On Oct. 3, Meg Whitman, Hewlett-Packard’s (HPQ) current and fourth chief executive in the past seven years, will meet with Wall Street analysts. Investors, customers, and employees better hope Whitman starts channeling Lou Gerstner, the former IBM (IBM) chairman who helped rescue that troubled icon.
HP, once one of the most trusted corporate brands, is in a similar weak position as Big Blue was in the early ’90s. As happened at IBM, Whitman has announced massive layoffs and a consolidation of facilities worldwide. But so far she has not indicated if the company will sell off assets or exit markets to secure its future as a more focused organization.
At this stage in HP’s 12-year decline, it will take more than slimming down the workforce and selling off assets for the company to succeed. I believe that by the end of the decade (if not before), HP will either become a holding company or be broken up and sold off—a fate Gerstner saved IBM from. HP’s only chance—albeit a slim one—would be to get back to its roots and focus on innovation and invention.
(Full disclosure: I have advised HP in the past but have had no relationship with the company for the last several years.)
HP’s founders understood the value of innovation. The company succeeded, in part, by empowering small teams of developers to create innovative solutions. A team of 10 people collaborating with Canon created the revolutionary LaserJet printer. Six engineers designed HP’s successful blade server. During those years, HP looked a lot more like Apple (AAPL) and Google (GOOG).
Today, HP is sitting on debt of just under $30 billion with a market cap hovering around $34 billion. The implication is that HP has limited options. It is no longer in a position to acquire its way to health.
Even if HP could buy other companies, its track record isn’t good. Over the past seven years the company has paid almost $72 billion for companies in all areas of IT. (This figure does not include privately held companies.) While several of these deals worked well, including 3PAR (storage management), 3Com (networking), and Mercury Interactive (testing software), many more never lived up to their hype: Bluestone (software), Verifone (electronic bill payment systems), and Indigo Systems (commercial printing), to name a few.
Here are the reasons why I believe HP will not be able to come back from the brink:
Profit comes from software.
There’s simply not enough profit in hardware, which accounts for most of the company’s revenue. Look at IBM and Apple vs. HP and Dell (DELL). (Apple customers buy hardware products, but they’re really paying for software innovation.) Since 2000, HP has spent more than $20 billion to buy more than 30 software companies, yet it has been unable to create a viable software business. For the first nine months of this fiscal year, software revenue was $2.9 billion. Ouch. Many of the companies HP purchased either were abandoned or never lived up to their promise. Bluestone, which HP bought in 2001 for $470 million, was folded and its assets sold to Oracle a few years later. In the third quarter, software was one of the rare growing and profitable areas for the company, but it contributed only 3 percent of revenue.
To be the largest technology provider, you have to fill the role.
With the $25 billion acquisition of Compaq in 2001, HP was able to create the illusion of scale and proclaim that it was the largest IT company in the world. That honor brings a huge burden. The biggest enterprise and consumer technology company must have a broad portfolio of hardware, software, and services with well-thought-out roadmaps for the future that customers need—for every product, region, and vertical market. HP still has major holes in its product strategy, including the lack of core database technology, as well as a services organization that has failed to provide high margin, strategic consulting. At the end of the day, a technology leader has to own the foundational assets that give businesses and consumers the confidence to become loyal customers.
Create a vision and execute.
It is easy to buy companies; it is much harder to consistently execute a strategic plan. The list of HP acquisitions is logical for the most part. The company purchased complementary printer companies, bought its biggest PC rival and purchased important software and services leaders. Management—pick any of the last few CEOs—simply failed to leverage those acquisitions. Now HP is trying to follow IBM’s lead by focusing on general technology requirements: cloud computing, information management, and security, but without the focus or commitment to R&D and high-margin business models. In cloud computing, the company has at least four different versions—a public cloud, a private cloud service, a cloud based on a hardware appliance, and a cloud designed on the Palm technology now called Gram.
It’s about the bench
One of the attributes that made HP a successful company had been the depth of its management team. Until Carly Fiorina was hired as CEO in 1999, all HP’s CEOs and senior leaders were life-long employees. Over the past decade, the ranks of internally grown talent began to shrink. Executives from each new acquisition would suddenly supplant home grown talent, what I call the shiny new toy syndrome. And when Mark Hurd suddenly was removed as CEO, the HP board felt that it had to go outside once again. Even the most successful internal managers—running businesses with revenue over $10 billion—were passed over.
Setting a course that is predictable
While customers want their business partners to support important emerging technologies, they also need predictability. HP’s strategy has been in a constant state of turmoil for too long. It purchased Palm in 2010 for $1.2 billion and entered the tablet market only to discontinue the product within a few months. The list of reversals is too long to go on here.
Is there a path forward for HP? The most obvious strategy would be to create a consumer company that would include PCs, tablets, and printers. While its success would not be guaranteed, it would free HP from this business unit that is a drag on the future.
HP is beginning to invest a lot of its future behind a new cloud computing strategy. With its assets in servers, networking, and services it could rebuild the company around cloud computing. However, that would take a major restructuring and require an even more significant software overhaul.
Even this thin ray of hope is dimmed by the current reality of a company that seems to be out of ideas. HP is no longer the focused, innovative company it had been in its earlier years. The company’s leadership (the board included) seems confused about how to build a strategy that is different than trying to copy both IBM and Apple. Unfortunately, HP is doing just that but without the money, time, or talent to pull off a comeback.
