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The eyes of HP are upon her

After the completion of the Compaq deal, a lot of hopes will rest on Hewlett-Packard exec Ann Livermore and her ability to turn the combined services arm into a potent rival to IBM.

Ann Livermore came this close to running Hewlett-Packard when the company went searching for a replacement for outgoing Chief Executive Lew Platt a couple of years ago. The board wound up choosing Carly Fiorina instead, leaving Livermore to run HP's business-customer organization.

Not bad as a consolation prize, but hardly a ticket to Broadway.

Her patience paid off. Livermore, confounding company watchers who expected her to leave for greener pastures, was ultimately rewarded for her loyalty and talent with the task of running HP's burgeoning services group.

Upgrading the company's services arm was going to be a critical component in HP's ability to better compete against IBM and Sun Microsystems. Clearly, that was a big deal--and it's since become even bigger in the aftermath of HP's pending acquisition of Compaq Computer.

After allowing for the inevitable job reductions that will take place post-merger, Livermore will be in charge of a 65,000-person strong division, commanding a work force that's bigger than most companies in the computer industry. What's more, a lot of hopes are resting on her ability to turn the combined services arm of HP into a more potent rival to IBM.

I'll stand HP Services up against IBM any day. On paper, at least, Livermore will have the resources to try to make that happen. But unlike IBM, which enjoys fat margins from outsourcing and hosting, HP's services business will initially rely on deriving the lion's share of its revenue from fixing broken PCs.

Livermore is clearly eager to change that--the company recently snared the services arm of Comdisco--as HP looks to wean itself away from depending on the low-margin PC business.

In a recent interview, Livermore gave us her thoughts about the near- and long-term future for HP in the aftermath of the megamerger announcement.

Q: The state of demand for IT services often provides a hint as to the larger climate. Are you seeing any indications that the current--what should we call it--"IT malaise" is coming to a close?
A: If you look broadly at the tech industry, I have not yet seen many signs that you can say...that things are back on an upturn. If you look at services specifically and the outsourcing industry, then I'd say it's doing very well. In some cases, it's actually counter-cyclical, with customers looking to drive down costs; the current economic environment is driving a lot of customers to outsource.

Let's get more specifically into the Compaq deal. Why do you think the reaction to the announcement has been so critical?
There's a whole lot here to digest and understand. One of the things happening is that anytime you see a deal of this size and strategic importance, it takes a while for the full benefits to be understood from a public perspective and analyst perspective. My belief is that as it becomes clear what are the benefits to customers and shareholders, you will see a turning of the tide in a lot of the comments. When you look at any large acquisition, this is the reaction. It's not much different from what you saw with General Electric and Honeywell.

For your sakes, you should hope it doesn't turn out that way.
(Laughing) We do!

But what do you think it is that folks aren't getting here?
There are a couple of things that are really important that not many people in the press or the analysts have picked up on. When you combine HP's services business and Compaq's services business, the inside customer support services is going to be very large. And customer support is a terribly attractive business to a corporation because it is a recurring revenue stream and generates great profit and cash. Having a really large customer support business is a very attractive thing. Nobody's picked up on that yet.

We'll have executives with all the battle wounds because they've done this kind of integration before. There's tremendous value in having members who have been through this before. On the services side, that's going to be one of the key things--having people who know what to do and not to do.

There are going to be job cuts, according to Carly Fiorina's letter to employees explaining the deal. Will the size of your group also be reviewed with an eye toward cost-savings through job cuts?
This is one of our fast-growing segments, services. As long as revenue growth stays up, we will add to (the division)...As we go through the integration activities, perhaps some back-office or systems areas, not as "customer touching," (will be affected). But in terms of customer-facing resources, that's totally a function of revenue growth. Our desire is to keep the focus on revenue growth and, in fact, add resources. Certainly, there will be some areas of cost savings, but our goal is to try and keep the focus on growing customer contact.

Can you put the services component of the deal in context for me? How important was it as a factor in deciding to acquire Compaq?
The services bid was not the primary strategic rationale. It's very positive for us; the combination of Compaq's and HP's services organizations is a stronger combined team than the teams separately. The way we evaluated this was that it was something that would be a positive for HP, but it was not the reason to do the deal.

When all is said and done, though, you still have a way to go before you can challenge IBM. That is, IBM's services business is a little north of $33 billion, and the combination of HP and Compaq is about one-third of that. So in other words, when you're pitching big accounts, is size going to matter?
When leaders are enthusiastic about the business, it's contagious. In the services business, it's critical to have scale. At $15 billion, we have plenty of scale. From a customer perspective, the difference between $33 billion and $15 billion is not big enough. We're past the point of being big enough. Even without Compaq, we're big enough. We've never seen an opportunity that we couldn't pursue because we were not big enough.

