Services key to merger’s success

With the final vote on approving the landmark Compaq Computer Corp.-Hewlett-Packard Co. merger coming on March 19, one of the most critical elements to the overall success of the deal figures to be smooth integration of the companies’ respective global services organizations.

Peter Mercury, senior vice-president and general manager of Compaq Global Services, is one of the key figures in trying to make that happen. Mercury has some experience in trying to meld services groups between large companies, having led the integration process for Compaq Global Services in stitching together the very different service businesses of Compaq, Digital Equipment Corp., and Tandem Computers Inc. In his 22 years at Digital before coming to Compaq, Mercury held management jobs in finance, manufacturing, software marketing, and services.

Mercury sat down with editor-at-large Ed Scannell to discuss some of the strategic advantages that the proposed Compaq-HP merger might afford the companies’ overall services businesses, as well as how the integration of the Compaq and Digital services groups has benefited the company four years down the road.

InfoWorld: How much are the opportunities in the services markets driving the proposed merger with Hewlett-Packard?

Mercury: We think just the services play in the merger is huge. These two businesses are very solid and profitable. By merging them you gain some huge cost synergies that make them even more profitable. They are both huge contributors to their company’s earnings power. In the case of Compaq, we generated over US$1 billion in profits just last year. For HP it is about the same. Putting them together is relatively easy because there are lots of similarities in segmentation, size, background, culture, and management orientation. We bring these teams together, it is like going to a high school class reunion. But the question is, can we get more than two by adding one and one. What you really want is one plus one to equal more like 2.5. Where we think we can get that is in putting the systems integration and outsourcing businesses together.

InfoWorld: How does the merger help you stack up better against IBM in those two areas?

Mercury: In both the outsourcing and systems integration businesses, we do not have the critical mass that allows us to play against IBM or EDS. There, critical mass counts. With the merger we will be on the candidates list more often as a major player. Also there are some nice complementary and critical-mass capabilities in systems integration and outsourcing. It doesn’t seem that anyone is picking up much on that. We have not a good enough job of providing that message that just from a service point of view, you get the third largest service player in the industry after IBM and EDS, that’s a $15 billion business.

InfoWorld: Why do you think the financial analysts are not seeing this?

Mercury: The problem we have at Compaq is, when analysts look at us they start with the PC business and you have to get them to understand the rest. With HP going forward, not only do you have this profitable printing business, you would have this huge and profitable services business. So you have two nice, stable businesses, which would serve as a pretty solid foundation. The revenues from the two services businesses are purely additive. And where we immediately pick up cost savings is in the management structure. That is low-hanging fruit in terms of getting some immediate cost synergies, which make the business even more profitable and streamlined. The services teams have worked well together through all this. We have integration work going on by line of business and by functional activities. As we get closer to the date we are engaging more of the field organizations to think about how to play out those plans in different parts of the world. Then we will be ready to fly.

InfoWorld: What if the deal does not go through?

Mercury: If it doesn’t go through we have plans in place. What I think might be different is that we put some things back on our own table. We would probably get more aggressive again around acquisitions in the enterprise systems integration space. We took off the table as a result of the merger because that would have been something HP could bring.

InfoWorld: What is your view of what has gone on in the ASP space over the past year and what does it look like going forward with the merger?

Mercury: Seems to me that both HSPs [hosting services providers] and ASPs [application service providers] are thought about differently today than they were about 18 months ago. Those models were on fire back then. I do not get the impression they are nearly as hot today. I think the reality is – and this is true for our computing-on-demand model – that large enterprises are not all alike. There is a broad spectrum of preferences for how they will design and manage their IT operations. So you might find that a small or medium-size business will say: “I don’t know squat about IT and so I just want to be able to go in remotely and do payroll and let someone else worry about the application, the maintenance and infrastructure.” This [is] compared to someone like Nasdaq, who says: “I want to own every ounce of technology. I want to be in control of every person who touches that system.”

InfoWorld: So does this create more opportunities in the ASP space for larger companies like Compaq?

Mercury: I think a lot of people may have overestimated how much of the market was willing to operate in that manner. They obviously could not support all those plays. Plus, how many of those plays have gone out of business. There was not enough business to go around, you need critical mass to be an ASP. It actually plays out well for people like IBM, Compaq, and HP because we have these huge services infrastructure. We can complement, add, or modify our existing infrastructures to offer computing on demand.

InfoWorld: What do you think Compaq’s advantage is over IBM’s services organization in terms of carrying out an effective computing-on-demand strategy?

Mercury: I think IBM’s utility model is much more hosting oriented. That is, their intention is to offer application capability or infrastructure capability that is owned and operated by IBM. So it is much more a one-to-many model, one piece of infrastructure from IBM intended to serve many users. It is a classic HSP or ASP model. And they can move into this because some of those players went away. Our model is much more of a one-to-one model in that our computing-on-demand model is not so much in this hosting environment. What we do is help move infrastructure like storage or server capacity to a customer on a one-to-one relationship. Those pieces become their dedicated capability, it is not being shared by a lot of other people. We are appealing to that market that is much more interested in the one-to-one relationship between the utility and their own company.

InfoWorld: Any other competitors out there whose services strategies keep you up at night? Some have put Dell on its radar screen as one competitor whose business model they respect in this space.

Mercury: We do not see Dell as a services company. Dell does not have much services capability themselves, they use partners. When I was at Digital, we were their global services partner. Dell does do a wonderful job of packaging support services with products. No one does a better job. They have off-site support and Web-based support themselves, but they utilize partners for anything more complex than that. So we never get into a situation where we are bidding on a large environmental support deal or outsourcing deal against Dell. [Dell] is not a stand-alone services competitor. Dell is in the business of moving desktops and low-end servers, and so their services business today is closely associated with driving that business.

InfoWorld: What are your goals for growing that business over the next 12 to 24 months?

Mercury: We want to grow our support business faster than the market, [that is] always our goal. [For] the systems integration business – like everyone else’s – to a great extent the growth will depend on something of a tech turnaround. The outsourcing business, we would like to grow that by 15 [per cent] to 20 per cent … Our growth segment is different from segment to segment, as it is for IBM and HP.

InfoWorld: How has the integration among Compaq, Digital, and Tandem’s services groups?

Mercury: One of the things Walter Hewlett and other critics of the [proposed HP] merger are saying is “Hey, there has never been a successful merger among larger companies.” They point to the Compaq-Digital-Tandem deals and say “Well, that didn’t work, so why will one with HP?” I take great exception to the thought that the Compaq acquisition was not a good thing and didn’t work well. I think it was brilliant. If you look at what Compaq was trying to do there, they were trying to expand their portfolio, to be a more diversified company so they would not be at the mercy of the downturn on one particular segment of the business. And if you look at Compaq over the last three years, the Digital and Tandem assets, particularly the services capability, helped create a huge and positive role for the company in helping some of the challenges that came from both the economy and the direct competition from Dell. In the services business, we have been generating about $250 million in profit per quarter since the merger.

So I think those acquisitions have been a huge success. It was designed to broaden and diversify the portfolio and I think it has accomplished those objectives.