InformationWeek

November 15, 1999

Hewlett-Packard's Makeover Starts Turning Heads
Revamp touts new CEO and ambitious Web-service initiatives

By Paul Korzenowski with additional reporting by Martin J. Garvey

ot very long ago, it wasn't hard for Hewlett-Packard shareholders, customers, and industry observers to pick apart the company's performance and strategy. Lackluster fiscal quarters and a dearth of innovative offerings seemed to define the hardware company, even as rivals such as IBM and Sun Microsystems were quickly becoming the darlings of the dot-coms. But HP has been hard at work changing its image: In the last few months, it has disclosed plans to spin off its testing and measurement operations as an independent company in order to focus on its core computer business; launched an aggressive E-services campaign; and appointed a new president and CEO, Carleton Fiorina, formerly president of Lucent Technologies Inc.'s global service provider business. Former CEO Lew Platt remains chairman.

Some analysts say the company's efforts have started to pay off, though it still faces challenges. "While other vendors champion technology, HP focuses on the whole package for E-business--technology and services," says Tony Iams, a senior analyst at D.H. Brown Associates. "That's compelling vs. Sun, which is just coming up to speed with services." But, says Iams, it remains difficult for HP to position itself as an Internet innovator compared with aggressive IBM and its vaunted Global Services Division.

Yet even a short list of HP's product and technology introductions during the last few months offers insight into the company's direction moving forward. Its e-speak middleware, introduced in May, is designed to help companies create and deliver services over the Internet via agent-based interactions. Last month, HP also teamed with 24 communications companies to deliver mobile services based on Nokia's Wireless Application Protocol Server and e-speak. In September, the company enhanced its HP-UX operating system to include e-speak and WebQoS management, which helps companies ensure that Web customers receive acceptable levels of service. "Quality of service will be one key factor in whether a company wins or loses on the Internet," says Anne Livermore, chief executive and president of Enterprise Computing Solutions.

Anne Livermore Photo by Shelley R. Harrison HP customer GetThere.com, a travel-planning Web service, recently expressed interest in taking advantage of e-speak. "Travel transactions are complex, and require making decisions based on multiple criteria," says John Metcalfe, GetThere's VP of marketing. With e-speak, a service can be created that checks on your flight, rebooks your car if the plane is late and your original rental agency's counter will be closed, and alerts your spouse that you'll be late getting in, he says. "That's all the stuff a travel agent can't do."

One positive sign that reflects the strides HP has been making is that revenue for its services business, which is increasingly focused on E-business opportunities, has grown 9% in the first three quarters. HP plans to hire 1,000 more services employees.

Hardware plays an equally important part in the company's E-services initiative. In April, for example, the vendor launched its HP 9000 N-Class Enterprise Server, a midrange Unix system for Web commerce that offers high availability and scalability features; it also can run HP-UX on PA-RISC CPUs and the upcoming Windows 2000 operating system on Intel's IA-64 chips. It followed that up with the launch in September of its entry-level HP 9000 L-class Unix systems, which, like the N-Class, offers application programming interfaces for e-speak, WebQoS, and PA-RISC/Intel IA-64 compatibility. HP plans the L-class to be the first of its Unix line to support access to Internet information via mobile devices over wireless connections.

Analysts say HP's third-quarter results for its Unix server business were solid. "In the last quarter, HP did a good job increasing unit shipment of its Unix servers--they were up 16%," says Kelly Spang, an industry analyst at Technology Business Group. "But because of pricing pressures, revenue increased only 5%." Iams predicts the L-class systems will help HP increase market share in the Unix space. "With the L-class, HP offers capacity guarantees even at the low end." At the same time, HP said it saw particular strength in Windows NT NetServer revenue, and HP expects its NT server business to grow at the high end.

The company has been making inroads in its partnerships with dot-com companies, acquiring Internet companies such as Open Skies Inc., which sells airline tickets online. It's also pursuing some creative financing programs. For instance, it participates in revenue-sharing models with Internet companies; HP supplies the infrastructure in return for a share of the profits. In these relationships, HP says it's focused on making sure the customer maximizes its hardware investment to help grow its business; it's not simply intent on selling more hardware.

"The companies that win have technical innovation and business-model innovation," Livermore says. "We're creating loyalty to HP when we help businesses create their wealth."

By the time HP disclosed its third-quarter results in August, feelings about the company were more positive. HP had a sterling third quarter, with 11% revenue growth, vs. 3% in its second quarter and 1% in its first quarter. It lowered the growth of operating expenses, which grew just 4% this quarter, compared with an 18% rise in the previous quarter and a 13% hike one year earlier.

Storage revenue took a hit, though, as HP shifted away from EMC as its supplier of enterprise storage systems. "Well before the breakup with EMC, it was clear that HP wanted to go its own way," says Illuminata analyst John Webster. "They saw opportunities, especially in the NT space, they didn't think they could exploit with EMC."

The vendor says growth was solid across its commercial PC lines in the third quarter. Webb McKinney, senior VP and general manager of HP's Business PC organization, says that because the PC business has low margins, "it must be run extremely well. The PC group leads the way in driving cost out of the business models." To develop a competitive cost structure and offer lower prices, HP has focused on creating a more efficient supply chain, with only about 2-1/2 weeks of inventory in transit.

The company recently launched three new buying models. These include HP Prime, a direct PC sales initiative for large enterprises that provides consulting, acquisition, and maintenance services and a custom Web site for access to online consulting, ordering, tracking, purchasing history, and system evaluation; and HP Business Store, an online site where small and mid-size businesses can custom configure PCs and track orders.

But HP isn't neglecting its channel partners. "The trick is making sure the business models are focused on where they add value," says McKinney. HP's Partner Prime uses partners to service customers that want to use offerings from many vendors or who need extensive third-party integration.

Steve Wolfcale, director of network operations for the Skil Bosch Power Tool Co., a Chicago company with about $700 million in global sales, says he buys HP NetServer systems from a reseller because it offers the resources he needs. But he likes the strong ties he has to HP through that contact. "HP has been great at bringing to bear anything we need," he says. "They bring us the total picture of a lot of technical resources others wouldn't even talk to us about."

There have been some rough spots in the bright picture, though. CEO Fiorina said in October that HP would have trouble meeting its revenue growth goal of 10% to 13% for its fourth quarter because of poor PC and server sales in North America. Wall Street pounded the company's stock, which dropped as much as 40% from about $116 per share when Fiorina took the helm in July. The company will report its fourth-quarter results this week.

Fiorina has begun to put her stamp on the business, changing HP salespeople's salary structure from a set pay to compensation based on performance. Analysts see this as a good sign. "Let's face it: If you're an aggressive salesperson and think you can blow out your numbers, you want to work in a place where you'll be rewarded for that," says Michael Kwatinetz at Credit Suisse First Boston Advisory Partners.

The new CEO has also made a number of management changes. Livermore remains in charge of E-services initiatives, and now also the company's services, financing, and consulting businesses, while Duane Zitzner has assumed the titles of president and chief executive of HP's Computer Products, leading the company's Unix and NT server products, enterprise storage, and software initiatives. Analyst Iams is hopeful but cautious about HP's future. "Pieces are in place, there are no holes in the solution, but mind share counts for a lot."

Photo by Shelley R. Harrison

Go on to the next story, "IBM's Mixed Third Quarter Reflects Market Changes ."

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