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An outsider looks in at HP's woes

Opinion Bureaucracy, they've heard of it
Sun Mar 06 2005, 10:58
SKHPC'S publisher has never worked for HP or for any of its acquisitees, but I've kept a close eye on the firms for more than 20 years. I've delivered hundreds of presentations at user group events worldwide, written reams of copy on the firms, and have gone out of my way to be fair and objective when dealing with the companies. I've also invested substantial time and effort in the process, and the ROI has been minimal. People inside HP may view things differently, but here's what this outsider opines about HP and its current state of affairs.

Conspiracy Theory? That Was a Mel Gibson Movie
First and foremost, the conspiracy theories regarding HP's acquisition of Compaq are absolutely incorrect. There was no conspiracy. Compaq did not opt to terminate the development of Alpha as a precondition to joining forces with HP. (As for Compaq's acquisition of Digital, the primary motivating factor was Eckhard Pfeiffer's desire to rule a $50 billion USD empire. DEC CEO Bob Palmer saw the acquisition as the best way to ensure that DEC stockholders got *some* return on their investment. Not much of a return, as Compaq purchased Digital for chump change when you factor in the $4 billion or so that remained in the First Bank of Digital and was transferred to Compaq.)

Alpha's fate was sealed in 4FQ00. Michael Capellas and Carly Fiorina first got together at the behest of Larry Ellison, who purchased certain Tru64 UNIX and TruCluster IP through the so-called "Huron Project." The acquired IP rendered Oracle Real Application Clusters reality. Prior to the infusion of Tru64 technology, Oracle Real Application Clusters represented a really great opportunity for high-priced consultants to render the distributed database workable.

Larry was so impressed with the Tru64-enhanced Oracle 9i RAC product that he called Carly Fiorina and suggested that she embark on a similar IP acquisition effort with Compaq. Carly and Michael talked of such a venture, but nothing came of it. Compaq officially de-committed from Alpha and embraced Itanium on 25 June 2001. The reasons for the change in strategy are well known to Constant Readers of SKHPC. None of the reasons involved Carly Fiorina or Hewlett-Packard.

About two weeks before the "Alphacide," Michael Capellas penned a 3K-word missive to the entire Compaq workforce. In the missive, Capellas asserted that in order to compete with IBM at the high end and Dell at the low end, Compaq would have to "reinvent" itself in a 180-day timeframe. The emphasis of the memo was on commoditisation, industry standards, focus, and agility

It was about two months later that Michael and Carly started talking seriously about a merger. The rationale behind the decision? Only by combining forces could the firms create a corporation endowed with the size, scope, and clout to take on IBM. Absent unification, Compaq would be IBM's breakfast, and HP would be on the luncheon menu in Armonk. The negotiations took place in deep secrecy, and in a September 4 teleconference the two vendors announced what they termed a "definitive merger agreement" that would create an $87B USD technology colossus--an entity capable of competing on a more equal footing with IBM. The Silicon Valley Soap Opera began, and the acquisition of Compaq was successfully completed on 7 May 2002. May 7 represented the day a good idea was cast in stone. It also represented the initiation of an absolutely atrocious execution strategy.

Blown Away By Big Blue
IBM sells servers, storage, software and services. And they do do a damn good job of it. One would expect that HP would attempt to emulate IBM in this regard, but such expectations proved way off base. Instead of jettisoning a flagging PC business and concentrating on emulating IBM, HP let the StorageWorks franchise spin down (Eckhard Pfeiffer started putting the brakes on that franchise: male chauvinism being the order of the day at Compaq, Digital expatriate Ellen Lary, who built StorageWorks into a formidable business, was not welcome in Houston). An "executive" of the male gender took her place, and the head crashes began. Things went from bad to worse when HP took over.

Meanwhile, HP pressed on with the Compaq strategy, which involved trying (largely unsuccessfully) to duke it out with Dell in the PC space. Concurrently, HP branched off into bold new "ready, shoot, aim" ventures replete with daunting entry barriers. IBM built servers, HP tried to build a home entertainment franchise. HP resells iPods and is tinkering with plasma TVs--a realm replete with well-entrenched rivals--while IBM continues to dominate its carefully chosen and well-defended turf.

Building a Bigger Bureaucracy
HP has succeeded admirably in one regard: they have demonstrated an ability to build a bureaucracy more rapidly than the United States government. For all its talk about agility and adaptive enterprise technology, HP can make prudent midcourse corrections at the speed of an aircraft carrier, not a BMW or Porsche. The firm can, however, reorganise at a moment's notice, and has honed this skill to the same extent that Digital and Compaq once possessed.

