 2006 the Wall Street Journal reported that HP was in talks about the possibility of buying a significant stake in Computer Sciences Corporation (CSC), one of the world’s largest IT services companies.

Sources close to the talks subsequently revealed that no deal was likely. Even so, the attention has only served to highlight the current problems HP faces with its services unit (HPS).

Senior executives at HP have long envied the success IBM had in creating a global services organisation: Fiorina’s ‘legacy-making’ deal was originally intended to be the acquisition of PwC Consulting not Compaq, but that deal fell apart amid shareholder wrangling.

In its fourth financial quarter of 2005 HPS’s $3.9 billion revenues accounted for 17% of the technology giant’s total income. But the unit remains inexorably linked in end-users’ minds to services based on its own products, says Kate Hanaghan, an analyst at market watchers Ovum Holway. The most likely way to change that is through acquisition, she adds.

Change may also be driven by a growing sense of commoditisation of the IT services market, says Hanaghan. Services deals have matured and offshore providers are driving down costs. All of this increases the pressure on the services companies to remain profitable. “The onus is on services companies to find more ways to increase the value of their contracts and to pinpoint the customers that will buy into more expensive, holistic managed support,” explains Hanaghan.

HPS is still strong in one area of services which is more than a commodity – support for high-end servers – where profit margins are high. It has also been busy targeting customers which it can prime for an upgrade to more complete managed services or full outsourcing contracts, says Hanaghan. “These ‘technology managed solutions’ are mainly aimed at ex-Synstar customers,” she says.

Ever since the Compaq deal, HP has made smaller, tactical acquisitions, aimed at filling gaps in its provisions – including the 2004 purchase of Synstar. That deal greatly enhanced HPS’s ability to provide availability services to its customers and this tactical approach has been widely recognised as being successful. If HP is to revamp its services division, these smaller deals may offer HP’s executives a safer passage to success.

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Ben Rossi

Ben was Vitesse Media's editorial director, leading content creation and editorial strategy across all Vitesse products, including its market-leading B2B and consumer magazines, websites, research and...

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