HP CEO Mark Hurd's Challenge: Cut Costs, Not Innovation

As Mark Hurd prepares to take over as Hewlett-Packard Co.'s sixth CEO in its 66-year history tomorrow, he'll face the two-fold challenge of clamping down on costs while leaving HP's vaunted research-and-development teams free to innovate.

During an introductory news conference Wednesday, Hurd said that before he undertakes an analysis of HP's corporate strategy--including whether to spin off businesses like printers or PC's--he'll "have to understand our cost of capital and return on invested capital. I don't think you can expect me to do anything very tricky," he said. Chairman of the board Patricia Dunn, who led the committee that picked Hurd, characterized the new CEO as "very much a fan of metrics." In short order, Hurd and the board will draw up a list of performance goals and indicators, she said.

Hurd was known as a cost-cutter during his two-year tenure as CEO of NCR Corp., which he left this week to take the top HP job. In a research note issued Wednesday, Merrill Lynch analyst Steven Milunovich pointed to a $250 million cost-cutting program Hurd implemented at NCR based on benchmarking the company against its competitors. But Milunovich also called Hurd a "blue-collar CEO" who could inspire HP employees. "The HP Way lives on," he wrote.

Customers and industry analysts say that while managing by the numbers works well for quantitatively driven areas of HP's business like sales, manufacturing, and IT, the approach is less effective for ensuring that innovative products get out the door. "One of the difficulties you have with R&D and the fuzzy aspects of the business that surround innovation is that you're building for a future that's uncertain," says Rob Enderle, principal of consulting company the Enderle Group. HP spent $3.5 billion on R&D last year, and the company is more effective than its competitors--including IBM--at translating projects from its chief technologist's office into effective products and deals, Enderle says.

Still, the pressure is on Hurd: Former HP CEO Carly Fiorina was fired in February for not cutting costs or lifting profits as quickly as investors and the board hoped--and for refusing to share power with an operations executive who could help unravel the company's problems.

Ultimately, Hurd may have to strike a balance between managing by metrics and managing for innovation. "They're in business to make a buck, so yes, they should be managing by the numbers," says Fred Wettling, architecture and strategy manager at Bechtel Corp., the $17.4 billion-a-year engineering and construction company, which spends several million dollars annually on HP products and services. Wettling says he's been talking with HP management about the company's direction since Fiorina's dismissal seven weeks ago. "One thing I'd encourage them to do is differentiate between their strategic and tactical investments," he says. "I expect them to be there in the future and be an industry leader in the future. And if they're distracted by, 'how am I going to bump up the numbers in this quarter', that's not the kind of company I want to make the investment in."