How HP thinks about R&D: It's about new products not spending

How HP thinks about R&D: It's about new products not spending

Summary: Hewlett-Packard is a lean scalable machine that is pumping out earnings nicely, but can the company apply the same efficient approach to its research and development that it does with its overall operation?

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Hewlett-Packard is a lean scalable machine that is pumping out earnings nicely, but can the company apply the same efficient approach to its research and development that it does with its overall operation?

During HP's earnings conference call Wednesday there was a telling exchange about how CEO Mark Hurd approaches research and development. HP's R&D spending has been falling in recent years. For the year ending Oct. 31, HP spent $2.82 billion on R&D, down from $3.54 billion a year earlier. In 2007, HP's R&D spending was $3.6 billion.

For comparison's sake, IBM spent $5.82 billion on revenue in 2009, down 8.2 percent from 2008. As a percentage of revenue, R&D spending remained 6.1 percent of IBM's revenue.

The real eye opener on the HP conference call came from Sanford Bernstein analyst Toni Sacconaghi. He asked HP executives---Hurd and CFO Cathie Lesjak---the following:

You commented on the need to invest heavily going forward. I think if you just looked at R&D dollars it looks like you’re actually going to spend less on R&D in 2010 than HP did in 2000. HP’s revenues were less than $50 billion in 2000 and will be more than $120 billion today. So how do we think about that? Is that just that you have a lot of wasteful R&D spending before or your portfolio is really different or how do we reconcile those statements?

My jaw dropped when I heard that---partially because it wasn't some analyst model question about deltas and financial mumbo jumbo only designed to make spreadsheets look pretty. But Sacconaghi's numbers check out. For fiscal 1999, HP spent $2.4 billion on R&D.

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So how should we think about this? HP has become a massive company, but R&D isn't rising accordingly. Does R&D have scale?

Lesjak and Hurd think so. Here are some key excerpts from Lesjak's answer:

One of the things you got to look at is that there are inputs and outputs. And the outputs in R&D really are helping to give us win in the marketplace. The innovation that we see, whether that’s around the G6 Blades, the Slate products that we’ve announced, the Web-connected printer, kind of on and on.

We’ve got good new products coming out that are helping us win in the market, and our market share gains frankly prove that. But then that there are also the inputs into R&D. You want to make sure that you are investing in the most efficient way that you can. And what we have found is that there are real opportunities to think about R&D as a series of processes and make sure that we are doing those processes in an efficient way.

Lesjak added that R&D has a bevy of inefficient processes. An operation like HP Labs has a lot of little processes with equipment. That costs money.

"If you go to a more virtualized environment, that’s going to be a much more efficient flow. It didn’t change the amount of innovation that the R&D engineers are doing. It’s just simply changed the process and the dollars associated with that process," explained Lesjak. Real estate and IT expenses are other areas that can cut the R&D benefits.

Hurd continued:

R&D was one of the biggest consumers of overhead in the Company. That’s one point. Second point, we’re in a mode to look for processes that we can standardize. Simple things like testing, QA, how many development tools we’ve got. All of these have been, because of acquisitions, very random and very unique, and very, if you will, siloed.

So our ability to get standardized on those processes gives us an opportunity to take out cost.

We look at R&D in the context of overhead, maintenance and innovation. What we are trying to do is get the innovation dollars up. So when you look at the total R&D spend, it’s down, and yet the yield to the product road map is up.

As I'm listening to this Hurd's approach to R&D I'm taken back to a briefing a few weeks ago with John O'Dea, CEO of a company called Crospon. In a nutshell, Crospon licensed HP's inkjet technology to come up with a drug delivery patch to replace needles. The patch is really a series of microneedles (backgrounder).

By repurposing inkjet technology, Crospon can create a more effective drug delivery platform.

"Drugs don't work because people aren't taking them. It's a compliance problem," said O'Dea. "With this technology there's a microprocessor that tracks what the patient takes and you can have multiple drugs on one patch. It's a hybrid infusion pump and patch. It could be used for insulin."

How much of that discovery from HP Labs was process vs. taking a think-tank approach? Is there serendipity to R&D that makes it different than procuring components?

We'll find out. Hurd may have the right approach to R&D, but the thinking here is different than the old academic think tank approach. For Hurd, R&D is all about the products.

Topics: Enterprise Software, Hewlett-Packard

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19 comments
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  • R&D is made up of 2 parts

    Hurd is partially on the right track. It is important to remove waste from all processes, including [b]development[/b]. But R&D also includes [b]research[/b]. It is OK if H-P moves more toward development as a way to improve the bottom line in the short and medium term.

    But who is going to do the "gee-whiz" technology now? Somebody will. I just hope it's a US company.
    karps
  • RE: How HP thinks about R&D: It's about new products not spending

    10% spending on R&D was the guidline in the good old days of HP, and the following still appears on the HP Labs official website:

    "In 1966, Bill Hewlett and Dave Packard decided to create a central research lab for HP to free scientists from day-to-day business problems so they could focus on ideas that would help shape the company's future."

