A critical ingredient of a successful merger of Compaq with HP will be retention of customer loyalty. Virtually unprecedented, the Customer Assurance Program aims at minimizing procurement risk and liability.
Core Topic
Hardware Platforms: Server Platforms
Key Issue
How will centralized and distributed servers evolve during the next five years?
On 22 October 2001, Compaq Computer introduced its Customer Assurance Program in an effort to spur sales and retain user loyalty.
As of 22 October, any user who purchases an AlphaServer will have built-in investment protection against future migrations and transitions to the Itanium processor family (IPF). Essentially, the program is enabling users to buy and try new-generation IPF systems from Compaq - or the merged Hewlett-Packard (HP)/Compaq should the proposed merger be completed - either before or after termination of the Alpha server line, with a migration from Tru64 or OpenVMS. Users can receive a money-back contractual guarantee if not satisfied by the IPF upgrade or a trade-in percentage applied to an IPF system. These conditions do not apply to purchases prior to the 22 October launch or to the current family of Intel ProLiant servers.
Compaq's financial results for the recently completed third quarter were poor, as the company was affected by three things: the overall weakness in global IT spending, the tragic events of September 11 and the announced merger with HP. Although many companies have been affected by the first two factors, Compaq uniquely has to deal with the issues surrounding the merger and the concerns whether an investment in Compaq technology creates risk for the customer. Therefore, the announcements of 22 October are designed to give Compaq's server customers reduced risk and greater reward. The highlights of the program are as follows:
1. A money-back satisfaction guarantee for customers purchasing Alpha systems today who expect to make the transition to Itanium processor solutions: Customers should note that the money-back guarantee applies only to the price of the Itanium upgrade and not to the cost of the initial Alpha system. The customer satisfaction is almost unconditional, covering such issues as dissatisfaction with performance, dissatisfaction with functionality or failure of the independent software vendor (ISV) to port. Enterprises considering acquisition of Alpha servers would do well to specify the acceptance criteria in as much detail as possible at the time of the initial procurement. This program does not currently apply to those customers who have already bought their Alpha server and are looking at the Itanium upgrade, but we suggest that those customers pursue similar protection before an Itanium migration is attempted.
2. A product continuity offering if a Compaq server or storage product family is terminated: Compaq has committed that, for a customer acquiring an Alpha ES or GS product after 21 October, if the product family is terminated following the consummation of the proposed merger with HP, the customer will receive a trade-in credit on a replacement product that amounts to 110 percent of the original purchase price. This follows up on a similar offering that Compaq had announced for storage products in early September. The biggest issue we have with this offering is that it is not a money-back guarantee but rather a credit; those clients who are averse to doing business with HP would get no benefit from the trade-in credit. Customers wanting to lower their risk might instead ask for early termination clauses with predefined residual values and avoid "fair market" terminology. Customers who have bought servers from Compaq in the third quarter might inquire about being "grandfathered" as well.
3. Guaranteed trade-in values for current Alpha servers being traded in for next-generation Alpha or Itanium processors: This would better be described as an incremental discount rather than a guaranteed trade-in, as Compaq is not establishing a hard value for the displaced system; rather, it will offer incremental percentage discounts of 10 percent to 15 percent off the purchase price of the next system. Thus, a customer buying a $100,000 system gets a trade-in credit of $10,000 to $15,000, while one buying a $1 million system sees a trade-in value 10 times higher. This program again applies to acquisitions after 21 October, and customers have 36 months from the date of purchase to exercise this option. This program will be most attractive to those customers with medium to high growth plans and a comfort level with doing business with the merged company in the future.
4. Transition leasing options: Special financing and terms and conditions will be available through Compaq Financial Services to ease the transition, including price caps, bridge hardware and credits for professional services, although customers should investigate whether the amount of professional services will be adequate. This should provide customers with predictable expenses through the transition period. Many customers have historically preferred to lease through product transitions, and these clauses could appeal to them in particular.
5. Software-pricing transitions: Compaq is providing some assurances related to Compaq software and will collaborate with third parties to again ease any transitions. Customers with third-party applications should check with ISVs about intent to support the software on Alpha and about when and if they intend to port their software to the merged company's IPF platforms (clarity in the road map and the chosen platform architecture of the merged company will have a bearing).
These programs represent a sincere attempt by Compaq to assuage customer concerns. In an ideal world, customers would prefer contractual language that protects them should the merger not happen, or should the merged company not be aligned with the customers' interests. However, such "no risk" options would be unprecedented in the industry. As it is, the offerings as announced will have a financial impact on Compaq and, subsequently, on the combined company, as the potential liabilities will need to be accounted for.
Bottom Line: The programs constituting Compaq's Customer Assurance Program are world-class if all that a customer is concerned about is a product cycle transition. However, there is an added level of complexity due to the nature (and uncertainty) of the merger (expected at the earliest in March 2002, but no later than June 2002). These programs are much more beneficial for those customers who are confident they will be doing business with the merged company. Installed-base customers, particularly those who have bought Compaq equipment in recent months, should attempt to get coverage retroactively and consider the issues raised here
Gartner's Unix and Midrange Strategies Research Note E-14-8059, G. Weiss, M. Chuba, 27 November 2001.
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