Faced with a slackening computer hardware market, Compaq is overhauling its business strategy to focus on selling all-encompassing packages of services, software and hardware.
In an internal memo to Compaq's 68,000 worldwide employees earlier this month, Chairman and CEO Michael Capellas said the company will take the next six months to transform itself from a hardware-centric vendor into a business offering packages that bundle everything from the machines to services and support, to better serve customers and increase its market share.
Word of the memo came on the same day that the company announced plans to move its 64-bit AlphaServer and NonStop Himalaya machines to Intel's new Itanium processor architecture within the next three years.
"Customers see less and less differentiation in the core technology components," Capellas wrote in his lengthy memo. "Customer value will be created above the core components in areas like solutions, software and services."
As part of the new strategy, Compaq will seek to acquire an IT services company and simplify its operations and systems throughout the organisation, Capellas wrote.
Compaq will also cut its structural costs by $US200 million per quarter, including a 20 per cent reduction in indirect manufacturing costs by the end of the year.
A company spokesman wouldn't comment on whether the spending reductions will mean layoffs. The company also wouldn't make any executives available for additional comments.
The memo was a "high-level strategic update" to employees, the spokesman said. "It was a rallying cry to get everyone on the same page. We see this as an overall evolution about how our company is developing."
Stephen Lane, an analyst with Aberdeen Group, said Compaq's new roadmap is being duplicated around the IT industry.
"None of it is surprising," Lane said. "What they're trying to do is consistent with a trend that's been going on."
"What Compaq is trying to do is replicate the IBM Global Services model," he said, to be able to offer customers top to bottom hardware, software, advice and consulting and technical services. "The best thing you can say is that there's a good market for doing that right now."
Lane noted that when Compaq acquired the former Digital Equipment Corp. in January 1998, one of the strongest reasons for the buyout was the inclusion of DEC's IT services departments. Eventually, Compaq split the services up by product lines, but now they are coming full circle and merging the services back as one.
Customers now want to spend less of their own time putting together all the needed pieces of their IT strategies and instead want to buy packages to serve their needs, Capellas said. The change has caused many companies beyond Compaq to make similar changes in their businesses, he said.
"[Customers are] interested in buying basic information technology as a utility," Capellas wrote. "They also want partners who can provide faster time to solution and a more rapid return on their IT investments."
He called the changing customer needs a "clear call to action." To succeed, the company will have to change its outlook on everything from what it sells to how it sells it, while reducing the number of products it offers and simplifying deployments, he wrote.
As part of the new strategy, Compaq will increase its emphasis on offering integrated, repeatable packages that serve customer needs while reducing sales and deployment costs for the company, according to Capellas.
Compaq will now consolidate its three services businesses -- Customer Services, Professional Services and Compaq Financial Services -- into a single services organisation to make them more efficient.
"Our goal is to increase services from about one-fifth of Compaq's revenue today to one-third of total company revenue during the next three or four years," Capellas said. "To get there, we will need to grow about 40 per cent per year through a combination of internal growth, acquisitions and increased software sales."
The company is setting aside $500 million to acquire a services company in the US, while also seeking acquisitions of enterprise services companies in other countries where service must be beefed up.
"We're in the midst of one of the most difficult periods in the history of our industry and our company," Capellas wrote. "We are not alone in facing both external and internal challenges. This market will force many players in the industry to reposition themselves."