HP’s ProCurve exec talks business directions and getting ahead of the competition

HP's ProCurve LAN switch business is second only to Cisco in revenue and port shipments, outperforming venerable competitors such as 3Com, Nortel, Extreme and Foundry. John McHugh, vice president and general manager of ProCurve Networking by HP, recently spoke with Network World Senior Editor Phil Hochmuth about where ProCurve stands inside the larger HP organization, and other issues facing the group.

HP's ProCurve LAN switch business is second only to Cisco in revenue and port shipments, outperforming venerable competitors such as 3Com, Nortel, Extreme Networks and Foundry Networks. John McHugh, vice president and general manager of ProCurve Networking by HP, recently spoke with Network World Senior Editor Phil Hochmuth about where ProCurve stands inside the larger HP organization, and other issues facing the group.The following is an edited version of their conversation.

Why doesn't HP break off its ProCurve business?

What is the relationship between ProCurve and HP?

I've been very aggressive and consistent about positioning the business as an open market networking business, as opposed to being a network accessories business within HP. As you look at the personality of ProCurve, as you look at the way we do or do not dovetail with the rest of HP, it really comes back to that concerted commitment, that when we go to market . . . and position products, first and foremost, we are accountable to open-market competitive standards set by the Ciscos, Nortels, 3Coms of the world. As a result, certainly in the last five years, that's driven us towards doing things that are open market, and independently of HP. Not that there's anything wrong with being part of HP. But that is what has asserted our level competitiveness and success in the market.

Speaking very candidly, [our relationship with HP] is very positive . . . The message to my organization was, HP will find us very compelling and will be one of our best advocates and one of our best customers when we earn that. The first thing we need to do is earn that credibility and we need to win in the market, and HP will follow. And we are definitely seeing that. We are becoming a more relevant supplier to HP, who is, in fairness, a unique customer in the market.

Given the success you've seen, what's to keep the ProCurve group from breaking away from HP?

It would be naive of me to say that that hasn't been something that hasn't been thought about. I would put two perspectives out there. In the way we're running this business, we really want that to be a non-issue. The business really does run and survive, and is based on an investment inside this company, which makes it look like a very stand-alone entity. That's been a part of our success; we haven't looked to other parts of HP. We haven't generated market success based on capabilities, which we didn’t own, ore were not consistent with what our competitors have to provide out there.

The second point is that . . . being No. 2 in this industry, and the one company growing faster than the market, we believe that discussion [of breaking off from HP] becomes less relevant. The interesting factor is that the business becomes far more relevant to HP as it goes forward. And that's exactly what we're seeing.

How could there be better cooperation between HP and the ProCurve business?

I would love HP to get the networking bug as completely as I have it. I would love the world to see HP as an IT company, as an IT solutions and services provider, that really sees how critical it is to have a competitive, open-market networking company in its portfolio. There really is no example of that. The closest may have been where Digital Equipment was, way back in the in the mid-1980s, when [CEO] Ken Olson talked about how the network and system architectures evolve together. Realistically, IBM never took advantage of their network business; they were really trying to play networking as accessory to an IT solution sale. And that just doesn't' work. If [as an IT company] you're going to make use of a networking company as an asset, you have to realize that your networking company has to be relevant to the open market as a [stand-alone] business.

When Cisco and HP make large computing and networking deals together, does that drive you nuts?

There are two sides to that. First and foremost, does it drive me nuts? The way I emotionally deal with it is with the basic mandate with which I run this business; our job is to go out there and win in the open market. If HP needs to or wants to partner strategically, and there are other business units in HP that have missions, they need to make the right choices for them. I would love to be the choice they select, and clearly that helps with our credibility thing when they do. But I need to go pursue my mission.

From the customer perspective of this, as to why HP does this, is because HP I think, as much as any large company, tries to really understand what its customers need from its business model and drive its business decisions based on that. So if you look at our relationship of having our own server operating system — HP-UX — and being Microsoft's largest distributor in the world, or our use of Intel architectures vs. others, as well as our relationship between ProCurve and Cisco — there is acknowledgement that, whether I like it or not, Cisco is the dominant player out there. And Most customers are going to have a predisposition. And HP from a services standpoint, from a solutions standpoint, needs to engage those customers. There is a portion of those customers that I will freely admit are best served by Cisco as a networking supplier. If you have a complex, cutting-edge design, or if they want to be the first customer to do a complex technology, and they're willing to embrace the costs and limitations of a proprietary end-to-end solution, Cisco is the right player. They'll be the ones who can take care of those business needs. But that's not the market sector I'm focused on. I really try to look for opportunities of partnering with HP, where HP is addressing mainstream customer deployments. And we are getting more traction in that area.

What are the advantages of being part of HP?