    Squeezing everything into a process might just squeeze out ideas.
    Deucharman
  • IMHO: Hurd's cutting of R&D @ NCR was a near disaster!

    Here he goes again.
    ThriceRetired
  • Smart ideas usually evolves in profit

    Smart ideas usually evolves in profit.The real trouble is to determine what is a brilliant idea and what is not.
    magallanes
  • RE: How HP thinks about R&D: It's about new products not spending

    HP should spend some money on the junk software they ship with their printers. I have never had a problem with the hardware but I can't begin to tell you how many people are giving up on HP due to the problems trying maintain a conncetion with their printers. There is only so many times I want to reinstall drivers.
    bob_aug@...
  • RE: How HP thinks about R&D: It's about new products not spending

    I think they definately need to put more into R&D these days. Have you noticed their new version of the tx ultra-portable convertible laptop? its a STEP BACK from the previous model (tx2z). Its slower, has no GPU accleration (due to Intel GMA), has no Optical drive, and costs more than its predecessor. As someone who was looking forward to a newer (hopefully more powerful) version of the tx2 I can say that HP cmopletely disapointed me.
    Jimster480
    • I really miss my OmniBook 800

      HP lost it's way after that...
      914four
  • RE: How HP thinks about R&D: It's about new products not spending

    Putting more dollar may not be the most efficient way of getting the maximum output out in terms of products, ideas and new ideas.I would think that HP R & D has optimized the parameter "output w.r.t. dollar spent". And that is an intelligent approach. Lesjak and Hurd know about this, HP R&D group are aware of it. Licensing ink-jet principle for drug delivery is an eye opener. Energy efficiency is another key area amongst many other areas where HP R&D Dollar is being spent and wisely. I will put my two pence on HP R & D and its policy.

    Sugata Sanyal, Tata Institute of Fundamental Research, India
    sanyal@...
  • Its not R&D its marketing

    Its not R&D that makes the decisions it the marketing department that makes the calls. Its easy to sell the hardware once but get them with the ink and toner and you make a ton of money. Now you have ink and toner clones so what does marketing tell R&D to do is to put a chip on the toner and the Ink jet cartages this way people have to buy HP products not clones. I wish HP would make a printer when you install the software it takes 2 min instead of 10 mins of useless programs.
    rupaa62
  • RE: HP R&D: If it's not money, then what's the metric?

    Being efficient is all well and good, but innovation does not come from doing the same thing all the time and getting different results. Penicillin was a lab contamination failure. Temperature-stable rubber came from a spill on a hot stove. Bell Labs worked mightily for years to produce the transistor, but it took two guys in a garage to create Apple Computers. And H-P itself, as I recall.

    What is the metric for measuring success in R&D? Is the reduced financial input producing comparable research results? How do we compare these results? What are we measuring? Or is it all dollars-in-we'll-think-of-a-reason-why-later? Because if it's dollars-out-and-we'll-check-profits-later then you are falling down a well with no sides, no way to tell how fast you are falling. Or how far.

    What's the metric?
    progan01@...
    • Metrics

      The problem with measuring the effect of money and effort (inputs) spent on R&D is that the relult is probably some sort of function of lags over time and interactions between differnt variables at different lags. Analysts and stock-holders have a short term focus and most of them either don't unsderstand these complex interactions or don't have the patience. The merely react to the outcome of this complex set of interactions that have played out over time. The manager who makes a decision on R&D headcount and spend today is having an influence on what analysts and stockholders will see several years out in turns of impact on the company's product line, but is also influencing todays bottom line. There is a major disconect between the two. Tomorrows stockholders cant travel back in time to fire a CEO who made a bad decision before he makes it.
      monei011
  • RE: How HP thinks about R&D: It's not HP Invent anymore, it's HP Acquire

    Hurd is full of it! I work in HP labs and recently I've watched a lot of the top-talent engineers leave the company (or get laid off based on location... their managers fought to keep their jobs because they're brilliant engineers, but HP closed the site and killed the jobs there! They didn't even give them a chance to work remotely! - STUPID!)

    I can understand optimization for efficiency, but Hurd's gone overboard. We're dropping great people for the sake of $$$.

    Has anyone noticed, HP dropped the "Invent" under the logo? It's now HP Acquire! We see something we like, buy it, then get rid of the best people, usually because they make the most $$$.

    Ironically, Hurd said, "R&D was one of the biggest consumers of overhead in the Company." Apparently he ignored his own ridiculous bonus!!!

    Pardon my ranting, but I'm afraid Hurd's "efficiency" is too short-sited. He'll make stock-holders happy by cutting costs, but when the best engineers are all gone and the company products are garbage, he'll leave on his golden parachute and not care, while the company tanks! I used to believe in HP... but now I'm not so sure. :(
    kevsor1@...
    • Very well said!

