HP's Happy Talk: Enough Already - InformationWeek
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8/19/2011
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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.

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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