The firm has also imposed rigid consistency where it is needed least. Where HP should be dynamic, it is static. And vice-versa. Take message delivery: HP spends some ~$300 million USD per annum on marketing and marketing communications. Where these marketing dollars go is known best to HP. The firm just sacked an employee who was arguably the firm's most effective message delivery system, which probably saved $150K or so per year. The opportunity cost inherent in lost sales opportunities is impossible to quantify, but the price will likely exceed the $150K figure by several zeroes. Perhaps the sacking was due to the fact that the employee in question failed to adhere to every aspect of the 132-page document HP created to instruct presenters on how to create a "One Voice" PowerPoint presentation. The employee may have used one of the Four Approved Fonts in the wrong place, or ran afoul of the text density police. Regardless, the employee was perfectly capable of speaking in his or her own voice, and the deals closed by this individual offer proof that substance matters more than style. By contrast, during the reign of Scott McNealy at Sun Microsystems, Scott and his lieutenants relied on often-shoddy slideware, but they sure managed to get their messages (whether you liked the messages or not) across to their audiences, and did so in their own voices.

Upper Caste or Cast Off?
Mergers are never fun, and never pretty. That said, it is SKHPC's opinion that HP-heritage employees are held in much higher regard than Digital or Compaq expatriates. The expatriates are far more vulnerable to "rightsizing" than those who have never fallen astray from the HP Way. Just ask Peter Blackmore (Compaq), Jim Milton (Digital), and Kaspar Rorsted (Compaq). And if industry rumours are correct--which they are from time to time--HP's workforce underwent a significant quarterly decline during its 1FQ05 ended 31 January 2005. Perhaps HP will separate fact from fiction when it reports its 1FQ05 financials on 16 February. It's less likely that HP will segment the alleged headcount reduction based on employee heritage.

Strategy or Stratego?
Stratego is a board game brought to you by Milton Bradley. According to, "a harsh and lonely battlefield is the setting for Milton Bradley's newly redesigned Stratego board game. A removable fortress barrier sequesters your army from prying eyes whilst ye prepare yourselves for a most lengthy and glorious conflict. Utmost care must be taken as you place your men. From the lowliest scout to the highest-ranking marshal, all must make ready to encounter enemy bombs, defend the flag, and steel themselves to triumph over the foe. Skillful planning, a keen memory, and sleight of hand will be your allies. Onward, for King and for Country! Spanish and English instructions are included. Stratego is for two players."

HP has far more than two players, but some number of people at HP are responsible for corporate strategy--which, like the board game, involves lengthy conflict with rival vendors, and requires skillful planning. The question is, WHO are the people at HP tasked with strategising?. According to the HP Web site, Executive Vice President and Chief Strategy and Technology Office Shane V. Robison is responsible for shaping HP's overall corporate strategy and technology agenda, and steering the company's nearly $4B USD annual research and development investment. All of the company's senior CTOs and the director of HP Labs report to Robison. He also leads the company's strategy and corporate development efforts, including mergers, acquisitions, divestitures and partnerships. Clearly Shane plays a key role in calling the shots at HP; SKHPC can only wonder who beyond Shane and the Board of Directors are involved in developing and executing corporate strategy. When you're formulating and executing strategic decisions that affect ~150K employees and your company's standing in the IT industry, you're not playing Stratego. The entire strategic chain of command at HP warrants an immediate and comprehensive performance review, as things most certainly are not going according to plan.

Advice, Not Admonishment
All of the above consists of factual information and personal opinion--and one rumour about headcount reduction. It is not SKHPC's objective to malign or disparage anyone at HP. Perhaps things look different from the inside, but from the outside, there is plenty of justifiable cause for concern about the future of HP. The firm's latest financials demonstrate that the areas in which HP must concentrate to compete with IBM are largely weak. HP's Business critical systems (BCS) revenue declined 2 percent and generated a mere 1.8 profit margin Networked storage revenue was down 1 percent. Within BCS, HP-UX revenue growth of 3 percent year-over-year was more than offset by NonStop revenue declines of 19 percent and ongoing—and fully expected—declines in AlphaServer sales. In 3FQ04, StorageWorks revenue declined by 15 percent, this slowed to 10 percent in 4FQ04, and the decline nearly halted in 1FQ05. Competitors such as EMC have captured significant market share, so storage still faces an uphill battle. HP's software business consists largely of OpenView and OpenCall management software, and the components necessary to bring the Adaptive Enterprise to market. (AE remains a "work in progress," HP lacks a middleware strategy, and thus is at a disadvantage against IBM.)

That said, HP possesses the services capabilities it needs to compete, and the financial resources to flesh out its software portfolio, but nobody outside the installed base seems to be aware of these assets. And only HP can make the decision as to where it should focus its resources. SKHPC hopes HP and its next CEO can deliver on the strategy that Michael Capellas and Carly Fiorina formulated almost half a decade ago, and Carly chose to ignore.

Terry Shannon has over 20 years experience in the IT industry as a journalist, analyst, and consultant. A frequent speaker at IT events worldwide, Shannon has delivered more than 300 keynote and plenary presentations, and is the author of one book and hundreds of articles in the IT trade press. A former military intelligence analyst in Viet Nam, Mr. Shannon has an additional 10 years hands-on experience operating, programming, and managing hardware and software from a variety of vendors. He currently publishes the Shannon Knows HPC subscription-based newsletter and maintains a web site at Shannon knows HSPC. Terry also contributes material to The INQUIRER from time to time. He can be reached at this email address.

© 2005 by Terry C. Shannon


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