Unless HP can turn enterprise software, cloud services, or some other line into a high-volume, high-margin business, it's in for a world of hurt.

Art Wittmann, Art Wittmann is a freelance journalist

May 18, 2012

5 Min Read

Hewlett-Packard's second-quarter earnings call is scheduled for May 23, and news already has leaked that CEO Meg Whitman will announce that the company will cut as many as 30,000 employees--about 9% of its workforce--as part of a restructuring plan. The news breeds speculation that HP's earnings will continue to be weak, requiring a fairly drastic cut in expenses to prop them up. It also comes on the heels of an oddly upbeat first-quarter earnings call in which HP announced that earnings had fallen 44% from the year-earlier quarter.

As HP's plight unfolds, it's tempting to compare it to others that have faced down a reinvention problem. There's Cisco, which has shed products outside its core mission, trimmed staff, and reinvented internal processes over the past two years, all to excellent effect.

But that's not a good comparison because Cisco has something HP doesn't: industry leading products that command huge profit margins. Cisco makes a lot of hay with its fancy televideo products, phones, and even mobile devices, but it's the dull products like its hugely successful ISR routers (the little gizmos found in hundreds of thousands of branch offices and retail stores worldwide) that pay its bills and allow the company the luxury of time as it goes through its reinvention process.

Sure, investors would always like a company such as Cisco to fix its problems instantly, but even when its performance is down, it's still very good. In the same way, Oracle can absorb the stupidity that was the Sun acquisition, which would have sunk most any other company, because when you've got a namesake product that drives revenue like Oracle's database, the market and everyone else gives you a pass. IBM has its Global Services business. Microsoft, for all its perceived problems, still has its Windows and Office cash cows. For all of these companies, fat margins mean time for reinvention.

HP used to have its high-margin businesses, but one by one they've disappeared or dried up--all but ink and toner, and now those are shrinking too. So when it's time for reinvention and what HP calls "cutting to invest," it's a much more public and painful thing than it would be for Cisco, Oracle, IBM, or Microsoft. And so as ugly as 30,000 people losing their jobs sounds, one wonders whether it's ugly enough, and whether, after it's over, we'll understand any better what is HP's vision for the future.

It's not hard to visualize a version of HP that looks a lot like Dell. Dell, about a third the size of HP by employee count, finds itself working to be more than a PC maker. Just like HP, it sees pressure on its traditional markets from the likes of Lenovo, Samsung, and LG, so much so that both companies probably envision a day when it will no longer make sense for them to sell laptop and desktop computers. Both companies have been ramping up their enterprise and professional services groups to make up for the sales and margin losses they'll see from their established product lines.

For Dell, that's working out to be a fairly well executed plan, one that keeps in mind its typical midmarket customers. For HP, if it doesn't find a high-margin business to hang its reputation on, the way down will be a bloodbath of layoffs and missed earnings projections.

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HP's hopes of avoiding that bloodbath lie in two areas: cloud services and enterprise software. Former CEO Leo Apotheker's contribution to that effort was the acquisitions of Autonomy and Vertica, which compete in data management and big data analysis, respectively. While Vertica has seen success since HP bought it, InformationWeek's Doug Henschen says that success may have come at the cost of relationships with partners who now view HP as a competitor. The result is that those software providers now more readily mention IBM as their hardware partner. Certainly, HP's relationship with Oracle isn't what it once was, given Oracle's acquisition of Sun, and that mudslinging hasn't helped HP's reputation.

As HP ramps up its software portfolio, it will continue to upset its existing partners. Whitman and team will have to do the calculus to determine if that's worth the gain. If HP is serious about becoming a software powerhouse, it will have little choice.

The ace in the hole for HP is cloud services. HP's cloud products are just now coming out of beta, and at first blush they look as if they will compete well with Amazon's. Whether cloud services can be the high-volume, high-margin business that HP needs is a tougher call. No matter what, it'll take time for that business to develop. And that means more rough quarters ahead for HP.

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About the Author(s)

Art Wittmann

Art Wittmann is a freelance journalist

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