Analysis: What kind of company will HP become?

Palo Alto (CA) - If any of the 14,500 Hewlett-Packard employees likely to be terminated over the next 18 months, or the other HP employees whose pension contributions will be frozen, can take anything to heart, it’s that new CEO Mark Hurd developed HP’s cost-cutting plan very scientifically. And, most important for a public corporation, analysts seem to be happy about the changes to come.

In a media conference call this morning to announce HP’s new program of cutbacks, Hurd told an HP employee that he and CFO Bob Wayman (who hired Hurd during his own term as interim CEO) implemented an intricate financial projection of the company’s present and future performance. This projection took into account not only cost models - obviously the focus of any cost-cutting program - but revenue, gross margin, and cost of goods sold models as well. "Typically, what you do in those models is start by addressing your costs up front," Hurd told the employee, "because as you do that early, it tends to be double-accretive towards your process, because it allows you to compete fast and more effectively in those markets where you want to grow revenue." But Hurd added his program shouldn’t be viewed as focusing singularly on cost, but instead having a broader vision of "the aggregate holistic model, [working] your way back through the various processes."

This language best characterizes Hurd’s approach to the problem of redefining HP, especially in contrast to the approach former CEO Carly Fiorina took in June 2002, when her company announced the elimination of 15,000 jobs in the wake of HP’s ongoing merger with one-time rival Compaq. The Fiorina approach was seen as singularly and stubbornly focused on cost cutting, and was even hailed for that reason, up until the point where the $2.5 billion in savings the Fiorina plan projected for her company, never materialized.

When Fiorina was first hired, Pacific American Securities analyst Michael Cohen told us, "they ran the ads with the garage that it all started in, [trying to resurrect] the original true spirit of the company. Hurd really seems to be headed in the opposite direction." So if we’re asking what kind of company HP is likely to become, stated Cohen, "it seems to be a U-turn from the vision that Carly [Fiorina] was taking the company."

Jonathan Eunice, principal analyst with Illuminata, disagrees : "I guess the biggest surprise is how little the cuts seem to change the overall strategies, directions, and complexion of HP," Eunice told Tom’s Hardware Guide. Despite the very large number of people being let go, it doesn’t seem as though there are any major products or initiatives being axed. This is staying the course - albeit with better SG&A [selling, general, and administrative expenses] - rather than becoming about becoming something different."

The new cost-cutting plan announced this morning seeks to recover $1.9 billion in cost savings, through an elimination of an estimated 10 percent of HP’s workforce over the next 18 months, combined with a freezing of pension benefits for employees with lesser tenure. Though the specifics of the job cuts have yet to be worked out, many will come through the dissolution of the Customer Service Group. HP’s press release this morning stated that CSG’s functions will be acquired by three other existing divisions - Technology Solutions Group (TSG), Imaging and Printing Group (IPG), and Personal Systems Group (PSG). But in a conference call with analysts this morning, CEO Hurd characterized the restructuring more as a bonding between CSG and TSG only, eliminating redundancies and handoffs in responsibility between those two groups. Such handoffs show up on Hurd’s and Wayman’s models as what they call "matrices." "I don’t have very high affection for matrices," Hurd told analysts, adding that their elimination makes the company "simpler, nimbler, and quicker.

"While I know that the head count numbers are the headlines that come here," added Hurd, "that’s not really how we approached it. We approached it by trying to eliminate multiple decision makers on a decision - eliminate handoffs, eliminate matrices, raise accountability. In the case of this integration of CSG and TSG, this was very much streamlining the accountability structure, getting a shorter line between the creation of an idea and the customer, eliminating layers, and getting us clearly focused on what we need to get done."

Michael Cohen casts a skeptical eye toward this part of the plan : "I think [Hurd] was trying to give an announcement that was all things for all people." It would be nice, Cohen told us, if all those job cuts could be taken out of the peer support division, without affecting revenue, quality of business, or the coveted research division. But to come up with 14,500 reduced positions, he said, "I’m not convinced that you can pull it all out of duplicated support roles, [to] get greater efficiency."

In characterizing his plan to analysts, Hurd glossed over a key issue, dealing with renewed focus on the three principal interests of the company - enterprise systems, research, and customer products. The latter tier will be "fronted," Hurd said, by the IPG group, thus moving the company away from what was supposed to have been one of the key payoffs of the Compaq merger : greater exposure in the retail personal systems market.

"I wouldn’t want to see them trying to copy the business model of Lexmark and Dell in printers, for example," Michael Cohen told us, "and pull away from what really built up their brand image, which is R&D and innovation and quality in the product."

In a report released this afternoon by Cindy Shaw, Senior Analyst at Moors & Cabot, taking Hurd’s cost-cutting measures into account, she projects HP’s net operating income for fiscal year 2005 (which ends in October) of $5.3 billion, on sales of $86.5 billion. Cohen stated Pacific American’s net income estimates for the same year will be $4.3 billion, on roughly the same sales amount. Given the gap between those two numbers, Cohen said, "The financial opportunity for the direction Mark is going is actually huge." Cost cutting measures will especially be necessary, said Cohen, in the PC unit, especially to catch up with competitive structures such as Dell’s. "So their opportunity is not just growing revenue - they have a lot of revenue up there. They really just need to put more on the bottom line. And that’s something that Carly [Fiorina] was never able to do. It appears that Mark [Hurd] is well on his way to try to deliver that."

The Moors & Cabot report paints a bright picture for the Hurd plan. Cindy Shaw projects the earnings per share (EPS) benefit from restructuring to be $0.16 for fiscal 2006, rising to $0.27 in fiscal 2007. The report acknowledged street analysts’ expectations for as many as 25,000 job cuts - and perhaps some disappointment regarding the lesser number - but added that Hurd comforted investors by providing positive language regarding minimal disruption to the company’s business.

Another key difference between Hurd’s plan and Fiorina’s concerns the personality behind it. The scientific method which Hurd uses to characterize his plan is just one factor he employed to help prevent it from being largely characterized as "the Hurd plan." "I don’t want this to be viewed as, ’Mark came in and did all this work.’ There was a lot of work done by this company before I got here," Hurd told the media this morning, "and all that happened when I got here is, we started to focus to bring it to a conclusion, and hopefully added some energy to it. But this was not a one-person show here. This was a team effort to get this done, and a lot of hard work." Hurd made a very similar comment earlier in the day to analysts.

By contrast, the Fiorina plan practically had "Carly" tattooed to it. As head of the highest ranking American corporation at that time with a female CEO, it was impossible for business and technology magazines not to cover it in-depth - with business magazines fumbling over the technology strategy, and tech writers looking up "P&L" on Google. Partly due to her personality, partly simply because of her gender, the bold plan she undertook was rarely attributed to a team. Like rookie racer Danica Patrick, Carly Fiorina’s performance was destined for examination under a microscope.

Hurd may not have his predecessor’s charisma. But there is still an obvious advantage to his being allowed to distribute responsibility for this plan throughout the company. With analyst-comforting terms like "double-accretive" and concepts such as broader holistic models governing HP’s new corporate vision, the company’s new keyword under Hurd’s leadership may not be "invent," but "accept."