Hewlett-Packard fulfils some services ambitions.

Half a decade ago Hewlett-Packard (HP) had a professed aversion to IT services. While rivals such as IBM and Compaq were crafting multi-billion dollar services units, HP argued that its systems customers were at an advantage because the company did not try to cross-sell them services. With little presence in the services market, it could do little else.

But a lot has happened since then. Realising that it was missing out on a huge opportunity and that customers were becoming more keen to source services from their systems vendors, HP has charged into services, pulling together existing services activities, grafting on core competency through acquisitions and by voraciously recruiting.

The rush has been produced some surprising results. HP Services now spans consultancy, systems integration, support, outsourcing and training, and boasts revenues of $7 billion, an above-sector growth rate of 15%, and a global workforce of 29,000. However, the different components of that business are showing varying degrees of success.

In consultancy, from an almost standing start, HP has added 1,000 consultants a year over the past two years, and intends to have hired another 2,000 by the end of its fiscal year on 31 October. That ramp up is reflected in the unit's runrate. Consultancy revenue growth in HP's second quarter was up 53%, making it $1 billion operation.

Not all has gone to plan there, though. An attempt to catapult HP Services into mainstream consultancy through the acquisition of the consultancy services division of PricewaterhouseCoopers fell apart in November 2000 after a drop in HP's share price meant the company could not afford the $18 billion deal.

HP Services' outsourcing division has had greater success in boosting its size through acquisition recently. The business, which reported an order growth of 26% in the second quarter, has revenues of around $2 billion, making it the fourth largest in the sector. But about half of that revenue flows from HP itself after the company passed its own internal $1 billion annual IT services needs to the unit. That has been a poster child for its outsourcing skills, as HP has saved 15% of its IT spend in the first 8 months of the contract.

Aiding its momentum in July 2001 was the $610 million acquisition of Comdisco's availability services. However, that purchase highlights a dilemma for HP Services. The outsourcing - and indeed other services wings - have to date shied away from working with so-called 'mainframe shops', unless these organisations have a "transformation agenda" for moving away from mainframes to Unix or Windows systems. For the present, the message from Francesco Serafini, head of HP Services in Europe, is clear. "We have no plans to invest in the mainframe arena. Our main focus for mainframe users is to help them move from an old infrastructure to a new one," he says. "If the company wants to stay with the mainframe, they are not our customers."

However, the limitation that puts on HP going after the largest deals - plus the fact that the Comdisco business is almost exclusively IBM mainframe-based - means that others within the company are questioning how long it will be before it embraces IBM mainframe outsourcing.

Neither consulting nor outsourcing represents HP's largest or most profitable services business. The company's support organisation, maintaining a mix of HP and others' equipment, has revenues of $4 billion, and net margins in the 10% to 20% range. Profit margins in HP outsourcing are well below that, sitting slightly below the segment average of 4%. But the company is seeking to address that by growing its presence in network and storage services, as well as raising its average deal size closer to $100 million.

Despite its successful ramp up, HP Services still only represents a relatively small part - 16% - of HP's overall revenue pie. But Serafini says HP Services has the potential to be 30% of HP's total business within the next three years, something that suggests there is no end in sight to both organic and acquisition-lead growth -- despite cutbacks and lay-offs in other parts of HP's business.

Company name: HP services (div of Hewlett-Packard Co)

HQ: Palo Alto, California 

Main activity: IT services

Last full year revenues: $6 billion

Last full year net income: Not available

Key issue: From a standing start, HP has moved into the top five of IT services. It still needs to grow fast, but the company also has to deal with its antipathy towards managing high-end computing systems, namely IBM mainframes.

www.hp.com/hps