      I saw several people I knew at HP who were brilliant leave during Hurd's tenure, some who were critical to HP success in certain markets. The fact is, IMHO, that HP is trying to compete with Dell more than IBM and as result they are losing focus on innovation. They haven't really done much with HP-UX in many years and seem to be focused on Windows. I used to swear by HP, their design and layout were brilliant, and the systems went forever. My hand held 41CX is still an awesome machine despite being a 30 year old design. I still have an old dual CPU Pentium Pro that I boot up every now and again to recover files stored on DDS tapes; it's now 14 years old and still runs well (not networked though, since Win2k is no longer being patched). Same with my 200LX The last two HP Pavillions I bought have both failed, one power supply and the other the CPU bracket broke and the fan fell off. Needless to say my current desktop machine is not an HP.
      Same thing with their notebooks, I've owned at least a dozen Portable Plus and Omnibooks over the years and the quality was lost on the last couple of machines; I now use a MacBook Pro, and it's a joy to use. The last laptop I enjoyed this much was an OmniBook 800.
      If I had to make a prediction, HP will continue on it's momentum until it runs out of steam at which point I predict it will be purchased, my guess would be by Sony.
      914four
  • It's a lot to do with re-inventing the wheel...

    HP and a lot of other companies don't have to do a lot of R&D like they used to, especially nowadays when all they have to do is to use some other companies' inventions and re-package them with the HP logos. In the worst case scenario, all that companies like HP and Microsoft and Google and IBM need to do is to buy the "inventive" companies if they have a product which would be beneficial to the company. A lot of research is already being done by third parties and when that research results in viable products, then just buy them out or just get a license to re-package and re-brand. No need to spend your own money on R&D.

    In essence, a lot of their research is being "farmed out" and done by the likes of Intel and AMD and Microsoft and others. All that HP needs to do is to re-package and re-brand those products.

    Whey re-invent the wheel when all that you have to do is to make the wheel bigger and prettier and marketable?
    adornoe
  • Internal R&D can't scale (was: How HP thinks about R&D)

    Thanks Larry for the thought-provoking post!

    Since the time of Carly the question has been how to feed the ever-growing "beast." The standard that CEOs are judged by is double-digit growth; for HP, with reported revenues of $120B, that growth is a Beast of almost unimaginable scale.

    The point of this comment is to suggest that HP has never acknowledged that it simply can no longer grow "organically," by way of internally-generated innovations, to fulfill its growth targets. This is not simply an issue of whether HP invests enough in R&D --- it is now meager both in terms of $$$ and in the size of its staff, including un-reported staffing cuts in UK and Japan --- but with HOW HP invests.

    HP seems to give lip service to the "open innovation" model without fully understanding, and leveraging the ways it can help their R&D organization scale to feed the Beast. HPLabs should be re-factored to operate more like the R&D organizations in Big Pharma, where researchers are expected to be domain experts focused more on external relationships that act as networked "force multipliers" and less on individual "bit bet" projects. Top researchers in OO environments measure success by introducing and driving entire fields of research, not clever gadgets and Powerpoint decks.

    In this vein, HPLabs and the few remaining corporations with captive R&D must see it as every researcher's job to foster community around particular innovations, to leverage a variety of networks. This was summarized in a recent blog, "Community as a Measure of Research Success," http://bit.ly/9z1VxV
    bitwacker
  • RE: How HP thinks about R&D: It's about new products not spending

    HP is now looking for $$$ invention, not for product invention. With the name of recession, they have cut huge from employees and compensated by Dec 2009. But, the actual cut from basic salary was not reverted yet. Who knows, is it going to happen?

    The recent HP strategies to make money, loosing more brilliant engineers. I cannot fully agree with Hurd's strategy. They have to acknowledge the effort producing by brilliant engineers and focus on the product innovation. As others said, clean up the junk software supplied with the product and make something more innovative product that can compete with everybody, not only with one.
    johnshibin@...
  • Best bang for your buck

    People looking at dollar is ignoring what the more important
    component which is ensuring the money is well spent and
    focused it the areas that actually produce and end product
    instead of pie in the sky pet projects that happen to be cool.

    Xerox is the prime example of spending billions of R&D in
    the past, producing lots of intellectual property and ideas but
    never actually taking the next step and turning them into real
    world products. I'm sorry but the shareholders want to know
    that when the money is spent on R&D, its going to actually
    turn around and appear in a product that'll produce even
    more profits. That is what the focus is.
    Macintoshtoffy
  • Would the current HP fund the development of inkjet printers?

    HP currently makes huge profits selling printer ink. HP makes those profits because they spent money on R&D to develop inkjet technology. At the beginning, there was no clear ROI on that R&D spend. Only in hindsight can we see that it created a multi-billion dollar business. Would the HP of today have spent the R&D money? NO. That's the problem with Mark Hurd. He knows the cost of everything and the value of nothing, and has no vision beyond the next quarter's numbers.
    johndoe445566
    • You're right - he only looks at the short-term

      I agree. Hurd is only interested in the short-term gain to put money in his pocket. The idea of long term innovation doesn't matter to him because when the company turns south because of lack of innovation, he'll just take the golden parachute & go to another company that needs to cut costs. Meanwhile, HP quality and ingenuity will continue to degrade.

      As an HP employee, this is very frustrating, but nobody cares about what the engineers say... just the stockholders.
      kevsor1@...