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May 24, 2012

HP Jettisons 8 Percent of Workforce, Refocuses Priorities

Michael Feldman

This week HP announced it will slash 27,000 workers from the payroll over the next couple of years as part of a company-wide restructuring. When complete, the effort is expected to generate between $3.0 to $3.5 billion of savings per year. The workforce reduction is the largest in the company’s 73-year history and reflects how far HP has drifted into unprofitable businesses.

“This is the beginning of a turnaround,” said HP CEO Meg Whitman, speaking about the restructuring strategy on CNBC. Despite the severe cutbacks announced this week, the recent quarterly earnings report was fairly upbeat. Compared to a year ago, sales and profits are down, but the company still managed to post a $1.6 billion profit in this last quarter, which was more than analysts had expected. Combined with the layoff announcement, Wall Street responded with approval, boosting HP’s stock by nearly 12 percent.

But the company has been slipping and sliding for the past few years as some of its businesses have foundered, while it spent billions buying up others (just since 2009: IBRIX, 3COM, Melodeo, Palm, Stratavia, 3PAR, Fortify Software, ArcSight, Autonomy, and Hiflex). Meanwhile, corporate leadership has been trying to figure out which areas of its diverse portfolio of hardware, software and services it needs to focus on.

According to Whitman, who joined the company last September, the big problem child has been the enterprise services group, a business HP inherited when it bought EDS in 2008. “Were in a transition from a lower growth, lower margin segment of that business to where we want to be in two or three or four years,” she said.

Whitman said the services group needs to be leaner and deliver higher value offerings. She conceded that such a strategy will shrink that business (currently around $26 billion per year) and contribute less to HP’s bottom line. The idea though is to make it profitable, which is not the case today.

According to the CEO, the company’s other four main business lines — personal systems, imaging/printing, software, and enterprise storage, servers and networking (ESSN) — should all be in growth mode. That wasn’t the case for the quarter just ended, where only the software business showed robust growth (22 percent year over year), with the ESSN business, in particular, taking a dive (down 5.5 percent). The was attributed, in part, to the recent world-wide shortage of hard drives. Longer term, though, HP looks to expand in all of these segments.

That doesn’t necessarily mean HP will be giving them equal attention. According to Whitman, the growth areas they will target include big data and analytics, cloud computing, security, and application modernization. She said that will involve investments in R&D as well as productivity tools for HP’s workforce. Whitman declined to specify exactly how much of that $3.0 to $3.5 billion of annualized savings would be plowed back into the company versus just adding to the bottom line, saying only that the “majority” of the money would be invested. HP’s R&D budget is around $3.2 billion per year, a value some analysts have pointed out is too small to compete with other large enterprise IT players like IBM.

Some of this additional investment could end up in HP’s high performance computing (HPC)business, but don’t count on it. Whitman said they are not intending to spread the money around the company in “peanut butter” fashion, with a little dollop for everyone. Instead, their intention is to invest strategically in certain growth areas, especially big data and cloud. “We’re going to make a small number of very big bets,” she explained.

HP doesn’t break out its HPC revenue from its ESSN sales, which totaled over $22 billion in 2011. But if you can believe IDC’s HPC server revenue numbers, which had HP at $3.3 billion last year, it represents a sizeable chunk of the company’s enterprise business. HP and IBM share about two-thirds of the HPC server market, more or less evenly, so any investment (or defunding) in HPC could disturb that dynamic. At some point soon, Whitman and company will have to ask themselves if they think HPC is one of those growth areas worth investing in.

The larger question for HP, though, is existential. What kind of company does it want to be? Right now HP develops and sells everything from printer ink cartridges to supercomputers. (Amazingly, it does both of those rather well.) And as of today, HP’s roadmap includes a new tablet computer and an exascale machine. No other company on the planet can make that claim.

But in an era where technology enables smaller and more nimble companies to compete at the same level as their largest competitors, it’s hard to imagine that a be-everything-to-everyone approach is a sustainable strategy. Like, its competitors IBM and Apple have already done, HP needs to decide if it wants to be an enterprise IT company or a consumer IT company. This week’s rejiggering of the organization may refocus some of HP’s priorities, but that larger decision awaits.