Hewlett-Packard's acquisition of Compaq Computer has given users a new tier 1 IT services provider that is a viable option to traditional powerhouses such as IBM's Global Services unit, Computer Sciences (CSC), Accenture and Electronic Data Systems (EDS).
The merger increased HP's services staff to 65,000, gave it new customers and significantly expanded its services portfolio, which covered three broad areas: technical support and maintenance; outsourcing; and consulting and integration.
Analysts give good marks to HP about its post-merger services strategy and results so far. But they caution that if HP's ultimate goal is to match IBM's services prowess, much work remains to be done.
IBM Global Services, which is the world's largest IT services provider, has more than twice as many employees, about three times as much revenue, a bigger services portfolio and a leadership position in name recognition and reputation.
This means HP is on the right track in services, but nowhere near its ultimate goal, which the company stated as such when it announced in September 2001 its intention to acquire Compaq: "The new HP will offer the industry's most complete set of IT products and services for both businesses and consumers."
So one year after the Compaq acquisition, it is clear clients will not find in HP the breadth and depth of IBM Global Services. But they will find that HP has significantly more to offer than it did a year ago.
"Generally, HP is being perceived as a viable service alternative by many companies out there," said Traci Gere, an IDC analyst.
Prior to the merger, current and potential clients had been demanding that HP offer more services, said Juergen Rottler, HP's vice-president of marketing, strategy and alliances.
"In the services market, you have to deliver globally and seamlessly a broad range of capabilities," he said.
HP needs a strong services unit to push its nascent enterprise systems "adaptive infrastructure" strategy, which, like IBM's on-demand push, aims to give users services and products that can be adapted according to changing business needs.
"This approach is the wave of the future in IT services," said Andrew Efstathiou, a Yankee Group analyst.
After the Compaq merger, HP Services has become much more aligned with HP's enterprise systems group, particularly for the adaptive infrastructure effort, IDC's Gere said. "Before, they were less tightly aligned than they are now," she said.
Grant Westcott, head of technology infrastructure at the Canadian Imperial Bank of Commerce (CIBC), HP's largest services client, likes what he has seen merger-wise, and is hoping for continued improvements. He gives HP a score of between six and seven out of a possible 10 for its performance so far in the outsourcing contract CIBC awarded HP in September 2002, a seven-year, $1.5bn (£0.9bn) deal.
"The cornerstone for us [in the coming year] is great service at the right price, and HP is doing pretty well," he said. "If they're able to sustain or improve that service relationship and keep their pricing competitive, there'll be quite a lot more business coming their way from us."
HP is still learning how to get the biggest synergies from its merged services unit, but the potential for great results is evident, he said.
In this past year, HP has done a good job of setting up its post-merger services unit and put itself into a good position to grow, said John Madden, a Summit Strategies analyst.
"It's clear HP Services can crawl. The question now is whether they can walk and then later run," he said.
"There's been a lot of progress there for HP Services. It's clear they've landed on their feet. But they still have a lot of work to do," Madden added.
The HP Services integration is ahead of schedule, but by no means over, according to Gartner's Eric Rocco.
"We would rate the services organisation as doing pretty well in terms of meeting goals and [clients'] needs," Rocco said. Now HP must continue to fine-tune the integration, continue to grow its portfolio, and make sure "all clients see the same face of HP Services", he said.
"HP will not pose a substantial threat to IBM until it establishes this full scope of services," Rocco and fellow Gartner analyst Michael Haines wrote in a research note about HP Services in April.
One of those companies is Procter & Gamble, which expects to award HP a giant 10-year outsourcing contract valued at $3bn (£1.9bn) in mid-May, for which IBM and EDS also competed. When the contract is finalised, P&G will become HP's largest services client.
"HP is positioned in IT departments as having a collaborative approach with customers, so it's being welcomed to the table. Although it's not always winning the deals, it's starting to win more," IDC's Gere said.
The merger significantly broadened HP's services on desktop and server software from Microsoft. It also expanded HP's skills on servers and storage from various HP competitors, such as IBM, Sun Microsystems and Compaq itself, including products from Tandem and Digital, two companies that had been absorbed by Compaq.
This expanded ability to manage heterogeneous environments has played a big part in HP's momentum in outsourcing. Recent outsourcing wins such as CIBC, P&G and Ericsson call for HP to manage this type of multivendor, multitechnology environments.
Regarding the three broad services areas HP covers, it is very strong in the technical support and maintenance, has a lot of momentum in outsourcing and remains weak in consulting and systems integration, analysts say.
On technical support, analysts say the merger combined two complementary and large teams that can support myriad products. In fact, HP's support team is the largest in the industry and "a solid profit performer which does well with customers", said Gartner's Rocco.
The smaller outsourcing team, meanwhile, has come roaring out of the gate, posting growth rates above industry levels and aggressively competing for and snatching away deals, such as the P&G contract, for which clients probably would not have even considered HP prior to the merger.
The weakest unit, analysts say, is the systems integration and consulting group. It is suffering from a generalised slump in demand for integration and consulting, and also lacks the visibility and reputation of IBM Global Services' Business Consulting Services - formed in part by IBM's PwC Consulting acquisition - Accenture, BearingPoint and EDS' AT Kearney unit.
"Consulting and integration, which they hoped to transform, so far hasn't happened. They have had some individual wins, but that business is challenged for all service providers, and it remains not so strong for HP," Yankee's Efstathiou said.
Consulting is an area IBM beefed up by buying PwC Consulting. In the coming year, analysts say HP must continue strengthening its consulting and integration unit, as well as its sales teams in order to be able to chase the increased number of deals it is now able to chase.
"HP faces capacity challenges in having enough teams to go after and negotiate deals out there," IDC's Gere said.