Call It `Stealth Blue'John W. Verity
This summer, National Semiconductor Corp.'s Arlington (Tex.) customer-support center ordered about 80 Digital Equipment Corp. personal computers through Avnet, a distributor. National needed the DEC gear installed quickly, but its own people were occupied with other work. So operations manager Judy Neill called Avnet for help. Quickly, a SWAT team of able technicians arrived and finished the job "no problem," Neill recalls. It wasn't until they began asking questions that she and her colleagues discovered these technicians didn't actually work for Avnet or DEC. In fact, they were from Technology Service Solutions, a company owned mainly by IBM.
Through TSS, a company it owns jointly with Eastman Kodak, IBM is quietly but aggressively making itself a major servicer of all kinds of desktop computers, networks, and software. TSS, which services tens of thousands of PCs and network components representing nearly every brand on the market, has more than 5,000 employees and will handle an estimated $700 million worth of work this year.
But few people even know the Memphis-based operation exists--and that's intentional. TSS's strategy is to make computer maintenance a wholesale commodity. TSS offers PC makers, distributors, and dealers--even other computer-maintenance companies--a broad menu of services that each can package, price, and sell as its own. It's a way for IBM both to boost its profits in the service arena and keep its hand in the important and fast-expanding "multivendor" desktop-computing market.
On the surface, at least, TSS's stealthy, private-label approach looks like a success. In just a year and a half, some of IBM's most potent PC competitors, including Compaq, Toshiba, NEC, Dell, Acer, and Gateway 2000, have started using TSS for at least some of their warranty-service work. Plus, TSS is handling service contracts sold by two large PC wholesalers, Ingram Micro and GTSI. Even Microsoft Corp. is employing the IBM subsidiary to assist customers who need help installing its new mperating system, Windows 95. Combined, these non-IBM contracts will generate as much as $150 million in revenues this year, according to market researcher Dataquest Inc., adding to the $600 million TSS will collect for work it does for IBM.
TIGHT SQUEEZE. So far, though, TSS's profits are marginal at best, reckons Dataquest analyst Stephen M. Clancy. TSS CEO Richard M. Hernandez, a 30-year veteran of IBM's service operations, says only that the company was profitable in 1994, even after some major investments. TSS's goal is to reach $1 billion in revenues by 1998 and take market share from rivals such as Vanstar, Entex Information Services, HP, DEC, and Bell Atlantic. "We will grow at twice the industry rate over the next three years," Hernandez predicts. Dataquest figures the overall U.S. desktop hardware-maintenance market will grow 6.1% a year through 1999, from $4.48 billion today to $5.48 billion then. The main growth, at 21.5% a year, will be in fixing PC servers that anchor networks. Desktop revenues will actually drop about 4.1% a year.
FEAR OF POACHERS. TSS is hardly alone. Major computer makers, including Digital Equipment and Hewlett-Packard Co., have tried to leverage their field-service forces across all brands of computers. But these companies have found profit margins razor-thin because computers are increasingly reliable and labor costs keep rising. Plus, PC makers have been quite reluctant to hire rivals to service their machines for fear that customers will be poached in the process. That's why, in part, TSS keeps its vans all-white and its ads and brochures devoid of Big Blue's signature hue.
The company also is hoping to outdo the competition on profitability. First came a big drive to control costs--not easy when the business relies so heavily on a specially trained labor force. Since spinning out of IBM in 1993, the unit has hired and trained a large pool of part-time employees who are called in as needed to help with heavy workloads at the TSS call center in Memphis. Sophisticated technologies are also used to cut training costs and dispatch field personnel efficiently. Artificial-intelligence software from Quintus Corp., for instance, helps technicians diagnose problems on machines they may never have encountered before.
At the same time, Hernandez is pushing into new markets. The company now offers overnight repair of IBM laptops, using Federal Express Corp. to ship machines in and out of TSS's Memphis repair shop. TSS is also servicing more networks and software, including all corporate installations made by Egghead Software Inc.
Meanwhile, the company is counting on IBM to help it grow through acquisitions. The parent paid an estimated $50 million for a General Electric Co. service unit last spring. Additional buys, Hernandez says, could help TSS flesh out its U.S. coverage, move into fast-growing international markets, and service new categories of products. Clearly, it helps to have a sugar daddy, even if you're reluctant to speak its name in public.