Leo Apotheker needs to target HP's forgotten businesses

Leo Apotheker needs to target HP's forgotten businesses

Summary: Can HP afford to converge itself in another direction? Can it afford not to? Leo Apotheker has a heck of a listening tour ahead of him.

SHARE:

This guest blog post comes courtesy of Tony Baer’s OnStrategies blog. Tony is a senior analyst at Ovum.

By Tony Baer

Ever since its humble beginnings in the Palo Alto garage, HP has always been kind of a geeky company – in spite of Carly Fiorina’s superficial attempts to prod HP toward a vision thing during her aborted tenure. Yet HP keeps talking about getting back to that spiritual garage.

Software has long been the forgotten business of HP. Although – surprisingly – the software business was resuscitated under Mark Hurd’s reign (revenues have more than doubled as of a few years ago), software remains almost a rounding error in HP’s overall revenue pie.

Yes, Hurd gave the software business modest support. Mercury Interactive was acquired under his watch, giving the business a degree of critical mass when combined with the legacy OpenView business.

But during Hurd’s era, there were much bigger fish to fry beyond all the internal cost cutting for which Wall Street cheered, but insiders jeered. Converged Infrastructure has been the mantra, reminding us one and all that HP was still very much a hardware company. The message remains loud and clear with HP’s recent 3PAR acquisition at a heavily inflated $2.3 billion which was concluded in spite of the interim leadership vacuum.

The dilemma that HP faces is that, yes, it is the world’s largest hardware company (they call it technology), but the bulk of that is from personal systems. Ink, anybody?

Needs to compete

The converged infrastructure strategy was a play at the CTO’s office. Yet HP is a large enough company that it needs to compete in the leagues of IBM and Oracle, and for that it needs to get meetings with the CEO. Ergo, the rumors of feelers made to IBM Software’s Steve Mills, and the successful offer to Leo Apotheker, and agreement for Ray Lane as non-executive chairman.

Our initial reaction was one of disappointment; others have felt similarly. But Dennis Howlett feels that Apotheker is the right choice “to set a calm tone” that there won’t be a massive a debilitating reorg in the short term.

Under Apotheker’s watch, SAP stagnated, hit by the stillborn Business ByDesign and the hike in maintenance fees that, for the moment, made Oracle look warmer and fuzzier. Of course, you can’t blame all of SAP’s issues on Apotheker; the company was in a natural lull cycle as it was seeking a new direction in a mature ERP market.

The problem with SAP is that, defensive acquisition of Business Objects notwithstanding, the company has always been limited by a “not invented here” syndrome that has tended to blind the company to obvious opportunities – such as inexplicably letting strategic partner IDS Scheer slip away to Software AG. Apotheker’s shortcoming was not providing the strong leadership needed to jolt SAP out of its inertia.

So it’s not just a question of whether HP can digest another acquisition; it’s an issue of whether HP can strategically focus in two different directions that ultimately might come together, but not for a while.

Instead, Apotheker’s – and Ray Lane’s for that matter – value proposition is that they know the side of the enterprise business applications market that HP doesn’t. That’s the key to this transition.

The next question becomes acquisitions. HP has a lot on its plate already. It took at least 18 months for HP to digest the $14 billion acquisition of EDS, providing a critical mass IT services and data center outsourcing business. It is still digesting nearly $7 billion of subsequent acquisitions of 3Com, 3PAR, and Palm to make its converged infrastructure strategy real.

HP might be able to get backing to make new acquisitions, but the dilemma is that Converged Infrastructure is a stretch in the opposite direction from business software. So it’s not just a question of whether HP can digest another acquisition; it’s an issue of whether HP can strategically focus in two different directions that ultimately might come together, but not for a while.

So let’s speculate about software acquisitions.

SAP, the most logical candidate, is, in a narrow sense, relatively “affordable” given that its stock is roughly about 10 – 15 percent off its 2007 high. But SAP would be obviously the most challenging given the scale; it would be difficult enough for HP to digest SAP under normal circumstances, but with all the converged infrastructure stuff on its plate, it’s back to the question of how can you be in two places at once. Infor is a smaller company, but as it is also a polyglot of many smaller enterprise software firms, would present HP additional integration headaches that it doesn’t need.

