Sept. 11, 2000

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Compaq Takes Direct Approach To Profitability

By Paul McDougall

here may be no better example of how IT vendors are themselves reaping the benefits of information technology than Compaq. Faced with decreasing margins and rising costs in its commercial PC unit, the company earlier this year embarked on an ambitious program to move much of the business over to online direct sales to cut costs, reduce inventories, and increase user contact. The results so far: the $62 million operating profit posted in the second quarter, ended June 30, marked its first time in the black in several quarters. "What we did was engineer no less than a fundamental change in our distribution model," says Compaq senior VP Michael Winkler, who oversees the company's commercial personal computing group.

Compaq's move to direct sales began in January, with its $370 million acquisition of the build-to-order manufacturing assets of Inacom Corp., an Omaha, Neb., value-added reseller that has since filed for bankruptcy. Winkler says the prospect of using Inacom's custom configuration and automated order-tracking systems to build a direct-sales capability is what drove the deal. "The best way to get the assets we needed was through the Inacom purchase," says Winkler, adding that he viewed Inacom's custom-assembly operations as "best in class" in the computer industry.

But buying Inacom's operations--renamed Custom Edge after the sale--was just the first step in Compaq's campaign to build an Internet-based sales infrastructure capable of serving an array of customers, from small businesses to giants like American Airlines Inc. and Xerox Corp.

For starters, Winkler says, Compaq had to create a system that could generate direct sales without alienating resellers--the lifeblood of its channel sales. To that end, the company implemented its Partner Direct program, which lets users place orders on the Web with Compaq, while installation and service is handled by the local value-added reseller, who gets a commission on the sale. "We needed to create a hybrid business model where customers would get the lowest cost by buying direct but still get the service they required from the VAR in their community," Winkler says.

Compaq also needed to create a system capable of serving large business accounts by feeding product and pricing information directly into their Ariba Inc. or Commerce One Inc. procurement programs. With that in mind, Compaq IT staffers set out to integrate Inacom's Vista information and E-commerce systems with the company's own Web-based front end, which Winkler says was no small challenge. "We had the combination of not only an entirely new culture and organization that we were integrating, but entirely new systems, wholly different information-management organizations, and entirely different business processes," he says. How tough was it? "It was the hardest thing in the world you might ever want to undertake," Winkler says.

However, strict adherence to project-management principles helped the company effect the integration with minimal disruption to existing operations. "We had to make sure that our processes were sound and that we had a good change-management process in place," says Vallerie Parrish-Porter, VP for information management in the commercial personal computing group. One key, says Parrish-Porter: Change engineers generated daily operational reports for all divisions. "It's impossible to overcommunicate when you are making changes this radical," she says.

Compaq says the efforts have been well worth it. Custom Edge and Partner Direct generate 40% of company sales, making the goal of 60% direct sales well within reach. By integrating the system's front end with back-end procurement systems, Compaq can build to order more efficiently and reduce inventory--a big part of why the unit is now profitable. "When you can take out inventory, it's like putting money in the bank," Winkler says.

Industry watchers call the turnaround striking. "The Inacom purchase and going direct has been a huge success story for them," says Lindy Lesperance, an analyst at Technology Business Research.

Looking ahead, Winkler says, the system will evolve to include more offerings from third-party vendors, noting, "We're not done with this investment yet."

Return to main story, "IT Looks To Its Own Expertise"

Illustration by Jeffrey Fisher

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