The HP way - soon to be the just-like-IBM-services-way?

You can rationalise HP's bid for rival hardware company Compaq in any number of ways. Most explanations don't hold up. Here, Suzi Kerridge examines whether the deal is all about envying IBM's services business - and what that may mean for existing HP partners.

When HP grows up it wants to be just like IBM. Or, to put that another way, when HP acquires Compaq it wants to be able to ape IBM Global Services.

HP CEO Carly Fiorina has her sights set on the very lucrative services market. She cites figures saying it will be worth $28.5bn by 2004.

Yet in order to realise this goal she has instigated a programme requiring a wholesale change to the way HP does business. The economy can no longer support the 'HP way', entailing guaranteed lifetime employment and staff empowerment. So Fiorina has made her mark, for better or worse.

In fact, she is the antithesis of her predecessor, Lew Platt, who encouraged the HP way of life. Under Fiorina, up to 20,000 jobs are expected to go - far more than the originally predicted 10 per cent. In July alone last year 6,000 staff were shown the door after the company reported it had fallen far short of its ambitious growth targets.

There soon followed further bad feeling after Fiorina announced 6,000 key staff would share in a £223m bonus on completion of the Compaq deal, revealed at the start of September. In addition, 10 top executives will receive a £23m bonus. According to reports, a total of £438m is available to smooth the way to completion.

The threat, Fiorina claims, is that if the deal does not go through HP will have to shut down its PC division completely to achieve her cost saving targets. This, she warns, will mean more rationalisation - job losses, in non-management speak.

In her defence, Fiorina claims the company has two choices: move ahead or remain frozen in time. She has publicly stated there is no future in the status quo and the merger makes compelling business sense.

Compaq would add $6bn in services revenue bringing HP's potential services revenue to $15bn. This has the potential to make HP the third biggest services vendor behind EDS and IBM Global Services.

However, Meta Group analyst Rakesh Kumar, doesn't see it this way. "Absolutely no way. There is no way HP could ever match the likes of IBM or EDS. HP Consulting is nothing more than a second-rate systems integrator and Compaq isn't much better," he said.

A modern day services organisation also needs to offer software reengineering and web-based application integration, continued Kumar.

To date, HP has competed for services on the merits of its partner programmes but what will happen to these once the Compaq takeover is completed?

Mitul Mehta, managing director at TekPlus, warns: "HP has a lot of partners and the question is whether these will still be around when the Compaq deal comes through. Once it gets these services it will be independent and won't need as many partners - it's as simple as that."

Quocirca analyst Clive Longbottom thinks the Compaq deal is a good way to jettison unwanted partners.

"In the late eighties and early nineties HP went through a period of saying any partner is a good partner. But now it is faced with the problem of getting rid of non-performing partners. If the two companies merged it could allow a massive cull and the partners can't complain as it can be put down as natural wastage," he said.

One suggestion is that HP will hang on to partners who deliver geographical or localisation benefits.

Whatever the decision, TekPlus' Mehta claims Fiorina has little choice but to compete for services.

"If you look at where the market is going you'll see there is not enough room for both companies. If HP wants to offer the full solution then it needs to be comparable to IBM," he added.

Quocirca's Longbottom claims Fiorina's great white hope is the DEC component of Compaq - especially the services expertise it gained through the 1998 Compaq-Digital merger. However, many of those skills have long since departed since that landmark deal.

Meanwhile other critics claim Compaq has been suffering ever since it bought DEC and its amalgamation into HP will do little to help anyone's cause.

There are undeniably some hard decisions ahead for Fiorina and co. The analyst community's biggest criticism isn't that Compaq has been in retreat or that it is yet to mature in the enterprise space - it is that HP is buying a mirror image of itself.

It is against this backdrop that it will try to compete with IBM Global Services, arguably the success story in the IT world of the past ten years. Assuming the HP-Compaq deal goes through, Fiorina will need to make sure HP benefits from the deal more than Compaq did after buying Digital - by several degrees if a challenge to IBM is to be made.