Little choice

HP may have little choice but to make a play for SAP if IBM or Microsoft were unexpectedly to actively bid. Otherwise, its best bet is to revive the relationship, which would give both HP and SAP the time to acclimate. But in a rapidly consolidating technology market, who has the luxury of time these days?

Salesforce.com would make a logical stab as it would reinforce HP Enterprise Services’ (formerly EDS) outsourcing and BPO business. It would be far easier for HP to get its arms around this business. The drawback is that Salesforce.com would not be very extensible as an application set, as it uses a proprietary stored procedures database architecture. That would make it difficult to integrate with other prospective ERP SaaS acquisitions, which would otherwise be the next logical step to growing the business software footprint.

Can HP afford to converge itself in another direction? Can it afford not to?

Informatica is often brought up – if HP is to salvage its Neoview and Knightsbridge BI business, it would need a data integration engine to help bolster it. Better yet, buy Teradata, which is one of the biggest resellers of Informatica PowerCenter – that would give HP far more credible presence in the analytics space. Then it will have to ward off Oracle – which has an even more pressing need for Informatica to fill out the data integration piece in its Fusion middleware stack – for Informatica. But with Teradata, there would at least be a real anchor for the Informatica business.

HP has to decide what kind of company it needs to be, as Tom Kucharvy summarized well a few weeks back. Can HP afford to converge itself in another direction? Can it afford not to? Leo Apotheker has a heck of a listening tour ahead of him.

This guest blog post comes courtesy of Tony Baer’s OnStrategies blog. Tony is a senior analyst at Ovum.

You may also be interested in:

Topics: Enterprise Software, Banking, Hewlett-Packard, SAP

Kick off your day with ZDNet's daily email newsletter. It's the freshest tech news and opinion, served hot. Get it.

Talkback

4 comments
Log in or register to join the discussion
  • RE: Leo Apotheker needs to target HP's forgotten businesses

    Dana,

    Interesting perspectives. Hopefully, HP's decision to bring on both Apotheker and Lane reflects a recognition that HP must evolve from being a products, and aspiring infrastructure services company, to becoming an enabler of business solutions.

    I would, however, be very surprised and dismayed if the company decides to acquire an application software provider. First, this is so far outside the company's culture and expertise that it would be almost impossible to integrate. Second, it would alienate third-party ISVs and make it tough for HP to position its infrastructure products and services (which will always account for the vast majority of its revenues) as being application neutral.

    It's one thing for a big software company (Oracle) to acquire a small hardware platform company to create an optimized, end-to-end solution. It is very different for an infrastructure company to optimize for a specific application.

    Tom Kucharvy
    tomkucharvy
  • Numbers do not lie

    However, numbers to not tell the complete truth either.<br><br>HP has been running its guidance control system by spreadsheet. Yes, the quants on Wall Street love it. But people, employees in particular, know more of the truth than the spreadsheet does.<br><br>In the acquisition space, HP has used their guidance system just like a missile defense system; acquire and destroy.
    pwatson
  • RE: Leo Apotheker needs to target HP's forgotten businesses

    HP needs to learn to be a technology company. As mentioned, HP equates technology with hardware. yet, HW is a commodity business across the board, servers, printers, storage, laptops, netbooks all suffer from thin margins. IF, and that's a big if, HP can grow it's software business and leverage it's services capabilities for more than break/fix, then they will be a technology company. Perhaps Apotheker is the right guy given his software company background. Time will tell. Hopefully he will understand the benefit of a services led approach to deals (a la IBM). I'm not sure Hurd ever did given the headcount and pay cuts once EDS was acquired.
    pegkayak
  • RE: Leo Apotheker needs to target HP's forgotten businesses

    Hewlett and Packard died and with them Hewlett-Packard died. After Agilent, the more correct descendant of the Hewlett-Packard legacy, was spun off the rest became merely HP. It is not the company that was invented in a garage. Pretending that it is that company is disingenuous at best. If HP is to succeed, it must stop believing it is that company and accept that it has more in common with IBM than any other company imagined or real. They MUST compete with IBM or die. That includes technology, services AND software. If they do go head to head with IBM they will most likely fail but they will have died fighting at least. They can start by taking a page out of IBM's play-book and spinning off their laptop, printer and perhaps even their PC businesses. They are just holding HP back from competing where they really need to be competing and are dead weight in an HP vs. IBM grudge match.
    Mark Bryant