HP's Apotheker Mounts Massive Technology Services Transformation

Hewlett-Packard CEO Leo Apotheker Tuesday launched what he is calling a "significant" technology services transformation in a bid to drive higher-margin, technology services sales growth.

As part of that transformation, HP has launched a search for an executive vice president of enterprise services reporting directly to Apotheker.

HP is also combining its technology services group with its successful Enterprise Servers, Storage and Networking (ESSN) business.

"We are about to engage in a significant transformation of the services business," he said during a conference call with Wall Street analysts on Tuesday to discuss the company's second fiscal quarter results.

The technology services-ESSN combination gives no nonsense ESSN Executive Vice President and General Manager Dave Donatelli a hand in the enterprise services business. "The ESSN business has made great improvements over the last several years," said Apotheker. "The next change is to create greater go-to-market leverage with our own products."

HP is also establishing a new higher margin business solutions group to create more strategic industry-specific services for customers.

Apotheker said the $126 billion computer giant will also make additional investments in consulting services, application modernization, business analytics and mobility. Finally, Apotheker said HP will add sales and technical talent and business development staff to its services organization.

The services charge comes nearly two years after HP spent a whopping $13.9 billion to acquire services giant Electronic Data Systems in a deal that was aimed at going head to head with the likes of IBM Global Services and other services giants.

"We had a solid strategy for services, but we didn't invest in the parts to support the strategy," said Apotheker in what appeared to be a critique of former HP CEO Mark Hurd's cost-cutting tendencies. "Instead, HP focused on maximizing its shorter-term margins. We have over-executed operationally and under-invested strategically."

That short-sighted services focus, Apotheker said, impacted HP's "ability to create sustainable [services] growth for the long term." HP simply never shifted its services mix to higher-value, higher-margin and higher-growth areas, said Apotheker. HP's services business grew only 2 percent in the second fiscal quarter ended April 30.

"You have seen it in our historical results," Apotheker said of what he called HP's short-sighted services strategy. "Our margins have expanded quickly and significantly, but revenue is not growing as fast as it can or should." In its fiscal year 2010, ended Oct. 31, 2010, HP's services business posted revenue of $34.93 billion, up slightly from $34.69 billion in the 2009 fiscal year.

Even with customers demanding more Business Process Outsourcing (BPO) and applications services capabitlies, Apotheker said HP's services mix has remain unchanged over the last several years. What's more, he said, outsourcing agreements have been "heavily weighted" toward longer term outsourcing deals.

"We have a choice: HP can continue executing for some time along these same lines or we can grow the value of our services business by better aligning our services strategy with the company strategy," said Apotheker. "I have decided that we are not going to just talk about our future. We are going to aggressively execute on our strategy and make some needed changes."

NEXT: HP Reaches Out To Enterprise Partners To Grow Its Services Business

HP channel partners contacted by CRN said it is too early to tell how the technology services transformation will impact the HP services channel initiatives that were spotlighted in March at its Americas Partners Conference.

The company at that conference launched an aggressive effort to partner on the services front with HP enterprise partners. HP Vice President Americas Channels and Alliances Technology Services Ken Archer, a former solution provider executive, former Avaya channel chief and a one time 24-year HP channel veteran, returned to the company recently to lead that partner services charge.

HP's plan is to double the channel services business by 2012, said Archer in an interview at HP's Americas Partner Conference in April. To that end, the company doubled the number of channel services sales reps working in the field with partners, he said. "The commitment from executive management is there," said Archer.

"We are a much different technology services organization than we were a year ago," said Pamela Lach, director of marketing, Americas Technology Services for HP.

That said, HP Enterprise partners said it is critical that the new executive vice president of services that HP adds to its management team has channel experience. "If they bring in someone from one of the big consulting companies that is not partner friendly, that is going to hurt HP," claimed one top HP enterprise partner, who did not want to be identified. "They are already struggling moving that EDS culture into a partnership culture. That is a major challenge."

"If you bring in an executive that does not know what the channel can do, it is going to be trouble," he said. "None of these big consulting firms have a hardware business which provides huge leverage."

Another problem HP is grappling with is the significant up front investments when it wins long term IT outsourcing deals. That means HP must wait some time before it sees a return on investment on those deals.

"There is a lifecycle cost for where we are on some of these deals and how many we have had starting up," said HP Enterprise Executive Vice President Ann Livermore on Tuesday's conference call. Livermore is acting as interim executive vice president of enterprise services for HP until the company finds a top executive for that post.

HP is making additional investments around building out its security services offering, said Livermore. "We have huge demand here," she said. "That is an area we will be investing in with additional services." Those security services can be sold along with the outsourcing deals and with cloud migration services offerings, she said.

HP is also seeing strong demand that it can not meet in the application services market, said Livermore. "That is a big attractive market for us," she said. "We have been performing very well in the applications management part of that market. We have strong customer demand and not enough capability today."

HP is adding more application services talent to its services lineup and upping its applications "modernization" capability, said Livermore.

Livermore said HP services competitors had a deep bench that were giving those player a competitive advantage in short term outsourcing deals. "We actually had too tight a bench in our applications services business," she said. "We needed more people on the bench. We had customer demand but we couldn't sell into it because we couldn't immediately address that demand."

Apotheker said that HP is on the move to execute a higher value-added services strategy that was set years ago. "We should have been moving into these higher value added [services] businesses," he said. "It didn't occur in the past. It will happen now. There is no doubt about that. We will execute starting as of today."