HP merges to serve

The consolidation of the two groups will unify HP's message to customers seeking HP hardware, software, or services, said Ann Livermore, head of the new "Enterprise Computing Solutions Organization." The Enterprise group currently is responsible for server development and sales while services picks up how to deploy these systems.

By combining the two, HP can pitch unified, and potentially more lucrative, solutions to customers where competitors are typically viewed either as service companies or hardware companies, according to Livermore.

"It makes some sense," said Roger Kay, an analyst with International Data Corporation. "They want to be able to provide a seamless experience to their major customers."

And selling services is increasingly important for HP and other companies whose customers include large corporations. For HP competitor IBM, services is the fastest-growing part of the company, Kay said. And Compaq was willing to spend billions of dollars buying Digital so the company could tap into the services market.

Services have the potential to generate a constant stream of revenue that can last for years, Kay said. A company can make money as it helps a corporation plan, specify, install, configure, test, maintain, troubleshoot, and eventually even retire computer systems. "The whole thing implies an ongoing relationship with continuous revenues," Kay said.

On the down side, services remains a low-margin business, Kay said, because it requires a large staff. "It's a people business," he said.

Nonetheless, services are not a business hardware vendors can ignore. Margins are decreasing in hardware sales, so "it's important to have these ancillary sources of revenue that are potentially profitable," Kay said.

"They're following the IBM-driven industry model," said John Oltsik, an analyst with Forrester Research. "There's too much money to be made right now doing services. I interpret this as a first step toward really putting the strategy together for services."

But while Oltsik believes it makes sense for HP to have all its services employees reporting to a single place, he thinks software should be split out into a different organization.

"Software and services are driven in different directions," Oltsik said. "HP buries its software division within services. It just doesn't make sense."

Eventually, HP will likely break the software group back out on its own, he added.

No employees will lose their jobs as part of the consolidation, because the sections involved are "performing quite well for us," Livermore said.

The details of the HP's new organizational structure will be released within the next week or two, Livermore said.