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Of all the execution problems contributing to the downfall of Hewlett-Packard Co.’s Chair and CEO Carly Fiorina, the company’s promising services business was not one of them. Nevertheless, the growth of that rising star among its other businesses could be accelerated with the right emphasis, believe HP watchers.

While HP after its merger with Compaq Computer Corp. became a Tier 1 IT infrastructure outsourcing provider, winning some significant deals over the IBM Global Services behemoth, some believe that the true promise of the IT services operation has yet to be met.

“I think executing on the promise of a major services play that would pull through products has not materialized,” said Dean McMann, CEO of McMann & Ransford, an IT outsourcing consulting company in Houston. “HP needs to realize that promise. They are the only people who can compete with IBM head to head like that.”

Becoming a trusted adviser that is “intimate” with its clients—something IBM Global Services has mastered—would allow HP Services to pull through product sales without the “inevitable price fighting,” believes McMann.

In one of the more high-profile outsourcing wins HP Services attained last year, it became a “trusted business partner” for The Proctor & Gamble Co., according to Rob Shimp, associate director of global business services, external relations, at P&G in Cincinnati.

Whether the $3 billion, 10-year outsourcing deal with P&G has resulted in increased product sales is unclear, however. “We certainly look at them as a trusted business partner in the IT service space. I’m not sure that’s resulted in increased sales,” said Shimp, who added that P&G does not expect its relationship to change with Fiorina’s departure.

Although the addition of the Compaq IT services business gave HP the size and scale to compete as a Tier 1 outsourcing player, it did not bring with it the kind of business consulting services that would give it real intimacy with its clients. “They settled on a strategy to rely on partners to do that for them and focus on their own managed services strategy,” said Eric Rocco, managing vice president of outsourcing research at Gartner Inc., in Lowell, Mass.

In its drive to create that product pull-through, HP last year integrated its services business with the enterprise systems group under services chief Ann Livermore to create greater synergies between products and services. Livermore, now executive vice president of the Technology Solutions Group, is in fact thought to be one of two potential internal candidates for the top post at HP. The other is Vyomesh Joshi, executive vice president of the Imaging and Personal Systems Group.

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But integration of products and services is not the route IBM Global Services has taken to achieve its success. IBM created “an autonomous unit that operates independently and treats the product business as another competitor. No one else has done it to that degree,” said Doug Chandler, program director for storage, software and services at IDC, in Framingham, Mass.

And the integration of HP’s services operation with Compaq’s IT managed services has not yielded a sum greater than the two parts, believes Chandler. For a technology company to have 15 percent or 17 percent of its revenues in services is not unusual. EMC has tried to build a larger services business, and it is looking at mid-20 percent of its revenue in services, he said.

HP’s services revenue for fiscal year 2005 was about $14 billion, with customer support making up $8.7 billion of that total. The fastest-growing segment of its services business was managed services, which made up about 19 percent of HP Services revenues for the last fiscal year. In contrast, HP’s consulting services revenue was about 18 percent of HP Services revenue, and that only grew 2 percent, according to IDC analyst Alexander Motsenigos, in Framingham.

“Any merger has its integration challenges. As they look to the next level they need to concentrate on areas like business process outsourcing. They need to build transformational skills around consulting,” he added.

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