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HP’s identity crisis

HP corporate split ongoing as 2015 revenues fall again.

 

As 2015 revenues continue to fall, Chris Middleton explores what the division of 75-year-old HP into two companies means for its long-term strategy and its immediate operational challenges.

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UPDATED May 2015. HP has said that it is pressing ahead with plans to split into two separate companies – announced in October 2014 – in the wake of second-quarter financial results that show falling performance across every sector of its business. The split is expected to be completed by the end of this year.

The two companies will be HP Inc, headed by President and CEO Dion Weisler, and Hewlett-Packard Enterprise, under the leadership of current HP CEO Meg Whitman (who will also chair HP Inc).

Strategically, the split is designed to enable the more commodity-hardware-focused HP Inc to take on the likes of Dell and Chinese giant Lenovo – which acquired IBM’s PC business in 2005 – and the Enterprise unit to compete more directly with the likes of IBM and Oracle in the integrated supply of hardware, software, and services to enterprise clients.

Q2 2015 revenues suggest that the new Enterprise business may face the greatest challenge. Overall, HP revenues stood at $25.5 billion, down seven per cent year on year. Sales were down in every part of the business, but most notably in enterprise services, which were down by 16 per cent.

Strategic issues

When it was announced last year, the split was seen by many as an about-face for Whitman, who rejected a similar proposal put forward by her predecessor Leo Apotheker when she replaced him nearly four years ago. At the time, Wall Street regarded Apotheker’s strategy as a mistake. However, times have changed and the break-up is part of a trend for large, poorly differentiated conglomerates to split into leaner, more focused business units.

Meg Whitman

Meg Whitman, soon to be President and CEO of Hewlett-Packard Enterprise.

Since taking over at HP, Whitman has attempted to fix the company’s damaged finances – principally by laying off tens of thousands of employees. But clearly, revenues are falling, the UK public sector market (HP’s second largest) is drying up in terms of mega-deals, and the repercussions of the Autonomy deal are still being felt. So 2015 must be the year in which Whitman and Weisler steady the ship(s).

It is thought that HP will need to take out a further $2 billion of gross annualised costs over the next three years – and some of that will surely occur during its split into two separate companies. But how much of the split is a properly considered strategic decision?

In 2014, the rumour mill over HP’s long-term strategic plans began churning as soon as HP was publicly linked with EMC. The fact that discussions with EMC were reported to have lasted for months and only ended in disagreement over the financial terms suggests that the break-up of HP was a much later decision.

Whatever the truth of the matter, the challenge for HP in 2015 is that the complexity and lack of focus in its business has existed for much of this century – an identity crisis that has endured ever since the 2002 acquisition of Compaq, in fact.

Will the real HP please stand up?

HP is no longer the world’s biggest PC maker, it lacks a convincing mobile strategy, and it has none of the consumer cachet of an Apple or a Google (or a Samsung, from a mobile hardware perspective). Enterprise customers don’t yet perceive HP strongly enough as a services company that’s in the same league as IBM, nor as a hardcore enterprise software company to rival Oracle, SAP, or Microsoft. Neither is it seen as a major cloud player, nor as a venture that is ‘born’ of the internet, as Google is.

And there is another challenge: the inexorable rise of Chinese companies, such as Lenovo, Huawei, and others, which are the natural heirs of what the general public still perceives HP as doing: making good-quality hardware for the office desktop.

In short, HP’s core problem is that it has long been neither fish nor fowl: it’s the company that isn’t Microsoft, Oracle, IBM, Apple, or Google – or Lenovo or Huawei, for that matter – despite being one of the oldest and most respected names in the business: a company that, like many of its progeny, started with two guys in a garage and some big ideas.

Yet it has a huge portfolio of IP, major contracts – it remains the UK government’s single largest supplier in any field – a respected marque, and many success stories, but its lack of a convincing ‘story arc’ and vision is the real reason why its market capitalisation is much smaller than IBM’s, Microsoft’s and Apple’s, despite its multibillion-dollar revenues.

HP has also long been culturally conservative at a time when charisma and big, forward-thinking ideas are more closely associated with the industry it operates in. In short, it’s hard to get excited about.

As a leader, Whitman’s decision to join HP from eBay, in the wake of the eccentric Apotheker and the disgraced Mark Hurd, promised much, but now she has to do something unusual: make a corporate divorce look like a bold, single-minded step into the future, after 75 years of history.

Ironically, unified communications and collaborative tools will be at the heart of that challenge. Hewlett-Packard Enterprise will include the current Unified Communications Services business, which mixes UC and collaboration (UC&C) technologies with strategic business planning, deployment, and change-management services.

However, the long-term strategic risk is that neither of the new companies will have its better half to support it: HP’s in-house mix of hardware and services has helped it clinch major public sector deals, for example, while the PC and corporate hardware businesses have long shared technologies. Presumably, that will still happen, but via some complex negotiations and horse-trading.

And that’s not all: each of the new companies will be left with an inherent problem: the PC business is significantly less healthy than HP’s profitable printer lines – in which Q2 2015 revenues are also falling – while HP Enterprise faces an uphill battle to convince as a services play, minus the PC business that has bolstered its acceptance among enterprise buyers.

The double-digit fall in Q2 services revenues show the size of that challenge.

As a ‘dis-integrated’ company, the internal props that have held HP together, and aloft, for so long will no longer exist. And whatever happens next for the two new companies and their separate strategists, the credit or the blame will be placed at Whitman’s door. TS

The Strategist says

A bold move, or a desperate one? That is the question. Whitman’s decision to hold onto the corporate mantle shows where her heart really lies, and the commodity hardware unit must now innovate, sink, or swim. During the transition, Whitman’s strategic challenge lies in convincing enterprise buyers that the break-up is a long-considered strategy, and not a recent toss of the coin. After the split, her challenge will be in convincing Enterprise’s largest customers that HP has a vision that can compete with IBM, and a technology stack that can stand up to Oracle, Microsoft, and the pack.

 

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