HP, Apotheker prep master plan: Five top issues

HP, Apotheker prep master plan: Five top issues

Summary: When Hewlett-Packard CEO Leo Apotheker outlines his master plan for the company in San Francisco Monday he will face a lot of doubters. Here's a look at the top five hot topics Apotheker will have to address.

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When Hewlett-Packard CEO Leo Apotheker outlines his master plan for the company in San Francisco Monday he will face a lot of doubters.

After all, Wall Street analysts have become quite skeptical about HP, especially after the latest quarter and outlook. HP's quarter wasn't a disaster, but did highlight a few worries about consumer PC demand and lackluster services growth.

Here's a look at the top five hot topics Apotheker will have to address Monday.

Software. Apotheker has made it quite clear that he intends to solve HP's software problem. The question is how he plans to do it. On one front, HP faces SAP and Oracle. SAP is friend. Oracle is foe. Then IBM has gobbled up software companies at an astonishing rate in recent years and now covers analytics, middleware and a bevy of other areas. In comparison, HP has a weak software hand.

Obviously, acquisitions will play a role here. But Apotheker has to pick a specialty. One idea is that HP could go heavy on the open source, potentially acquire Red Hat and aim to commoditize non-critical workloads. That message would definitely resonate with technology executives. Another path for HP would be to go heavy on software as a service. My list of SaaS players highlights an industry that could be consolidated on the cheap. HP could be that consolidator and pluck off many key areas.

How will services be fixed? One big trouble spot on HP's last quarter was the services business. The growth just isn't there. While IBM, Accenture and others have claimed the high ground in services, HP's unit is flattish. Why?

Here's my take: Under former CEO Mark Hurd, services headcount was frequently cut. Hurd also didn't quite grasp business process outsourcing. Add it up and Hurd thought services was a lot like the hardware business, but you simply can't automate everything. Relationships matter in services. The former EDS saved HP's earnings in the recession, but Hurd milked the cash cow dry. Now Apotheker has to clean up the services mess while IBM fires on all cylinders and companies like Xerox, which acquired ACS, get their groove on. Xerox is melding printing and document management intellectual property with ACS' services. HP could have done the same, but lacked the vision.

WebOS: In a recent Bloomberg Businessweek interview, Apotheker said that the WebOS would be embedded on HP PCs. Just because you have distribution doesn't mean consumers will use the WebOS. What will HP do to make the WebOS the glue that ties mobile devices, printers and PCs together? The theory is there, but the vision of the secret sauce needs to form.

Can HP innovate? Apotheker also indicated that HP lost its soul. If you look at HP Labs' big bets a lot of the topics sound me-too. HP Labs is an asset that needs to be beefed up. Hurd cut HP's R&D spending down to the level of Dell as rivals like IBM remained steady at about 6 percent of revenue---even as sales ballooned. There's a balance between pure research and creating products. HP needs to get that R&D balance back. The problem: Apotheker will raise R&D spending at the expense of profits and get reamed for it. Innovation investments don't pay off in two quarters.

Apple envy and the future of the PC business. The innovation issue quickly leads to HP's consumer business. With consumer PC demand flagging, can HP come up with the designs and toys that will wow the masses. The parts are there and HP is capable of good design. In addition, the tablet field is open. Apple's iPad is the clear leader, but there isn't a No. 2 player established. HP could be a tablet player with the WebOS. However, HP lacks the focus of Apple. If HP can't compete with Apple on tablets---not that other PC makers have---there's an argument to be made that the company shouldn't bother with PCs. Why would you want the PC business in the post-PC era?

The numbers certainly add up. The consumer is low margin. The enterprise is high margin. From a business perspective, it makes sense to focus on the enterprise. Could HP exit the consumer business like IBM did? It's possible, but not today.

Look for Apotheker to combine WebOS, tablets and PCs and see if he can compete with Apple. If that strategy doesn't work out, Apotheker could ultimately exit the Apple-envy game. Barclays analyst Ben Reitzes wrote in a research note:

We are getting questions from investors on HP's commitment to its PC business, which accounts for about 32% of total company revenues and 15% of profits. While we think selling the PC business is unlikely, we believe over the long term the potential sale of HP’s PC business (in an IBM-like move to shed lower-margin businesses) would be a positive event given persistent secular threats in PCs. Near term, however, execution would be crucial as there would likely be some additional pressure on other segments such as servers, given a lack of purchasing scale.

Reitzes also noted that HP's profit margins would surge if it dumped the personal systems group.

