Industry weighs in on HP revamp

HP is taking some drastic steps to restructure itself, aiming to cut costs and respond more quickly to market and customer demands. But some users and industry experts aren't convinced the company is headed in the right direction.

Last week, new CEO Mark Hurd made good on industry expectations and slashed HP's workforce . The massive reorganization, which will cut 14,500 jobs (10% of the workforce), revamp retirement benefits and restructure internal business units, is expected to save the company $1.9 billion annually beginning in 2007. HP, set to announce its third-quarter earnings next month, posted a strong second quarter, outpacing analyst estimates with revenue of $21.6 billion.

HP's financial results in the past few quarters, however, have been uneven at best, leading to the ouster of CEO Carly Fiorina earlier this year. Hurd told reporters and analysts in a conference call detailing the latest staff reductions that the restructuring was just getting started, but he wasn't specific about what moves might come next.

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The cuts follow several earlier moves by Hurd, who took the helm in March, to rejigger HP's internal structure. Among the changes was the breakup of the PC and printer groups that were fused by Fiorina in January, and new hires, including former Dell CIO Randy Mott to run HP's internal IT department. Hurd says the moves are designed to create a simpler, more flexible HP that can innovate and operate more closely with its customers.

Still, the moves leave some industry observers scratching their heads. Hurd, for example, says the cuts would only minimally impact HP's research efforts, but then the company confirmed it was cutting four projects at its labs.

"We still need to hear more about strategy and differentiation," Merrill Lynch analyst Steven Milunovich writes in a research report he issued following the announcement of the layoffs last week. "No doubt HP's execution will improve, but we think there are strategic issues to be addressed, as well."

Those issues center on how HP will bring new products and services to market, analysts say. Nevertheless, analysts applauded the staff cuts and restructuring, saying the moves could help bring HP back to its engineering roots.

"The initiatives that Carly put in place to try to overpower the engineers with a sales culture that she layered on top of the engineering culture has now been reversed," says Mark Stahlman, senior vice president of equity research at Caris & Company. "Now those extra people that Carly put in place are leaving."

By trimming the fat, HP will be able to better innovate in an increasingly competitive market, Stahlman says.

"The new new HP is in a much better position to take advantage of its capacity to innovate and compete in a marketplace that is increasingly excited about new products," he says. "We're not in the slump anymore. The computer systems and consumer electronics and networking businesses that HP is in are growth businesses again.

"HP is a far more focused and lean organization to try to compete. They have a much better chance at success now than they did a year ago," he says.

Better communication about its strategies, and about the reorganization in general, is important to keeping customers loyal as HP moves through its transformation, users say.

Dave Geiver, vice president of technology at Premier Bankcard, in Sioux Falls, S.D., says he was surprised that he never heard from his HP account executives regarding the restructuring.

"We have been watching the news of HP's restructuring and layoffs with concern," says Geiver, who worries about HP moving its focus away from mid- and large-scale customers. As part of the restructuring, HP dissolved its Customer Solutions Group, which handled sales to enterprise, small and midsize business, and public sector customers. Instead, sales functions are being merged into three business units: Technology Solutions Group, Imaging and Printing Group, and Personal Systems Group.

"I'm concerned about a slide to more of a mass production, low-cost manufacturing and distribution channel," he says.

Good-bye user group

Geiver says he also is concerned by the demise of  Interex , the 31-year-old, 100,000-member HP user group that suddenly announced it was "financially necessary" to shut it doors. Interex also canceled its HP World conference scheduled for August, likely in part because of HP's Technology Forum in September, which the company is co-sponsoring with the Encompass user group.

HP will pay registration fees to the forum, to be held in New Orleans, for users who already paid to attend HP World. Encompass and the OpenView Forum, also participating in the conference, are helping to direct its content, and Interex was invited by HP to do so, as well, HP says.

Geiver says he is considering attending the Technology Forum but is disappointed that his only option now is to attend an HP-sponsored event.

"This is a concern mainly because we look hard to find non-vendor-specific events to give us an industry-wide perspective," he says.

Mike Peckar, co-chair of the New England chapter of the OpenView Forum and principal consultant at Fognet Consulting, says HP interaction with its user groups is essential to the company.

"That HP should look at these events as a financial burden is a product of short-term thinking that will result in the long run in the erosion of HP's loyal customer base," he says.

He adds that HP needs to define a consistent message for its customers in terms of its product strategy and be sure to maintain customer service in the interim.

"Any moves HP makes now to undermine customer satisfaction could prove disastrous in the long run," Peckar says.

Industry analysts also note that HP needs to work very closely with its customers going forward because despite its strong technology offerings, the company doesn't make clear to customers how to apply them.

"Today, HP is a bundle of products and services and a vision wrapped up in multiple, complicated, technical architectures. This is too complex. [HP] lacks a methodology to help their customers see how to apply" its products and technologies, says Rich Ptak, principal analyst with Ptak, Noel & Associates.

While it's true that HP has been struggling to digest the acquisition of Compaq, finalized in 2003, it still has all the components of being a market leader in the years ahead, analysts say.

"HP is one of those companies where if you can get it tweaked right and put a couple of good strategies in there - look out," says Richard Evensen, an analyst at Technology Business Research. "It will come back, and it will come back strong."

Learn more about this topic

HP plans to cut 14,500 jobs and save $1.9 billion a year

07/19/05

HP exec discusses what reorganization means for customers

07/20/05

HP cuts four research projects from R&D budget

07/21/05

Fiorina ouster raises questions about HP plans

02/09/05

Copyright © 2005 IDG Communications, Inc.

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