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Will HP/Compaq become a managed services behemoth?

The HP/Compaq merger will not only produce the second-largest PC maker but will likely also spawn a major player in the managed services provider space. Columnist Tim Landgrave looks at the steps the combined companies are taking toward the MSP model.


At the joint press conference announcing the merger of HP and Compaq earlier this month, both CEOs made statements that indicate the direction of the combined companies.

From Carly Fiorina, HP chairman and chief executive: "People have asked, 'Why is technology getting hit harder in this economic downturn than other industries?' What customers are saying, which is being amplified by this downturn, is, 'I want something different. I want more value. I want more choices. I want more options.'"

From Michael Capellas, CEO, Compaq Computer Corp.: "[Customers] don't want to put the pieces together. They want to buy IT as a utility," he said. "They really want a trusted partner that can do it all, and there's only going to be a couple of companies doing that, and we are absolutely going to be one of them."

Based on these statements and the companies’ investments and divestitures during the last 18 months, the vision is clear: The new HP intends to deliver more choices and more options to the customer directly, using an IT utility model.

Given the need to drive hardware sales while they build their combined services organization, the most likely IT model is that of a managed services provider (MSP) rather than an application services provider (ASP) model.

Market forces at work
As enterprises are increasingly pressed to justify rising overall technology costs while the price of PCs is falling, technology suppliers are responding by finding more innovative ways to combine their product and services offerings. Rather than selling hardware products, the move is toward selling a service or utility that includes all of the necessary hardware and software to run the system at a desired performance level.

The resulting products eliminate up-front capital commitments and give companies access to applications on demand through new pricing and delivery models.

ASPs ushered in the first generation of the utility services movement by providing applications and services on a pay-per-use or subscription basis. Their services provided a single purchase point for installation, integration, and licensing issues.

Unfortunately, the requirement of ubiquitous, high-speed bandwidth, the lethargic move to rental pricing by major software vendors, and the hesitance by IT managers to allow their data to move off-site has resulted in the rapid thinning of the ASP crop.

The software manufacturers themselves heralded the next generation of the movement by offering their applications directly to end users. Major players Microsoft (with bCentral) and Oracle, as well as thousands of vertical ASPs with single product offerings (like Salesforce.com and Employease), created their own ASP distribution models rather than relying on independent ASPs.

What made the ASP model so appealing? In addition to the obvious ongoing maintenance advantages, one of the most appealing ASP services was hardware management.

Enterprise server capacity has always been at 200 percent or higher in order to insure against outages caused by high demand. Multiply this server capacity by the percentage of time it’s actually required and by the number of enterprises that an ASP can serve and you have a financial formula that shows a significant cost savings to companies that can generate good gross margins for an ASP. But these advantages aren’t enough to mitigate the data control and connectivity issues of the ASP model.

The third generation of utility services
So who’s in the best position to eliminate these issues? Hardware companies that can rapidly deliver excess processor power on-site but can also deliver the inherent advantages of the ASP delivery model.

Even before the merger was announced, HP offered servers priced not on the hardware provided but on the amount of the hardware utilized. Pricing options include paying based on forecasted utilization, on unexpected excess demand, or on a straight per-use formula using metering software.

When combined with the services arm of Compaq (acquired from Digital but enhanced through smaller, service company acquisitions), the combined HP is in a position to provide a complete, on-site, managed services offering for enterprises. Customers get the advantage of ASP pricing and management with the security of locally installed and supported hardware and software.

The best analogy I can find in an existing company is that of CenterBeam, which offers a suite of Microsoft products installed on local Dell PCs and servers. They support the infrastructure remotely with proactive server and desktop management and software distribution tools.

The company also provides help desk services and custom configuration and support of its customers’ local applications. HP has staked its future on being able to replicate this model successfully in the corporate environment.

Will HP succeed?
IBM created the managed services business with its mainframe support model in the 1970s and early '80s. After its unsuccessful attempt to monopolize the PC market based on the closed mainframe model (remember OS/2 and the PS/2?), IBM remade itself into one of the best technology-agnostic service companies in the world.

While IBM was trying to dominate the data center, HP was telling people to “do it themselves” with minicomputers, and Compaq was sending the same message but touting PCs and servers as its solution.

What a difference a decade makes.

Now, the IBM theory seems to be that companies can manage their own infrastructure if given enough support in creating and deploying it properly. The “new” HP will be telling companies that they should hand over the keys to the data center and just let HP manage it for a monthly fee.

The irony here is that Digital could have been in a position to acquire both HP and Compaq if it could have stayed the course and converted to a total services company. IBM has been able to fill the vacuum and emerge as the leading integrated services company in the world. Now, HP (with Compaq and Digital merged into it) is trying to create a viable competitor by re-creating the IBM Mainframe Support model over again using microcomputer technology.

Whether the combined companies have the ability to bridge the gap between technology and an intimate understanding of a customer’s business process that creates real value has yet to be seen.

What else will the HP/Compaq merger bring?
What other changes do you see on the horizon with the merger of Compaq and HP? Give us your predictions in a discussion below.

 

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