WT Business Beat

By Nick Wakeman

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Nick Wakeman

HP, Dell know they have to change or die

If you need more evidence that service is king in the government market, look no further than the Dell and Hewlett-Packard announcements this week.

Dell’s plan to acquire Perot Systems launches that company into the systems integration and information technology outsourcing space in a big way.

HP’s announcement that it was dropping the EDS brand name indicates that its on its way in following IBM’s model of creating a services business that will eventually overshadow its hardware business, particularly the sale of PCs.

Dell and HP are fierce rivals in the hardware business and both face a market where PCs and other hardware are commodities. It almost to the point where the customer dictates the price. They both have realized there is a limit to how much profit you can squeeze from volume sales, and efficient manufacturing and distribution.

HP acquired EDS a little more than a year and now has a services business that accounts for 47 percent of its revenue and 60 percent of operating profits.

Dell’s business mix isn’t there yet, but its services organization will top $8 billion after Perot is added. The acquisition of Perot moves Dell into the higher margin services such as systems integration, outsourcing and professional services.

Like EDS, Perot’s business wasn’t built by selling PCs, and selling PCs isn’t what will drive HP and Dell’s businesses going forward.

The market has changed, and if there is any lesson to be drawn from the HP and Dell announcements of this past week is that companies have to adapt or die. There is no sitting still.

Even through HP’s deal with EDS is a year old, it still faces questions about how to combine a services business with a product business. Dell must answer that question as well.

I predict that these companies will have the answers. It might take years, and it will probably take more services-related acquisitions, especially for Dell, but eventually we'll stop thinking of them as hardware companies. Because these two companies will be different from the firms we know today.

To succeed, they have no choice.

Posted by Nick Wakeman on Sep 24, 2009 at 9:53 AM

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