Commentary: HP's integration success

By Charles Rutstein, Research Director

Defying huge challenges--and conventional wisdom--Hewlett-Packard has mostly been successful in digesting Compaq. While the company still has challenges ahead in services and middleware, enterprise buyers should feel comfortable putting it on their shortlist.

It's been a roller-coaster couple of years for HP. But as Forrester has consistently predicted, the HP story is stronger than conventional wisdom suggests. What's happened in the year since the merger was consummated?

• Few customers defected. In the months following the merger announcement, executives at Sun Microsystems and IBM licked their chops in anticipation of scooping up swarms of dissatisfied customers. But few customers have defected--not surprising, considering the inertia of enterprise data center purchases. In fact, a recent Forrester survey shows HP leading in server customer satisfaction.

• Leadership was never in question. Dissident shareholders predicted that employees would be left in a leadership vacuum as the management team struggled to get nearly 150,000 employees marching in the same direction. But leadership has been clear throughout--from the executive ranks down to product managers.

• Innovation has proceeded. Some observers feared the loss of the company's famous "invent" culture and the demise of the "HP Way." But recent announcements--like HP's Darwin Reference Architecture--show that the company continues to innovate effectively.

• Messages are improving. Neither Compaq nor HP was particularly good at getting out their message to enterprise buyers, especially when compared with IBM's dominant presence. But HP's new Adaptive Enterprise story, with its "Demand More" tagline, is clearly on the right track.

Not out of the woods yet
OK, so the integration was a success. But does that mean HP is in the clear? Not yet--company executives still must:

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• Return the Enterprise Systems Group to profitability. CEO Carly Fiorina and her team have done a great job in cutting costs--the company now expects to shave about $3 billion in costs by the end of the fiscal year in October. Despite these efforts, however, Enterprise Systems is still running at a loss. And with Dell Computer tugging at the low end and IBM gobbling up the high end, the right path isn't clear.

• Blunt IBM's broad advantage in services. While HP has made strides in matching IBM's offerings of packaged application implementation and hardware support, it still lacks a business-level consulting capability. IBM is pressing this advantage, convincing buyers that data center overhauls are more valuable when coupled with business process change.

• Plug the middleware hole. Last year, HP shifted gears in its middleware strategy and once again embraced a partnership with BEA Systems. But in a recent Merrill Lynch survey of 100 CIOs, 68 percent indicated that they'd prefer to buy a package from one company--a la IBM--rather than a partnership.

Three thoughts for buyers
What does all this dictate for enterprise IT buyers? Businesses should:

• Keep HP on the shortlist. Let's be crystal clear: Enterprise buyers shouldn't have any fear about buying from HP. Though the company's ability to thrive in a somber IT market remains in doubt, the its viability is now apparent.

• But play to HP's strengths. Despite some solid innovation, HP still lags in some product categories. For example, companies that want to build "organic" IT infrastructures can turn to HP for many of the required pieces--but competitors like Opsware, Veritas Software and BladeLogic continue to outperform HP in the important realm of heterogeneous provisioning.

• Use HP's renaissance as a lever against IBM and Sun. A year ago, a buyer's threat to turn to HP didn't hold much credibility. But today, HP is a credible competitor that should be invited to compete for business, even in large Sun and IBM shops.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.