We believe that HP’s issues in the PC business have reached a critical point. While those linked to the Wintel value chain may tell you differently, it appears increasingly clear that consumer PCs are facing significant long-term challenges from the rise of smartphones and tablets – these challenges are not going away. While HP has Palm and the ability to even make PCs with its own OS, it just seems too little too late. HP is the only company we cover struggling in China and while that country is likely to improve for HP, we believe that tablets will cannibalize PCs there too.

Topics: Hewlett-Packard, Hardware, Laptops, Mobility, Operating Systems, Tablets

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24 comments
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  • How do they do it?

    Isn't IBM amazing? Every time a seriously disruptive technology has threatened their core business, whether it was electromechanics, computers, solid state electronics, microelectronics, the Internet... they have managed to dance away unscathed while those around them were falling into the abyss.

    While Carly Fiorina was buying Compaq and increasing HP's exposure to the Client Side, IBM was exiting the business and heading for The Cloud. Which was the better decision?
    Robert Hahn
    • IBM

      @Robert Hahn
      IBM made the better decision.
      davebarnes
    • RE: HP, Apotheker prep master plan: Five top issues

      @ Robert Hahn

      Unscathed? Lou Gerstner's success in turning round IBM in the 90s has become a business school classic. Before Gerstner salvaged it, the firm was widely viewed as headed towards insolvency.
      WilErz
      • The point is, they got away

        @WilErz I didn't say they were never threatened. In fact I said they were. All businesses have trouble dealing with fundamental technology shifts. My point is, IBM escaped again... as they have numerous other times. The boneyard is full of one-time IBM competitors who didn't make it through one transition or another. Somehow IBM always manages to see the tree in the road and swerve just in time.

        To be fair, HP did an excellent job of hiding in plain sight (as a printer company) during the early days of the PC business when IBM was mopping the floor with DEC, TI, NCR, etc. They are the only surviving member of the 'minicomputer generation'. Can they manage another transition as well? We'll see.
        Robert Hahn
  • Wasn't there a song:

    Suicide is Painless?

    HP needs to go back to its INNOVATIVE roots.
    davebarnes
    • RE: HP, Apotheker prep master plan: Five top issues

      @davebarnes
      Does anyone remember the hoopla when Compaq, now a part of HP, released the first Pentium 386 computer? Where went that ingenuity and marketing ability?
      Wakemewhentrollsgone
      • RE: HP, Apotheker prep master plan: Five top issues

        @ ptorning

        To be fair, Compaq only got the chance to be first with a 386 PC because IBM management were incompetent. IBM refused to release a 386-based system, imagining that they could thereby keep 386 PCs off the market. They further insisted that OS/2 (a joint project with Microsoft) target the 286 (instead of the 386 as Microsoft wanted), which is one of the key reasons OS/2 failed in the marketplace against Windows/386 (including its derivatives, e.g. Windows 3.x/9x).
        WilErz
      • RE: HP, Apotheker prep master plan: Five top issues

        @WillErz

        I agree with your discussion of the history, but do you remember the "buzz", the excitement? That's what I was referring-to. It seems long lost. When was the last time, if ever, that an HP product had that "buzz", that excitement?
        Wakemewhentrollsgone
    • RE: HP, Apotheker prep master plan: Five top issues

      @davebarnes The song "suicide is painless" is the theme song on M*A*S*H, I always liked that tune.
      j-mccurdy@...
  • The consumer is low margin. The enterprise is high margin

    that's a telling statement.<br><br>Is enterprise in america paying too much and having stupid CIOs? is that one of the reasons enterprise in the u.s is (in many sectors) in big crap trouble? you would think enterprise would more ferociously try to cut expenses and get the best deal vs consumers <br><br>it's also interesting that companies with inferior products or those doing badly like HP with it's Windows Slate and dell with it's Streak says they will aim those products at Enterprise (really both Hp and Dell made statements like that) . So is enterprise more stupid and easier to convince to buy bad products? perhaps it's due to the cozy (free lunch, junket to resorts marketing that companies like Dell have with enterprise purchasing managers) that allows this to happen. CEOs should wake up.
    Davewrite
    • RE: HP, Apotheker prep master plan: Five top issues

      @Davewrite While the profits on enterprise sales may be larger, the cost to get those sale sis also larger ... how many lunches/events/etc do you have to give a consumer to get them to buy one PC? How many lunches do you think it costs to win the business of a multi-million dollar company?

      Let's compare apples to apples.

