Opinion: What Went Wrong at HP?

With HP’s high-flying CEO Carly Fiorina departing, the company’s woes are well known. But how did a firm with such a storied history and vast assets get headed down the wrong path, and what do they need to do to set their course straight?

As the author of this piece, I’ll state that I
have never worked for HP or for any of its acquisitees, but I’ve kept a
close eye on the firms for more than 20 years. I’ve delivered hundreds
of presentations at user group events worldwide, written reams of copy
on the firms, and have gone out of my way to be fair and objective when
dealing with the companies. I’ve also invested substantial time and
effort in the process. People inside HP may view things differently,
but here’s what this expert outsider opines about HP and its current
state of affairs.

The Coronation — and Abdication — of Queen Carly

Carleton Sneed Fiorina took the helm at HP in 1999, having been deemed
“Perfect Enough” for the job. Six years later, the decision proved to
be a definite “backfire.” On 9 February 2005, HP’s Board of Directors
requested Fiorina’s immediate resignation, allegedly for her failure to
execute her corporate strategy in a timely manner. Since she resigned
rather than being officially terminated, she received $45M USD worth of
stock options and severance pay on top of her regular salary and cash
bonuses after five years at the company, an HP spokeswoman said.

During her tenure at HP, Carly drove the share value of HP stock down
by ~58 percent, and failed to return the firm to growth mode. She also
blithely ignored the rationale that led to HP’s acquisition of Compaq.
In early June 2001, about two weeks
before the “Alphacide,” then-Compaq-CEO Michael Capellas penned a three thousand word missive
advising the entire Compaq workforce that in order to compete with IBM
at the high end and Dell at the low end, Compaq would have to
“reinvent” itself in a 180-day timeframe. The emphasis of the memo was
on commoditization, industry standards, focus, and agility.

Two months later, Michael and Carly started talking seriously about a
merger. Only by combining forces could the firms create a corporation
endowed with the size, scope, and clout to take on IBM. The
negotiations took place in deep secrecy, and in a September 4
teleconference the two companies announced what they termed a “definitive
merger agreement” that would create an $87 billion technology colossus — an
entity capable of competing on a more equal footing with IBM. The
Silicon Valley Soap Opera began, and the acquisition of Compaq was
successfully completed on 7 May 2002. May 7 represented the day a good
idea was cast in stone. It also represented the initiation of an
absolutely atrocious execution strategy.

Invent — or Repent?

Capellas and Fiorina agreed that achieving parity with IBM was
instrumental to the consolidated firm’s long-term future. Compaq
invested very little in R&D; HP spends close to $4B USD on its HP Labs
operations. According to one former HP Labs engineer (name withheld by
request) who bailed out in 2003, competing with IBM slipped Carly’s
mind. “I remember the first time [Carly] walked into the HP labs. She
said that our new company slogan was “Invent.” Then she told us that
the technology industry would never again be as exciting and profitable
as it was in the ’90s — I knew from that moment that HP’s best days were
behind us,” the engineer lamented. Carly was a marketing person put in
change of engineers, a person who cared nothing about the art and
beauty of technology. She just wanted saleable stock to bring to
market, the engineer opined. And we all know what happened to HP’s
share value during the Fiorina Fiefdom.

Blown Away By Big Blue

IBM sells servers, storage, software and services. And they do a damn
good job of it. One would expect that HP would attempt to emulate IBM
in this regard, but such expectations proved way off base. Instead of
jettisoning a flagging PC business and concentrating on emulating IBM,
HP let the StorageWorks franchise spin down (Eckhard Pfeiffer did a
good job setting StorageWorks up for failure.) Things went from bad to
worse when HP took over.

HP pressed on with the Compaq strategy, which involved trying to duke
it out with Dell in the PC space. Concurrently, HP branched off into
bold new “ready, shoot, aim” ventures replete with daunting entry
barriers. IBM built servers, HP tried to build a home entertainment
franchise. HP resells iPods and is now a player in the plasma TV
business: a realm replete with well-entrenched rivals, while IBM
continues to dominate its carefully chosen and well-defended turf.

Building the Perfect Bureaucracy

HP has succeeded admirably in one regard: the firm has demonstrated an
uncanny ability to build a bureaucracy more rapidly than the United
States government. For all its talk about business agility and adaptive
enterprise technology, HP can make prudent midcourse corrections at the
speed of an aircraft carrier, not a BMW. The firm can, however,
reorganize at a moment’s notice, and has honed this skill to the same
extent that Digital and Compaq once possessed.

Marketing: Style over Substance

The firm has also imposed rigid consistency where it is needed least.
Where HP should be dynamic, it is static. Take marketing communications and message delivery: HP spends
some ~$300 million per annum on marketing and marketing communications.
Where these marketing dollars go is only known to HP. The firm just
sacked an employee who was without a doubt the firm’s most effective
message delivery system, which probably saved HP $150K or so per
year. The opportunity cost inherent in lost sales opportunities is
impossible to quantify, but the price will likely exceed the $150K
figure by several zeroes. Perhaps the sacking was due to the fact that
the employee in question failed to adhere to every aspect of the
132-page document HP created to instruct presenters on how to create a
“One Voice” PowerPoint presentation that emphasized style at the
expense of substance.

Change in the Wind?

