Six reasons why HP's IBM moment will prove elusive

Six reasons why HP's IBM moment will prove elusive

Summary: HP's transformation moves resemble what IBM pulled off, but the timing and situations are vastly different.

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Did HP have its IBM moment as it outlined a series of moves to transform the company? Comparing the companies is a straightforward exercise since HP and IBM are similar, but it's unlikely that Leo Apotheker will be able to replicate Lou Gerstner’s accomplishments.

Lou Gerstner

Lou Gerstner

The temptation to cast HP's Apotheker as Gerstner is hard to resist. New CEO comes in, remakes company, sheds low margin businesses, makes a few bets and transforms a massive operation. It's a story out of central management casting.

And there are other similarities in what HP is trying to do and what IBM did. Among them:

  • HP is cutting its losses early on WebOS because it couldn't compete with Apple. IBM had to acknowledge its OS/2 wasn't going to compete with Windows.
  • HP plans to shed its PC unit because of margins. IBM withdrew from the PC market in steps. First, IBM pulled away from the retail market and then sold its PC unit to Lenovo in 2005 (after Gerstner left).
  • HP is betting on software and services. Apotheker is focused on making HP's services more strategic to customers and buying Autonomy for $10 billion. Gerstner focused on services, moved into high-end consulting and current Big Blue CEO Sam Palmisano doubled down on software.
  • And both companies have research and development arms that can be leveraged.

Leo Apotheker

Apotheker said on a conference call:

HP is at a critical point in its existence and these changes are fundamental to the success we all want as investors, employees, and customers. These changes I've outlined today will transform HP and accelerate the strategy we have laid out and the transformation starts today. Decisive steps are never easy and change doesn't happen overnight.

With that backdrop, it's no wonder that there are plenty of articles noting how HP is following in IBM's footsteps. As David Gewirtz notes, HP's moves will be in business school case studies for years to come.

But just because HP is following in IBM's footsteps doesn't mean that Apotheker's master plan will work. There are critical differences to consider.

Time: Apotheker noted that change doesn't happen overnight, but it's unclear whether he will get a decade to transform HP. Gerstner's revamp of IBM took almost 10 years before it was complete. Apotheker has been on the job nine months and has missed quarters, suffered from news leaks and outlined strategies that have been changed in just a few months.

Here's HP's vision from March.

And here's what happened on Thursday.

Gerstner's IBM turnaround occurred at a different time. Shareholders may not have the same patience these days.

The post-PC era: In investing timing is everything. IBM's move out of PCs came when the industry was strong. Sure, IBM couldn't make money on PCs, but at the time losing money looked specific to Big Blue. Dell and HP were doing just fine. Fast forward a few years and HP is the top dog in the PC industry, but the conventional view is that we're in a post PC era. This era is about mobility, tablets and smartphones. If you buy into the post PC era rap then you assume there's a day when no one wants a PC. HP's PC unit can go from being top dog to just a mutt of a business few want. In other words, IBM's exit from the PC business had much better timing.

Also see: Analysts crush HP's revamp: 'Juggling in a wind tunnel'

The under promise, over deliver axiom: When Gerstner came to IBM, the company was a flat out mess. Bankruptcy was actually pondered and the prevailing view was that IBM should be broken up. Gerstner had only one way to go: Up. Now contrast what Gerstner walked into relative to Apotheker. Apotheker inherited an HP that regularly made its quarters. Under Mark Hurd, HP hit its numbers. Today it's clear that Hurd's cost cutting may have set HP up for a fall. Hurd cut costs on the services business and lost talent. Now HP is a no-show in high level consulting. Hurd also bought Palm. Apotheker just unraveled that mess. However, Apotheker isn't exactly in Wall Street's good graces these days. In other words, Apotheker has less wiggle room than Gerstner did.

Software acquisition candidates: IBM built its software business over time with a strategy that veers away from the big bang. HP has to play catch-up in software and many likely candidates have been taken off the table by both IBM and Oracle. As a result, HP may have to overpay for companies like Autonomy. Given HP's scale and revenue, the company needs big bets to move the software needle. Contrast HP's approach to Dell, which is quietly gobbling up software and services companies that can be tucked in easily. HP ignored software for too long.

Services: When IBM launched its foray into services, the field wasn't all that crowded. There was a nice crosspollination between technology and consulting to be had. In 2002, IBM bought PwC's consulting arm in a move that changed the services game. Apotheker has HP's services unit---the former EDS---but acknowledges that the company has to focus on more high-level engagements. How will HP get there? If you follow the IBM playbook, HP may want to swoop in and buy Accenture. The problem is that HP just blew $10 billion on Autonomy. HP's services turnaround will take multiple quarters.

Research: Through the years, IBM has spent roughly 6 percent of revenue on research and development. Meanwhile, IBM has honed its ability to turn research into products and services. Does anyone doubt that the Watson supercomputer will have an offspring in some hospital near you in the future? Under Hurd, HP's research and development spending fell to the 2 percent to 3 percent range. Apotheker is reinstating that R&D investment, but doesn't have the financial flexibility to really step on the gas. In any case, R&D investment may take years to play out. And as noted previously, Apotheker may not have all that much time.

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Topics: Emerging Tech, CXO, Enterprise Software, Hardware, Hewlett-Packard, IBM, IT Employment

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7 comments
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  • Huawei and Aplle are hurting hp a lot!

    in the professional space Huawei has been hurting HP big time.
    in the private sector, the USD 1000+ machine Space is Apple kingdom.
    in the mobile Space HP is non existent.

    HP got It very wrong in the hardware space for years and one reason for that is Microsoft got it very wrong too.