      Ludo
      Ludovit
    • RE: HP, Apotheker prep master plan: Five top issues

      @Davewrite

      Dell has always though of itself as the "Great Commoditizer". It is now entering I/T services in a big way and I can't help but wonder if it's intent is to "commoditize" enterprise services as well. It would certainly keep me up at night as the CEO of a big services company.
      SlithyTove
      • RE: HP, Apotheker prep master plan: Five top issues

        @SlithyTove
        I think Dell realize two things... 1) hardware margins, especially at the low end of the market is shrinking rapidly...
        2) services has a greater margin... and gives a better return on he dollar spent.
        3) services can promote hardware sales and vice versa...
        4) Dell bought the company of the original outsourcer... you can commoditize software delivery, but too a point...
        scotth_z
      • RE: HP, Apotheker prep master plan: Five top issues

        @scotth_z

        About #4. HP bought the original outsourcing company EDS. Perot systems, the company Dell bought, was a company Perot setup after he sold EDS to GM. Dell really should have bought EDS before HP did.
        portablenuke
    • RE: HP, Apotheker prep master plan: Five top issues

      @Davewrite

      So, Apple and Intel must be doing terribly because they make so many things which are/end up in consumer products, right? Oh... wait. Just because HP sucks at dealing with the consumer market doesn't mean it's a market they should get out of. They should just stop sucking.

      Is the Slate doing badly? It's priced at $799 and has been on back order since its release. HP has supply chain and forecasting issues, but someone must be ordering them.
      tkejlboom
  • Relationships matters!!!!

    I never understand why EDS gave to much importance to relationships, after HP brough EDS I did "you simply can?t automate everything. Relationships matter in services. The former EDS saved HP?s earnings in the recession, but Hurd milked the cash cow dry." Another reason why many customers/employees were affraid of HP. Why the management never saw Hurd mistakes
    Jaime69
  • RE: HP, Apotheker prep master plan: Five top issues

    As a former EDS employee (and still an HP employee), the comment about Hurd milking the cash cow dry is spot on. Somehow, Hurd convinced his board and Wall St that the skills of EDS veterens with 20 years of industry experience and client relationships could be replaced by a 25yr old IT graduates in China, India and Brazil. The legendary culture of EDS could have added huge value to HP, instead it was gutted in the years since EDS was purchased by HP. There was no attempt whatsoever to create a dialogue about culture and the value of it between the two companies. It was a pure play to obtain the 7000 corporate accounts EDS had around the world. It will be interesting to see what Apotheker thinks he can do to repair that damage.
    optimax99
  • RE: HP, Apotheker prep master plan: Five top issues

    "The numbers certainly add up. The consumer is low margin. The enterprise is high margin. From a business perspective, it makes sense to focus on the enterprise. Could HP exit the consumer business like IBM did? It?s possible, but not today."
    I have some good news and some bad news for you.... Good news is that there will be a effort to rebuild both consumer and enterprise sales and service... The bad news: A large info storage corp. gave a contract to Dell to upgrade their systems!!!
    puppadave
  • RE: HP, Apotheker prep master plan: Five top issues

    I have been reading the comments on this and reflecting on my 20+ year relationship with the DEC/Compaq/HP group. At one time each of these individual entities had excellent customer relationships and technical prowess as did EDS. Those days were driven by the individuals who were key to their creation. It seems to me that their demise was brought on by the 'all knowing' MBA crowd. These individuals thought they knew better what a company needed, so they slashed and burned their way through the companies before they left them in ruins. These companies were successful before then with technical people running them and building real world relationships with their customers. Maybe we should go back to that era.
    mkemp@...
  • RE: HP, Apotheker prep master plan: Five top issues

    Why would HP buy RedHat when it has WebOS? I'm sorry, but that's a very uninformed statement to make. WebOS can be leveraged to be the equivalent of UNIX for the Mac. Imagine what would happen if PCs operated on a layer of WebOS and ran Windows inside a super-secure and super-stable shell? Hmmm? What if your phone and tablet and your printer ran from the same shell? Hmmm? HP can build an ecosystem just like Apple's iOS but only IF they can get away with it. If they fail in the implementation because of acquisition-driven problems and a lack of evangelism then they will certainly get screwed with a giant opportunity that they never realized. BUT... If they can put together this ecosystem then it's very likely that HP will do for the enterprise world what Apple has done for the creative world. Look at most creative artsy folks and see how much they depend on iOS; it's more than a fashion statement for them. What if Apple could be an enterprise-level champion? THAT is what HP should bet the farm on doing.
    ifyoucanreadthis