The New Converged Infrastructure: A Challenge and an Opportunity

Rob Enderle

In what could be seen as the CEO equivalent of piling on, IBM's Sam Palmisano was sharply critical of HP in a Wall Street Journal piece. He lit into HP for the way it handled the removal of CEO Mark Hurd, how Hurd had run HP into the ground, and said that as a result, IBM didn't take HP seriously anymore.

 

IBM has been in sharp competition for the business Oracle has been losing on the Sun side since that acquisition and is indirectly cooperating with Oracle to render HP weakened or irrelevant in a very competitive market. This is a "blood in the water" attack where like companies, seeing a peer wounded and limited in its ability to respond, dovetail their verbal attacks to give themselves more power and to increase the damage on the targeted firm's image. Without a CEO and historically weak in central marketing, HP is particularly vulnerable to this kind of attack.

 

Realize that this kind of attack doesn't depend on facts, but on the ability to sustain perceptions. So let's look under the words and talk about both the trigger and the validity of some of the content.


Trigger: Anger at Hurd

 

Every technology CEO for the past several years has been held up unfavorably against both Steve Jobs and Hurd. While most concede that Jobs is unique, Hurd was not. It rankled CEOs from Palmisano to Michael Dell to be compared to a guy who by most measures was slowly killing his company to maximize quarterly returns. A kind of vampire, Hurd represented the inordinate power financial analysts had and how they were forcing decisions that were crippling long term. However any company that didn't listen to analysts was pounded in the market with an expensive impact on executive bonuses and longevity. It was understandably upsetting for Palmisano and others to see Hurd receive massive rewards for sucking the life blood out of HP while their better parenting went largely unnoticed and often unrewarded.


 

This is why the attack by Palmisano reads as much as a personal attack on Hurd as it does on HP the company.

 

3PAR and Research

 

Palmisano calls out the 3PAR acquisition, at around a billion dollars over what the firm's reasonable value should have been, as an example of Hurd's mismanagement. This is partially true, but not necessarily for the reasons Palmisano calls out. He argues it was HP's cuts in research and development that resulted in this, but even though IBM does spend substantially more on R&D, it, too, had to make a similar software acquisition. However, Hurd was largely against acquisitions and blocked purchases, starting with VMware and ending with 3PAR, that HP's strategy group had identified. This allowed one of the most valuable acquisitions, VMware, to go to EMC last decade and forced HP to do a hostile acquisition for 3PAR, which drove up the price. The premium HP paid for 3PAR largely offset the savings Hurd had achieved in R&D, but the two were not directly related.


HP and PCs

 

Palmisano argues that that IBM was better able to anticipate the declining PC market and get out at the right time because its research was more forward-looking. It's clearly true that the IBM's PC business, defined by ThinkPad and ThinkCenter, was suffering and needed separation from IBM to survive. Lenovo, the company that bought this business, has been the fastest-growing PC manufacturer over the past several quarters. This market is projected to grow at a healthy 18 percent (or better) for the foreseeable future, according to firms like Gartner and IDC (as presented at Intel's Developer Forum).

 

Granted PC makers such as Acer, Asus, and Lenovo are growing faster at the moment then HP, but HP's PC unit is still a strong contributor to HP's bottom line. HP has a large presence in the consumer market with two divisions, the PC division and the Printing and Imaging division, which is a massive cash cow. IBM never really understood the consumer market, which has been driving PC sales much of the past decade. It took a company like Lenovo to turn that division around. So while it was smart for IBM to divest, HP isn't in the same space yet, though Acer has taken its place as the most influential company in the market. That's likely troubling for a variety of vendors in this space, but especially for market share leader HP.

 

Oracle as the New IBM Enemy

 

Palmisano indicated that HP was in such bad shape that IBM no longer considers it a competitor. This has some truth to it because with Software and Sytems division head Steve Mills' rise to the No. 2 spot in the company, it is clear that IBM is girding for a fight against Oracle, Microsoft, and the EMC/VMware/Cisco alliance called Acadia. It puts HP as a lower, still hardware-based priority. Particularly because HP is drifting into conflict with Microsoft, which used to balance out IBM's superior software position, HP does represent a lower threat to IBM.

 

However, HP still remains unmatched in most of the server space in which IBM competes, either by leading the segment or as a strong No. 2. And Oracle was left with a bleeding mess after the Sun acquisition. By positioning Oracle prematurely in the superior position, IBM resets the bar in its favor, but that is mostly artificial. HP remains a credible competitor, though weakened by the sudden departure of its CEO, in terms of responding to this kind of perception-based attack. HP's execution engine in the division that faces IBM remains strong and might actually be benefiting from the lack of Hurd's excessive expense control.

 

Hurd's Excessive Termination Fee

 

It is hard not to agree with Palmisano's position that Hurd's near $42M termination fee was excessive, particularly given that Hurd walked right over to Oracle with knowledge about HP that could give Oracle an unprecedented advantage. However HP's board is made up of relatively smart people, and when smart people make what appears to be an incredibly stupid decision, it generally means we don't have all the information. One thing is clear: Hurd was a massive liability. Behavior such as his, which speaks to integrity-or in this case the lack of it-stands as a warning for future employers. One thing both Palmisano and HP's board can likely agree on is that it is good Hurd is at Oracle and not at either of their companies. The HP rank and file really hated the guy.

 

Wrapping Up: Crisis Management

 

Hurd put HP in a horrid position that has both IBM and Oracle seeing blood in the water and attacking the firm in a near-coordinated fashion. What Hurd did to HP, in my opinion, is almost criminal and serves as a warning to others. I give him at most nine months at Oracle before that company comes to its senses. However, this also illustrates a need for companies to be prepared for events like this.

 

I'm actually helping with a volunteer talk on this subject with Sage Circle next week at 8 a.m. Pacific time. You'll find details here if you want to listen in. (It's free.)

 

The world moves on perceptions. HP's current weakness is that both Oracle and IBM are better able to craft those that surround HP than HP is itself. It had better fix that fast or it will bleed a lot of business before this crisis runs its course.



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