    I agree, pulling out of the hardware Space is going to be a challenge. I am not sure I understand the move. neither does the Market it seems. share price went down big time in one day and this is not finished. S&P marked them down.

    Maybe the CEO is having a middle life crisis :-)
    Drakkhen
  • Shaft the customer

    I don't own apple products but apple is customer and profit centered. HP has lost its connection to its customer if it EVER had it. HP used to make the BEST test equipment hands down. Now its not run by wonks but bean counters. Remember your "home customers" also WORK in industry, finance, banking. Do you think they will forget you ditched them. What always amazes me is that ONE man can have drastic effects on both millions customers and thousands of employees.
    proton_z
  • RE: Six reasons why HP's IBM moment will prove elusive

    The next Lou Gerstner? Leo Apotheker is the next John Sculley.

    IBM were never a consumer company. By moving HP into all Enterprise, they are completely tied to the Wall Street economy.

    Ask Cisco how well that's going...
    dazzlingd
  • Will any savvy tech editor stop talking about the "post-PC era"

    as if it was a given? One of the stupidest business moves ever by IBM was to sell its PC division, lock, stock and barrel to the Chinese (lenovo) and we're not talking about just any transfer. IBM gave up everything, including the intellectual property (imagine, for a moment, that these guys were the same ones who "invented" the personal computer, the PC, and now that whole knowledge has been sold for a few bucks!). Saying that mobile computer represents a post-PC era is tantamount to saying that the Segway represents the post-automobile era (!) Personal Computers, PCs, and specially desktop computers are here to stay for many years, as a fixture in any office or home. People don't get creative with their fingers (touchscreens), you will still need a keyboard, a mouse, a design tablet, all of those attachments to your PC. Do not mistake retrieving information with your fingers on a touchscreen for the act of actually producing something (not just typing e-mails or text messages). There are billions of people who still don't have access to a computer and that is a huge potential market. The Chinese, think long-term, not just short-term unlike IBM, HP and white elephant companies, which strive to keep their tech challenged CEOs and investors happy. Read this book: "The Lenovo Affair: The Growth of China's Computer Giant and Its Takeover of IBM-PC". And don't forget that in a knowledge management economy within a global context, talent is not exclusive of any nation. It's like classical music: you will find 'virtuosos' in any country.
    Gruffydd
  • RE: Six reasons why HP's IBM moment will prove elusive

    [For some reason I haven't been able to edit my own post which I'm reposting here]
    Will any savvy tech editor stop talking about the "post-PC era" as if it was a given? One of the stupidest business moves ever by IBM was to sell its PC division, lock, stock and barrel to the Chinese (lenovo) and we're not talking about just any transfer. IBM gave up everything, including the intellectual property (imagine, for a moment, that these guys were the same ones who "invented" the personal computer, the PC, and now that whole knowledge has been sold for a few bucks!). Saying that mobile computer represents a post-PC era is tantamount to saying that the Segway represents the post-automobile era (!) Personal Computers, PCs, and specially desktop computers are here to stay for many years, as a fixture in any office or home. People don't get creative with their fingers (touchscreens), you will still need a keyboard, a mouse, a design tablet, all of those attachments to your PC. Do not mistake retrieving information with your fingers on a touchscreen for the act of actually producing something (not just typing e-mails or text messages). There are billions of people who still don't have access to a computer and that is a huge potential market. The Chinese think long-term, not just short-term unlike IBM, HP and other white elephant companies, which strive to keep their tech challenged CEOs and investors happy regardless. Read this book: "The Lenovo Affair: The Growth of China's Computer Giant and Its Takeover of IBM-PC". And don't forget that in a knowledge management economy within a global context, talent is not exclusive of any nation. It's like classical music: you will find 'virtuosos' in any country.
    Gruffydd
    • RE: Six reasons why HP's IBM moment will prove elusive

      @Gruffydd
      By the time IBM sold their PC division to Lenovo..

      1) other PC manufacturers had overtaken IBM in the PC market... IBM was a distant 3rd, not the market leader, when they sold off their PC division.
      2)other manufacturers had already moved to China...so I would question what technology exactly that you claim is critical... PCs are not the do all, end all of the technology chain. Intel and AMD, not IBM are the chip manufacturer for the PCs.
      3) Most analysts agree that IBM could have gotten more for their PC division if they had sold it earlier.
      4) Alot of the PC manufacturers are no longer around, Packard Bell was sold, Gateway was sold, Compaq was sold.. By 2004, what was special about IBM selling to Lenovo.
      5) Margins have disappeared in PC's, IBM made the business decision to go with higher margin products... and NOW they have nevered been more profitable... How is that a 'bad' business decision or short term? They knew that PCs would eventually lose their profitability and choose to concentrate on things that would make more money.

      FYI... IBM has been the patent leader for most of the last decade... they are most certainly looking at the long term...

      FYI... IBM's R&D budget exceeds HPs and Oracle's combined, every year... even with HP still making PCs.

      As for it being the 'post-PC' era... it just means that PCs will never experience the double digit growth it experienced in the past.
      scotth_z
  • RE: Six reasons why HP's IBM moment will prove elusive

    First off I want to say the PC era is alive and well. I just completed 6 years of college and graduate studies and entered the work force with a real career for the first time and the PC is still king. Saying smartphones and tablets are taking over is absurd as saying that golfcarts are taking the automobile industry. I have a smartphone (Samsung charge) and an iPad2 and these devices are fun and portable and do admittedly make me feel connected but when it comes down to productivity these devices are inept. With Steve Jobs gone hopefully the over the top marketing hype and fan boys will disappear and we can all see the tech world for what it really is and think more with our heads and less with our hearts
    frandaddy