One thing is that from an HP Services perspective, there's tremendous upside. We can contribute to HP; we haven't yet grown our outsourcing business to a huge scale, and there's really strong customer interest. We think we have a great growth opportunity before us.

Does it matter that most of the services revenue will come from fixing busted computers? It's a fact that systems are becoming less unreliable, and this business isn't as big a growth area as, say, outsourcing and hosting, where IBM has been strong.
We have a great opportunity in outsourcing business. In the third quarter, it grew 27 percent in constant currency. That was a lot faster than IBM, though off a smaller base. We had great growth, and that says customers are interested. And we believe that business can grow very fast for us.

How would you compare the services capability that you're acquiring to the expertise you would have acquired had the deal for PricewaterhouseCoopers' consulting business gone through as planned?
Clearly, Compaq's service organization and PwC's are dramatically different. PwC is focused on consulting and has deep, deep experience focused around helping company transformations...When we first looked at buying PwC, we were concerned that we needed to acquire expertise to do the business management of a consulting business, of knowing how to manage a consulting business. But in the last six quarters--every quarter our profitability has improved--we've attracted incredible talent to join HP Consulting. I've been very pleased in our own organic growth. Initially I didn't think we'd be able to attract that much talent that easily.

So you're not looking at Compaq as a booby prize?
Heavens! I think they're a very strong business. If the merger goes through, we will be very pleased to have them.

Are there still gaps in the services coverage that you might later want to fill through acquisition?
We will continue to look at focused acquisitions in the consulting arena to bolster our outsourcing capabilities. Our Comdisco acquisition is still pending, and that is going to help to fill out our capabilities.

IBM can say, "Look, not only can we offer the hardware and software, but we've got this as well." In essence, soup to nuts. What's HP's thinking about how to best showcase its services arm in this new world order?
If you go to almost any corporation today, the problem is that they have a current IT workplace and want to move to a new environment. They're always dealing with the hassle of moving from one to the other. Our value add? We can plan, design, migrate, integrate and run while they're dealing with the current environment and moving to the new environment. Then we'll drop down to specific areas they want to deal with.

What are going to be your top agenda items once the deal is completed?
Nos. 1 and 2 are absolutely clear. No. 1 is to keep the focus on customers. The most important thing I live and breathe for in HP is focusing on customers and doing the right thing for them. The second thing on the agenda will be to build on market momentum. Compaq's services business is growing well--so is ours. The third point is to look where we have synergies to drive to a more competitive cost structure.

During this transition, do you expect IBM to try to sow FUD (fear, uncertainty and doubt) among customers?
Absolutely. That's what competitors do. The whole competitor battlefield is all about creating FUD. What I ask our customers for is to judge our services organization based on our actions and the service level I deliver to them. I'll stand HP Services up against IBM any day.

So, let me ask an operational question: What's going to keep you up at night? That is, what are the sorts of things that you fear might sour a successful integration?
This deal is very positive overall for HP's services business, and what I'm after is that our charge ends up being positive for shareholders, customers and employees. The first is to keep separate the integration planning from the people who drive the business every day. We'll be very, very diligent at having some of our people doing planning so that we're ready to hit the ground running when the flag drops. And the rest of that will be to focus on the business while we wait for approval. The tough part is that Compaq is still now my competition.

OK, another operational one for you: In the reorganization, you received services, while Peter Blackmore, who now runs services over at Compaq, wound up with the infrastructure group. How were those assignments determined? Was it an issue of to the victor goes the spoils or something like that?
Peter Blackmore's been in charge of all sales and services at Compaq. He is a very accomplished and strong business executive. We believe his experience with enterprise customers positioned him very well to focus on enterprise solutions. He's one of the top executives in the IT industry.

You're going to be running a 65,000-person division that's larger than most companies in the world. You were considered as a candidate to run HP after Lew Platt announced his resignation. If you conduct yourself well on this new watch, would you hope to be considered for a CEO position somewhere down the road?
I have never, since my first job, speculated on what my next job would be. I focus all my energy on my current assignment, and that's served me very well. It's just something I chose never to waste energy on this. I have to make this good for my people; employees need to wake up and feel enthusiastic about this. My belief is that when leaders are enthusiastic about the business, it's contagious. I think this deal is very positive overall for HP's services business, and what I'm after is that our charge ends up being positive for shareholders, customers and employees.