Hardware out, services in

Picking through recent news events, James West finds that moves by IBM and HP show a market desperately trying to keep up with rising demand for IT services.

The IT proverb no one ever got fired for buying IBM has taken an ironic twist in the last few weeks, with Chinese computer maker Lenovo being dragged over the coals by the financial markets for sticking to this outdated mantra.

In offering $1.75 billion for IBM’s PC division, Lenovo was expecting to create the third largest computer manufacturer in the world. Instead, investors have recoiled in horror at the division’s recent history of massive losses – the last reported as a $139 million deficit in the first half of 2004. So bad has been the reaction, that when the deal was reported to be running into severe problems, stock in Lenovo actually rose for the first time since the announced merger. Adding to the bad soap opera feel of the whole saga, US foreign investment officials may scupper the deal because they are concerned the Chinese will use IBM’s US headquarters to launch espionage attacks.

Regardless the final outcome, the inescapable fact is that hardware is no longer the draw that it once was. Such is the impact of price wars and falling component prices that only the very best box shifters (Dell) can do good business from selling hardware. IBM has been credited as instigating the personal computing revolution but now it is desperately trying to distance itself from its once crowning glory.

To make money in IT today, you need to offer support services. For many years, IT was left alone by a corporate body blinded by jargon and uncertainty as to the extent and importance of computers. Now the blinkers are off, IT is being treated in the same way as other functions, and it must deliver business services in the same cost effective way as HR, fulfilment and sales etc. Expertise to do this is at a premium and companies are willing to invest with names they trust to ensure IT becomes accountable.

Not convinced? HP has recently parted company with its chief executive Carly Fiorina amid rumours of infighting, much of it stemming from Fiorina’s insistence on proceeding with the blockbuster $19 billion buyout of Compaq in 2002. Deals of this size rarely work, and the plummeting value of IT equipment during the period of integration between the two companies has led to the deal being labelled a flop.

Perhaps mindful of the mistake of investing heavily in hardware, Fiorina turned her attention to services. Yet despite recent successful pick-ups (Synstar, CEC), HP’s inability to land Accenture (IBM won it) means that it has never been able to build the critical mass needed to compete with the market leaders.

Stock in HP has risen since Fiorina’s departure and the challenge for her replacement is to decide a concrete strategy for the company. Failure to focus on services could signal a long-term decline for HP.

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