The customers in this sector of the market do not embrace a supplier arbitrarily. We see this effect when we go into an account that has been a long-term, loyal customer of a different supplier; despite what that supplier may have done . . . whether it be arbitrary management of the business . . . turnover in the executive ranks, or changes in products — those customers still have a tremendous bias towards riding that supplier until it just becomes so painful to them that it's causing harm to their business. So there is tremendous bias to make a selection and stay with that supplier. So when we look at this and think about what being part of HP means, it's the fact that we're a credible company, part of HP, and that commitment to customers. I have a lifetime warranty on most of my edge products, which is a strong statement of long-term commitment. Customers think about that: what does it really mean if HP spun this business out. Would it change that commitment? It turns out it doesn’t.

Are there any economies of scale you take advantage of being part of HP? Such as in manufacturing, or supply chain?

It's turns out to be a very limited number of things. Because of the size of ProCurve as a standalone business. Because we're shipping many of our most popular products at thousands of units per month. The volume and the volume of the components that go into this business, we ProCurve, not HP, represent one of the largest customers of companies like Broadcom, and other companies that supply that kind of technology. For most components, either our contract manufactures are using them in such high-volume that they eclipse HP's usage of those [components], or my personal user eclipses HP's general use. For the most part, we being the number-two networking company, we represent a very compelling critical mass on supply chain, procurement and manufacturing capacity and support infrastructure. All the things we do … we do mostly ourselves.

The lifetime warranty seems to be a driver behind ProCurve loyalty. How did that come about, and how are you able to offer that?

It was one of the first decisions I made in becoming the head of this business unit, to go from a five-year warranty as a default to a lifetime warranty. I had kind of a vested pride interest, having been the R&D manager prior to taking over the ProCurve business unit.

It comes back to the design philosophy and methodology. It's not that I just have better engineers. We have a fundamentally different strategy about the way we design products than a company like Cisco. There is a hard tradeoff I make. I'm going to focus on mainstream customers. That's going to be my sweet-spot, so I can deliver to those customers who have, certainly not commodity requirements, but they're mainstream; they're embracing converge and mobility, but they're not doing it as an early adopter — not as the first company in the Unites States to deploy an end-to-end VoIP network. They're doing mainstream deployments, and I’m going to provide them robust, interoperable products. Doing that, I make tradeoffs. I don’t have to go out on as many risky, first-deployment, kludgy-OS implementations. I don’t have to develop proprietary architectures, and then support those. There's a lot of complexity in trying to be the most flexible supplier in the industry that can handle the 99th-percentile customers. By making that trade-off we can make products that are more cost effective and reliable. That translates into the way we do business, the simplicity of deployment, and the cost of ownership.

Some analysts have said that HP is able to have sustained success, and can offer such a breadth of products, it does not have the high demand for margins, or come under such scrutinizing analysis that your competitors are under. Is there any truth to this idea?

The truth I can tell you is that we hold this business to the highest standards. The revenue growth in this business, which is accurately portrayed by Dell'Oro, and IDC have, are pretty accurate. From a revenue standpoint, what's available in the industry is very good. From a profitability standpoint, HP, and especially with the current CEO, have no tolerance of charity cases. And rest assured that [CEO Mark Hurd] is at least as critical as Wall Street is of the business units in his organization. I report to [CTO] Shane Robinson, I don’t' report to one of the global businesses. One of the reasons I did that, is because network has always been — with a few brief years at the end of the 1990s, when we were trying to recover from our failed commoditization strategy — for the most part, the networking business has had significantly higher profitability and gross margins than [HP] on average. Moving the company under [CTO Robinson] was one of the requests I made, after a couple of years of running it, because in fairness, this business has been used as a cash cow. And by moving under [Robinson], we were able to clearly understand what its profitability was. The objective was to hold it to industry standards. HP does not need to be in this business to just flex its muscles and say it's in the networking business. We're in this business because it's a good business, and it's self sustaining. Our gross margins tend to be very well matched to our business model.

In reporting to the CTO, how does that affect your R&D? And how well is ProCurve R&D funded?

On average, we invest around 12% of our revenue on R&D. That's kind of in the middle of the industry average, for companies like us. Commodity players are down at 2% to 3%, then others like Force10 that are way up there, in investment mode. So 12% is a very healthy investment. It means our investment is probably only second to Cisco. This is all [ProCurve's own] R&D; we have a list of 350 or so engineers that are in the HP ProCurve org chart working for me. Obviously, HP has this giant HP Lab development activity. And for the most part, HP Labs is trying to do those things that are relevant to the most critical strategies of HP as a company going forward. So I'm always, and my CTO Paul Condon, are always trying to influence that, and trying to drive that to think about things that are critical to HP as a company, things that are specific to networking. We don’t' get to assertively grab [HP Lab's] reins and pull them in one direction, but we do look for nuggets and gems that come out of there, and take as much advantage of those as possible. An example of this is Virus Throttling; this came as part of a server defense mechanism, to prevent a server that's under a [denial-of-service] attack from being brought down. We recognized that if you took the ability to shut off a talker — the server being attacked -- [and put that into network hardware], you could put Virus Throttling into every switch port. We deployed Virus Throttling — great HP intellectual property —but we did it with kind of a networking bias, instead of a data center bias. So we kind of sow seeds in HP labs, then go into the fields and harvest when we can.

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