HP's Happy Talk: Enough Already - InformationWeek
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8/19/2011
03:00 PM
Art Wittmann
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HP's Happy Talk: Enough Already

The next two to five years will be difficult for HP, as it tries to transform itself into a consulting and high-end services business like IBM.



HP stole the headlines Thursday with its plans to divest its personal systems business and its intent to acquire enterprise content management and search vendor Autonomy. HP also revealed that it's giving up on webOS, the fruit of its $1.2 billion Palm acquisition last year, after fielding only one device that runs on the latest version of the operating system. All of this news came along with its fourth-quarter financial results, which, while not terrible, were below HP's guidance and just met market expectations.

Ever since IBM's masterstroke sale of its PC business to Lenovo in 2004, there has been a drumbeat that HP should do the same. But as recently as March 14, HP and its new CEO, Leo Apotheker, were touting the benefits of being the only major vendor that could offer a soup-to-nuts set of systems, from end user devices up through the data center. HP wasn't going to sell the PC division; it was going to double down on it. The reason to be in that business, at least according to HP in March, was to get its newest crown jewel—WebOS--into the hands of 100 million users.

Whereas the March presentation was delivered at an event, held in San Francisco and intended to show an energized HP ready to take on the world, yesterday's news came on a simple earnings call, somber and without video. A reassuring Apotheker spoke in a monotonous yet comforting voice, seemingly calibrated to show that HP is in good hands. He took turns speaking with HP's veteran CFO, Catherine Lesjak, who laid out the numbers for each division and stated where HP made and missed its targets. From Lesjak's point of view, the fault lay mostly in a bad world economy, tsunamis in Japan, and a range of other issues mostly out of HP's control.

As I took a few minutes to digest the performance, the emotion I most felt was anger. How is it possible that HP had gotten things so wrong in March? Then, the most important thing was how webOS would let the company build an HP cloud that would include its own app store tuned to users' needs, so that one device--a webOS device--could satisfy business and personal requirements alike. No one, said Apotheker in March, knew both the personal and business needs of individuals like HP did.

And then Thursday, there he was--just six months later and after fielding just one WebOS device in July--calling it quits on the platform. Was HP even serious in March? Or was that presentation, which also underscored HP's intent to beef up its software, security, and management products, nothing more than an attempt to put a happy face on the pile of goods former CEO Mark Hurd had left behind?

In discussions on Friday with HP, the claim is that many of the ideas presented in March are still driving the company. While webOS tied to a hardware platform is dead, webOS as piece of software still has value, according to HP, letting the company make good on its March claim that there's value in knowing both consumers and businesses. How HP will make that happen without the full backing of its personal hardware business is hard to see. And while HP says the vision it presented in March is still valid, aspects of it have changed dramatically. The rationale for the about face is far from clear.

Surely, shareholders and customers deserve more honesty. This is particularly true with regard to the audacious webOS claims that, frankly, no one believed HP could live up to--a fact reflected in the company's share price, which has been on a slide since then, from $49 a share down to $29.50 at the time of announcement and down another 25% on Friday.

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I wrote in August 2010 that there was no chance for webOS. Bracketed on three sides by Windows, iOS, and Android, webOS was the fourth dog in a three-dog race; it would never make it out of the blocks. Now, a year later, it appears that Apotheker (who started at HP a month later) and other top company planners thought the same thing. So why the happy words back in March?

Imagine the poor IT pro who liked the technology, trusted HP, and bought some TouchPads for his company. Or the programmer who spent time learning the development system. Or the investor who thought HP might be onto something with its end-to-end story and looked forward to seeing the strategy unfold, but who instead saw the grand plan scrapped after a month in the marketplace.

So what are IT pros and investors supposed to think now? Should they applaud the potential divestiture of the PC unit?

Let's take a look at what IBM did and how that affected its business.

When IBM sold its PC operations to Lenovo in 2004, it wasn't an obvious move by any means. While end user systems have been a low-margin business for years, IBM's PC business was profitable. And, of course, tablets as we know them today were barely a glimmer in Steve Jobs' eye, and smartphones were mostly a curiosity. IBM's PC business would never be worth more, and by selling to Lenovo, Big Blue made a bold statement about the role it wanted to play in IT.

But there's more to it than that. By selling to Lenovo, IBM gave the Chinese a huge gift, a company that had worldwide respect as a provider of quality, business-ready products. That's something the Chinese value. It's no coincidence that IBM has since been building giant data centers in China and otherwise doing well there.

That deal hints at real business genius. We'll see how well HP does with its planned spinout, which comes at a time when interest in the classic desktop and most laptop systems is flagging. We may not be in the "post-PC era," as Apple's Jobs calls it, but we're close enough to it that HP isn't likely to get anything close to the return that IBM did. HP says it's merely exploring its options, including keeping the PC business as is. But as these announcements go, HP has a notion of what it wants to do, and that notion surely isn't the status quo.

What Apotheker Found

While Apotheker and others at HP have been skirting the issue, the problems at the company are both strategic and operational. Mark Hurd's austerity program did indeed lead to larger profit margins and preserved some profitability during the recession, but it also left the company far less able to respond to changing customer needs. The strategy amounted to belt-tightening. And now, by jettisoning webOS (hardware for sure, and probably the software too after this public fiasco), we're left with no HP strategy beyond IBM envy--and it'll be a very long path to get there.

Nowhere is the austerity effect as clear as in the services business and HP's $13.9 billion acquisition of EDS in 2008. EDS's business was less strong than HP had expected, and EDS's people were already weary of austerity programs put in place by senior management. The result: A demoralized staff that's been hollowed by departures since the acquisition. So when HP said yesterday that it's lowering margin expectations for its services business as it seeks to rectify problems with the business, it seemed to be a moment of frankness. One that, unfortunately, was erased when CFO Lesjak claimed that the consulting business would be fixed in just four to six quarters.

Barring an acquisition, which I suggested a year ago, this is a four- to five-year problem. Teams need to be rebuilt, business has to be won, and competence and success have to be proved. A year will not do it. HP tells me they've been working on this since the beginning of the year, but the six-quarter timeframe seems overly optimistic. Particularly if HP wants the sort of high end consulting business that IBM has built.

Even Apotheker's claims for Autonomy are a bit over the top. While it's a solid player in enterprise content management, the hot part of that market has to do with social networking and big data analysis, which will likely relegate Autonomy's traditional archiving, e-discovery, and records management software to "yesterday's technology" status.

The next two to five years are going to be difficult for HP. Rebuilding itself into a consulting and high-end services business like IBM will be no easy feat. And the first thing that will need rebuilding is trust with customers and shareholders. It's time to tell it like it is.

Art Wittmann is director of InformationWeek Analytics, a portfolio of decision-support tools and analyst reports. You can write to him at awittmann@techweb.com.

To find out more about Art Wittmann, please visit his page.

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