Effective 14 February, and in a personal decision totally unrelated to
Ms. Fiorina’s ouster, HP’s senior VP of marketing Allison Johnson
announced that she was leaving HP to take a top marketing post at Apple
Computer. She will become VP of worldwide marketing communications,
reporting to CEO Steve Jobs. At Apple, Ms. Johnson will be responsible
for Apple’s global advertising and related efforts. HP Chief Marketing
Officer Mike Winkler said that for the time being, the leadership of
HP’s corporate marketing team will report to him until a successor is

At HP, Ms. Johnson served as VP of global brand and communications,
before being named senior VP as HP launched its plans to buy Compaq. At
HP, Ms. Johnson’s role stretched beyond marketing under Fiorina. One
former co-worker described her as the “prime minister” of HP. Ms.
Johnson was one of Fiorina’s closest advisers at the company, having
led the firm’s PR campaign during the turbulent proxy battle over the
acquisition of Compaq Computer Corporation She also engineered the “+HP
= everything is possible” advertising campaign that followed HP’s
acquisition of Compaq. It will be interesting to see if Ms. Johnson’s
successor takes a new approach, Case in point: HP’s Business Critical
Systems (BCS) franchise, which builds high-end enterprise servers based
on the Itanium architecture, reported a whopping 1.8 percent profit
margin in 1FQ05. That’s a half percent lower profit margin than the PC
Group reported in the same period. If HP and Intel don’t get their
Itanium act together right now, market as if the firms’ mutual success
depends on getting into customers’ faces, using a pair of pictures to
explain why Xeon64 and Opteron are recent upgrades to 25-year-old
technology, and educating customers about the added-value of Itanium,
the companies will learn a very painful lesson and HP may well be
forced to abdicate the high-end space dominated by IBM. Time will tell
if HP opts to take an aggressive, proactive, FUD- busting stance.

Upper Caste or Cast Off?

It is my opinion that HP-heritage employees are held in much
higher regard than Digital or Compaq expatriates. The expatriates are
far more vulnerable to “rightsizing” than those who have never fallen
astray from the HP Way. And if industry rumors are correct, HP’s
workforce underwent a significant quarterly decline during its 1FQ05
ended 31 January 2005. Significantly, HP made no mention of current
headcount when the firm reported its 1FQ05 financials on 16 February.
The firm did, however, promise more “rightsizing” in the current
quarter and beyond.

The HP Way: Strategy or Stratego?

Stratego is a two-player board game board game from Milton
Bradley. HP has far more than two players, but numbers of people at HP
are responsible for corporate strategy; which, like the board game,
involves lengthy conflict with rivals and requires skillful planning.
The question is WHO are the people at HP tasked with strategizing?

According to the HP Web site, Executive Vice President and Chief
Strategy and Technology Officer Shane V. Robison is responsible for
shaping HP’s overall corporate strategy and technology agenda, and
steering the company’s nearly $4B USD annual research and development
investment. All of the company’s senior CTOs and the director of HP
Labs report to Robison. He also leads the company’s strategy and
corporate development efforts, including mergers, acquisitions,
divestitures and partnerships. Clearly Shane plays a key role in
calling the shots at HP; we can only wonder who beyond Shane and the
Board of Directors are involved in developing and executing corporate
strategy. When you’re formulating and executing strategic decisions
that affect approximately 150 thousand employees and your company’s standing in the IT
industry, you’re not playing games. The entire strategic chain of
command at HP warrants a stringent performance review, as things most
certainly are not going according to plan.

Many Challenges

All of the above consists of a combination of factual information and personal
opinion–and one rumour about headcount reduction. It is not my
objective to malign or disparage anyone at HP. Perhaps things look
different from the inside, but from the outside, there is plenty of
justifiable cause for concern about the future of HP. The firm’s latest
financials demonstrate that the areas in which HP must concentrate to
compete with IBM are largely weak. HP’s Business critical systems (BCS)
revenue declined 2 percent and networked storage revenue was down 1
percent. Within BCS, HP-UX revenue growth of 3 percent year-over-year
was more than offset by NonStop revenue declines of 19 percent and
ongoing, fully expected, declines in AlphaServer sales. In 3FQ04,
StorageWorks revenue declined by 15 percent, this slowed to 10 percent
in 4FQ04, and the decline nearly halted in 1FQ05. Competitors such as
EMC have captured significant market share, so storage still faces an
uphill battle. HP’s software business consists largely of OpenView and
OpenCall management software, and a subset of the components necessary
to bring the Adaptive Enterprise strategy to market. HP lacks a
middleware strategy, and thus is at a further disadvantage against

And a Few Opportunities

That said, HP possesses the services capabilities it needs to compete,
and the financial resources to flesh out its software portfolio, but
nobody outside the installed base seems to be aware of these assets.
For example, the OpenVMS OS franchise, including hardware, peripherals,
add-ons and services, represents nearly $4 billion in high-margin (>50
percent) revenue and is arguably the only “proprietary” OS in growth
mode due to its bulletproof characteristics. Some 400,000 customers run
the OS, yet HP refuses to aggressively market this cash cow. HP and its
new CEO face a daunting challenge: deciding where the firm should best
allocate its resources to delivering on the strategy that Michael
Capellas and Carly Fiorina formulated almost half a decade ago.

About the author:
Terry Shannon has well over 20
years experience in the IT industry as a journalist, analyst, and
consultant. A frequent speaker at IT events worldwide, Shannon has
delivered more than 300 keynote and plenary presentations, and is the
author of one book and hundreds of articles in the IT trade press. A
former military intelligence analyst in Viet Nam, Mr. Shannon has an
additional 10 years hands-on experience operating, programming, and
managing hardware and software from a variety of vendors. He currently
publishes the Shannon Knows HPC subscription-based newsletter and
maintains a web site at http://www.shannonknowshpc.com. He can be
reached at [email protected] .


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