HP's Beachhead in High-Tech Services

Three contracts put it in the running against IBM and EDS

When Carleton S. Fiorina grabbed the helm at Hewlett-Packard Co. (HPQ ) in 1999, she envisioned building a services juggernaut that would someday rival IBM. After all, tech services -- the business of deploying, supporting, and running technology gear for clients -- was en route to becoming a $36 billion business for Big Blue. Now, after struggling in IBM's (IBM ) shadow for years, HP has finally taken several big strides toward realizing Fiorina's ambitions.

Beginning on Apr. 11, HP announced the imminent signing of three jumbo info-tech services agreements with a total value of roughly $4.6 billion, including a $3 billion, 10-year deal to run all of Procter & Gamble Co.'s (PG ) technology gear. The deals, which also include customers Ericsson (ERICY ) and Bank of Ireland, give HP a solid beachhead in the market for large-scale outsourcing deals.

Still, concerns linger over the terms HP may be offering to gain early customers. The company's stock dipped 2% the day it announced the P&G deal and now hovers at about $16, where it was before the wins were announced. "I've got to believe the pricing on [the P&G] deal isn't terribly attractive," says Merrill Lynch & Co. analyst Steven Milunovich.

Few question HP's need to raise its profile in tech services. The Palo Alto (Calif.) company notched just $12.4 billion in ser-vices revenues in fiscal 2002, compared with IBM's $36.4 billion and Electronic Data System Corp.'s (EDS ) $21.5 billion. And most of the services business HP does have is in the form of low-end tech support, such as fixing and maintaining office PCs, a market that's expected to grow just 2.9% annually.

That humdrum market makes tech outsourcing, and its projected 8.3% growth rates, a richer prize. HP's $1.5 billion presence in tech outsourcing puts it just fifth in that market, but now it is being invited to compete for some of the biggest outsourcing deals. Such contracts entail taking over every computing task for a company, from running its network to troubleshooting employee problems. TPI, a firm that negotiates outsourcing contracts for buyers, says HP is competing for $4 billion of the $35 billion in contracts in its pipeline. "A year ago, they wouldn't have been considered," says Peter Allen, managing partner at TPI.

Why is HP such a contender now? First, acquiring Compaq Computer Corp. vaulted its services staff to 65,000. Second, HP Executive Vice-President of Services Ann M. Livermore is plucking talent away from key competitors. Finally, rival Electronic Data Systems Corp. is hindered by a cash shortage, creating opportunities. HP's push for a friendlier image also seems to be paying off. "Culture is important," says Mike Woeller, chief information officer at Canadian Imperial Bank of Commerce, which signed a $1.3 billion outsourcing deal with HP last year. "We really like the people we work with."

Still, if HP is winning deals by lowballing, it could come to regret them. EDS, after all, ran into problems by aggressively pricing large deals, such as its $9 billion outsourcing contract with the U.S. Navy. HP isn't disclosing specific details, but company officials say all three imminent deals will be profitable right away. If such promises hold true, HP could be on its way in the high-tech services business.

By Ben Elgin in San Mateo, Calif.

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