Turning Around HP: Year One, Four to Go

Rob Enderle

The quarter’s financials are out for HP and they showcase the expected pain of a turnaround and the problems facing a CEO managing one. Turnaround efforts, particularly for large complex companies, take about 5 to 7 years (assuming they are successful) and there are often hills and valleys during the process.

The latest financial report showcases a valley. In a market that lives on quarterly reviews, the trick is for a turnaround executive to survive 5 years of financial pain in order to fix the company and investors often aren’t that patient. This is why a lot of turnarounds don’t seem to work; they simply take longer than investors are willing to wait. This one is particularly difficult because Mark Hurd, Meg Whitman’s predecessor as CEO, gutted the company to make quarterly numbers, leaving his successor(s) with a nasty, expensive mess to fix.   

So while the bad news is that this will take a while, the good news for HP is the firm remains profitable so there is no risk it will run out of money and the trend appears to be up, suggesting improvement. This means the firm, at least for now, is in no danger of failing.   

What Is Going Right

From a financial perspective, the clear winners are (from a revenue growth perspective) networking (10 percent growth) and software (18 percent growth). HP also made critical leadership changes in its services and enterprise business, putting in experienced executive Mike Nefkens to run services as the firm looks at recruiting someone from outside who may be stronger to run that business while leaving the option open to retain Mike if he can prove a high level of execution in this area.  

Ex-Microsoft executive Bill Veghte had been moved to a strange mix of titles (chief strategy officer/COO), but most of the normal COO duties reside elsewhere. This appears to be an interesting blend of strategy tied to organizational responsibilities in order to speed the physical changes in plant and equipment to increase HP’s turnaround speed. While I don’ t think this has been well articulated, there is some method to this madness as often strategic plans fail in execution, particularly on anticipating needed changes in plant and equipment, which this blended role could creatively address. Being creative in a turnaround is an asset. 

Software had appeared like a train wreck a few weeks ago and HP has moved aggressively to fix the structural problems asking the ex-CEO of Autonomy to leave and bringing on board George Kadifa as the new head of HP Software. He comes from Silver Lake Partners, which has been investing in firms like Gartner Group, Skype and Avaya and is generally thought to be one of the leading firms that buy and sell companies for a profit.  

Printing, while in decline and currently HP’s unit, is not only dominant, it is performing far better than competitors like Lexmark, and HP is growing commercial printing at an amazing 4 percent in this declining market. This unit represents $6B in HP revenue. 

Weakness

While most of the hardware businesses were showing slight declines, the two areas hitting double-digit declines were PCs and consumer printers. As noted above, printing as a segment is in decline and consumer products are leading. HP is successfully shifting to commercial printing but eventually it will need to transition this business because the market is increasingly going digital and printed publications continue to decline. Fortunately, this decline appears relatively slow; unfortunately, HP has not yet emerged as a leader in electronic media and if this isn’t corrected, HP’s leadership in the post-paper market will likely be passed to someone else.  

Services had been gutted by a series of layoffs over a long period of time. Services are a people business and layoffs generally have a lagging impact on revenues and clearly we are seeing that this month. HP is addressing the problem with executive staffing changes but positive results will likely take several quarters to materialize. 


Oracle really did a number on HP’s high-end, Itanium-based servers and while HP won the litigation against Oracle — and that this compensation should be impressively high given this damage — it will also take a while to arrive and even longer to apply to fix the problem. Any material change here is likely a year or more out.  

Personal computers remain a problem and while HP did attempt to move with the market to smartphones and tablets, existing leadership has failed now several times to create products in these growth categories that are successful. HP shares this failure with Dell, and some may recall that IBM was actually the first to ship a smartphone, the Simon, which failed in market.   

Currently, true success in both categories is only broadly enjoyed by Apple and Samsung, consumer electronics vendors, suggesting that HP may need to launch a focused unit. Such a launch was recently rumored to have happened, but it will likely be nearly a year before related products hit market with full marketing support. Typically firms create units like this with existing executives and Apple has been the only firm in recent memory that used industry experts instead, which is why it has been more successful.

Wrapping Up: It Is All About Image

Where HP continues to be weak is in image. It is in the process of reversing Mark Hurd’s shift of all marketing resources to the line managers, which has left HP open to this and other problems. Once this reversal, once again largely centralizing marketing control is done, I expect the company will be far more able to tell its story as a company. This will be a critical part of the turnaround and consistent with both Steve Jobs’ moves at Apple and Louis Gerstner’s moves at IBM.  

In the end, HP is still in the first full year of a turnaround and in these early months it is its CFO, not its CEO, who will likely be called on the most. Fortunately, Cathie Lesjak, HP’s CFO, is considered to be one of the best in the business. The only thing that is truly clear at this point is that HP’s turnaround is very young.



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