Compaq Plots Services Path

Compaq Plots Services Path

Gary Newgaard

By Richard McCaffery, Staff Writer

Compaq Computer Corp.'s bid to be a major services provider to the federal government is gathering steam thanks to groundwork by Digital Equipment Corp., but building its own pipeline of projects will take some time, analysts and industry experts said.

Since the Houston computer maker completed its $9.6 billion acquisition of Digital Equipment Corp. last June, Compaq's bulked up government services unit has won contracts with the Justice Department and the Navy, as well as additional work from the U.S. Postal Service and Veterans Affairs.

Also, last month it formed an alliance with Government Technology Services Inc., aimed at marketing a broad array of services to government customers.

The integration of Digital's federal business was completed in October 1998, said Gary Newgaard, vice president of Compaq federal. The company consolidated five divisions under one umbrella while keeping many of Digital's engineers and programmers on its payrolls.

"It's gone really well," said James Beaupre, a former vice president of Digital's defense division who is now president of J.B. Cubed, Herndon, Va. Despite the obvious culture clash between hardware and services, Compaq has handled the acquisition deftly, Beaupre said. "I've talked to people who used to work for me who are doing really well."

But several analysts do not expect the company to pick up any major services contracts for at least a year.

"I think it's probably a little too soon to see exactly how successful they'll be in terms of winning services contracts," said Kevin Plexico, vice president of Input, a Vienna, Va., research firm.

Louis Mazzucchelli, vice president of research at Gerard Klauer Mattison & Co. of New York, said Compaq may be able to make the move to full service computer company quicker than IBM did in the late 1980s, but only because it's not as big.

"It's going to take longer than most people expect," Mazzucchelli said. Most of the services work Compaq has landed so far were projects Digital had in the pipeline, he said. "How long before they build their own pipeline, we'll have to wait and see."

Experts and analysts praised the Compaq-Digital acquisition last year, which joined the world's largest supplier of personal computers with one of the industry's largest professional services organizations.

The move pits Compaq against powerful companies like IBM Corp., Computer Sciences Corp., Hewlett-Packard Co. and Electronic Data Systems Corp., but it gives the company new markets and economies of scale.

For example, Digital's work force contained more than 2,500 Windows certified engineers and software developers, which Compaq planned to leverage for a strike into the server and workstation market. It has had some luck with this.

In October 1998, Compaq was picked to help Federal Data Corp. of Bethesda, Md., on a large software integration project at the Justice Department's Federal Prison Industries, a division of the Bureau of Prisons. Compaq was picked because of its Windows NT experience, Newgaard said. The project was worth about $2 million to Compaq.

In December 1998, Compaq landed a three-year lease contract with the Naval Medical Center in Portsmouth, Va., to provide hardware as well as networking services and Windows NT infrastructure. The first task order was worth $6 million, according to Cmdr. Ray Swisher of the Navy's Medical Service Corp.

Swisher said Digital has done business with the naval hospital before, but never so much. The Navy picked Compaq because of its "willingness to evaluate military health care standards and balance them with commercial best practices," he said.

"We're winning opportunities we wouldn't have won before," Newgaard said.

On the services side, Compaq chalked up $7 billion in sales for 1998, according to company officials. Newgaard said the company expects to double that by the end of 2002, and he expects services on the government side to double as well. "We're either meeting or exceeding company goals," he said.

One way the company is trying to speed the transition is by keeping Digital's engineers and programmers close to their customers, Beaupre said.

"Digital has a huge professional services organization, and what's happened is Compaq has left them alone," he said.

But concerns linger among customers.

Eric Undesser, a chief information officer at Veterans Affairs, said Digital worked with the agency for 15 years. As part of a $22 million contract won by Digital in September 1997, Compaq is helping the agency install a new backbone and network services for hospitals and clinics from Texas to Florida.

"Compaq doesn't know the VA, and we don't know their people," Undesser said. "I'm hoping we don't lose that mutual understanding we've had with Digital. It's too early to tell. We're keeping our fingers crossed."

The bulk of the networking services segment of the contract has been done in the last nine months, Compaq officials said. When the project is finished, doctors in 10 hospitals will be able to conduct teleconferences and send images such as X-rays hundreds of miles on the agency's network.

The transition has been smooth so far, said Undesser, who said he is worried even though the people assigned to the project have not changed.

Beaupre has heard similar concerns. "Of all the companies I ever worked for, the value [Digital added] was the best I ever saw," he said. "Naturally, there are some anxieties about whether it will continue."

But Newgaard said customers won't be left out in the cold."Our organization is focused on one thing: customer satisfaction," he said.

Compaq's most recent services initiative is its Internet push, or Next Generation Infrastructure Consulting and Integration Services. Compaq will offer planning, consulting, outsourcing and other services aimed at a company's most important business functions, from e-mail to the corporate network.

More than ever before, the program is aimed at chief information officers and is part of Compaq's plan to grow its enterprise business, according to Ted McKie, director of business development for Internet and Network Infrastructure. Compaq announced the initiative Feb. 16.

"It's one of our major thrusts for growth this year," said Rick Distasio, Compaq's vice president for systems integration services in the federal government. He said Compaq is pushing network services to customers in agencies such as the departments of Commerce, Education, Energy, Justice and Treasury, as well as NASA and the Army, Navy and Air Force.

Compaq's stock performed well in 1998, but slid late last month when company officials reported weak sales figures for January. The stock closed at $35.37 Feb. 26, down more than $5 a share on heavy trading that saw other technology issues tumble as well. Over the last year, Compaq's price has ranged from $51.25 to $22.93 a share.

Compaq had revenues of $31 billion in 1998, up from $25 billion in 1997. The company posted a loss of $2.7 billion for the year because of acquisitions and related expenses, compared to a profit of $1.9 billion in 1997.

Compaq executives declined to disclose government revenue, but analyst estimates put the 1998 number at about 5 percent of total sales. Ashok Kumar, an analyst at U.S. Bancorp Piper Jaffray of Minneapolis, said Compaq shipped 13 million computers and related units last year, and 850,000 went to the federal government.

But the main challenge for Compaq is getting the two sides of a 71,000-employee company to understand the difference between selling hardware and services, Plexico said. "The sales cycle for selling services is a lot longer," he said.

Plexico, who recently met with Compaq executives, said the firm is making strides, that lines of communication between products people and services people are open.

"They seem to be on top of the issues," he said. "The sales group is definitely organized."

Another push for the company is maintaining close ties with the sales channel, Newgaard said. Last year Compaq announced it would sell some products directly to end users, skipping distributors and resellers that helped make it so successful.

Similar moves came from other manufacturers like IBM Corp. The shift was aimed at better competing with Dell Computer Corp. of Round Rock, Texas, which changed the industry by building computers to order and selling them directly to customers.

Newgaard said Compaq wouldn't shy away from contracts where the government wants to buy from manufacturers. In such cases, Compaq's channel partners would work as subcontractors, Newgaard said. But he stressed that Compaq is as committed as ever to the sales channel. "That hasn't changed," he said.

Compaq's partnership with at least one reseller is getting a boost. Over the last few weeks Compaq's government services unit reached an agreement to team with GTSI of Chantilly, Va., said Dendy Young, GTSI's chairman and chief executive officer. Under the deal, GTSI will market services Compaq offers to government customers.

Young said GTSI never marketed services for Digital, but has sold Compaq hardware for years. The new agreement gives GTSI worldwide reach, Young said.

"We think of ourselves as a marketing and sales company," he said. "We're just as happy selling products as services."

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