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PC makers push service package deals

The beleaguered PC industry is taking a cue from McDonalds, bundling hardware and services into computing "value meals."

The beleaguered PC industry is taking a cue from McDonald's, bundling hardware and services into computing "value meals" that offer better deals for customers and steadier revenue for PC makers.

With PC manufacturers facing one of the worst years ever for hardware sales, services are increasingly becoming the new lifeblood of the industry, analysts say. Not only can services secure more hardware sales, PC makers have become more adept at coming up with ways to make the services industry follow the same business patterns as does manufacturing.

Dell, for instance, announced Monday that, for $40,000, it will provide all the hardware, software and services for a Windows 2000 server cluster under its Infrastructure Accelerators program.

"It enables the hardware sale," Chief Executive Michael Dell said in September. "Services now represents 10 percent of our revenue."

Many of the techniques adopted in high-volume PC manufacturing are being retrofitted for services. Help desk groups are being moved to India--a tactic similar to how manufacturing has moved to countries with lower labor rates. Standardized service packages at set prices are being developed for particular tasks. Guesswork for both the customer and provider are eliminated.

"It's an objective of Dell management...to turn services into more of a commodity business," said Brooks Gray, an analyst with Technology Business Research. "In the past few weeks, (Dell) has become more aggressive on selling services."

Dell's move reflects broader industry patterns, with PC makers offering smaller customers generic service packages and bidding against each other with customized proposals for large companies.

"A few years ago, you had a little bit more of a plain vanilla pricing and options program" for large accounts, said Jeff Lynn, vice president and general manager of Compaq Global Services. "Now, you come up with a customized approach."

Compaq on Monday announced a five-year, $95 million outsourcing agreement with GE Aircraft Engines in North and South America.

Taking the services challenge
The services industry, of course, covers a broad swath. On one end of the spectrum, companies such as IBM and EDS provide consulting services that lead to the creation of complex global networks.

On the other end of the spectrum, local computer dealers offer to host Web sites, fix computers and serve as the IT support desk for small- and medium-sized businesses.

Although margins on consulting projects can be higher, PC makers are largely aiming at the more pedestrian end of the market. For one thing, help desk and support services can provide recurring revenue streams.

In a similar vein, Microsoft, through its .Net effort, will market generic, easily replicated online services.

Just as important, lower-end services can be provided efficiently. A centralized help desk can serve as the computing backbone to thousands of small businesses. Support personnel can be trained relatively rapidly. By contrast, consulting projects require elaborate business proposals and armies of MBAs.

Though Dell's services effort was once more secretive, the company has become more aggressive of late in its attempts to push packaged services.

Who's who in the field
Technology Business Research predicts the total services market for 2001 will reach several hundred billion dollars, and the market can only go up as companies decide to place the management of most of their IT infrastructure with third parties.

IBM was out early in the game and is, by far, the largest services provider with some 150,000 employees and $33 billion in revenues for fiscal 2000.

The proposed combined services organization that would result from the merger of Hewlett-Packard and Compaq Computer would rank third, behind IBM and EDS. The new organization would have 65,000 employees and garner $15 billion in annual revenue.

Dell is No. 4, according to Technology Business Research. It took in some $751 million in service revenue in the first quarter of this year and $772 million in the second quarter. As a result, Dell's services revenue climbed to 10.1 percent of its overall revenue in the second quarter, up from 9.4 percent in the first quarter.

The company's philosophy has been to keep services offerings tightly packaged with hardware offerings, said IDC analyst Roger Kay. That means Dell "has room to grow there," he said. "They could become a bigger service player."

The road to profit through services, though, is full of potholes. Dell unveiled Dell.host, its Web hosting and services unit, last February. But the deal angered Verio, which had partnered with Dell on Web hosting. This year, Dell struck a deal with Sprint to offload the hosting business.

Dell isn't the only PC maker seeking to provide packaged services to its customers.

Analysts say Compaq and server maker Sun Microsystems are also selling service bundles.

Compaq recently introduced Access on Demand, a new service effort aimed at medium-sized businesses that need help in running their internal computing operations. Compaq is betting that companies will budget for services the same way they do for utilities, cutting back services as business needs require.

"Customers want computing to be a variable cost," said Peter Blackmore, executive vice president of worldwide sales and services at Compaq. "The hardware cost is the tip of the iceberg."

Some of Compaq's new service packages for companies outside the Fortune 1000 include data migration, asset recovery and automatic backup. Prices start at $99 per desktop.

"Normally, the larger businesses like a customized set of support services. The medium-sized business is...reached with packaged services," Blackmore said. "It lets them outsource the plumbing of their computing environment."

In some ways, Compaq's service group seems specifically geared toward providing these types of services. Of the 38,000 employees in its service division, only 12,000 work in system integration consulting, said Blackmore. The balance focuses on customer service issues.