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HP: A billion here, a billion there - pretty soon it adds up

Opinion The floggings will continue until morale improves
Sun Sep 07 2003, 16:00
OVER THE PAST few weeks, we have chronicled the almost certainly self-destructive behavior of HP. The short recap is that it is laying off support staff left and right, and farming it out to possibly second rate service organizations in India and other places. End result, pissed off customers who are dropping HP like flies. We know of half a billion dollars in contracts, Australian Dollars, lost so far, and hear strong evidence of billions more business over the next few years going away.

A piddly few billion dollars here and there isn't enough to dissuade the HP management team that this may not be the most prudent course of action. Are they idealogues, do they have a grand plan, or are they simply crazy? The answer is simply that they have a plan, and it is a very good one. The unfortunate part for the employees and shareholders of HPQ is that it does not benefit them, or the company in the long term. Management will get very rich though, but that is a short term issue.

First a little background on the corporate culture, overly simplified for those who don't live and breathe stocks. Simply put, every quarter, companies report the financial results for the past quarter, and give and outlook for the next quarter. The stock market has gone from pricing companies based on what they did, to what they will do next quarter, to a speculative la-la land where they will boost or hammer a company based on how well they think the company will do relative to how others think it will do, and other higher order speculation. It is a mess.

If company X has profits go up 50% every quarter for 2 years, and Wall Street prognosticates that it should go up 75% next quarter, it damn well better go up 75%. If it doesn't, the stock goes into the toilet, and people flee from it, even if they hit a 50% sales rise, after all, they were supposed to do 75%. Even if every other company in the sector is losing 25% per quarter, you don't hit your numbers, you get punished. If some other company only loses 20% instead of the forecast 25%, they will get rewarded. Sane? Hell no.

So, who cares about stock prices? CEOs do. If they don't make the stock go up, they get replaced, and are out of a job, usually with a stigma attached to their career. Actual business performance has become a footnote that is routinely ignored, and stock price is king. Overall, it is madness.

HP and Compaq were not doing well, and the expectations for both companies, Compaq in particular, was quite low. HP bought Compaq just over a year ago, and promised massive cost savings, more efficiency, and a broader range of products and services. As far as paper plans go, it looked good.

When the merger was proposed, it should surprise no one that there were probably pretty hefty performance clauses in Carly's contracts. You will save the combined entity X dollars, you will make things more efficient, and you will achieve these goals. It is painfully obvious to even a casual observer that the company crows about how many jobs they cut at every analyst meeting, but downplay sales at even more venues. This should tell you what senior managements' goals are.

So, you may be thinking that the goals are laudable, and cost savings lead to efficiency. Efficiency leads to higher profit margins, less overhead, and all the other things that financiers love to see. So far you are right. The catch, and one that will absolutely destroy HP is that they gains are short term, and long term they are destructive.

A good example of this is your car. You can save a good deal of money by not maintaining it. Change the oil? Why, that costs money. New belts? Why, the old ones are still functioning. You can go on down the list, and save lots of money on your car. One day in the not to distant future, you will be driving along, hear a very strange noise, and find yourself in a situation where your car is quite dead, and it is more costly to fix than it is worth. You sell the remaining parts for scrap, and someone who is good at carving up the carcass sells the bits off individually, and makes money doing so. You however lose out. The unscrupulous out there will have an instinctive feel for when the car is about to show it's neglect, sell it to a sucker, and walk away laughing, pocketing the savings and the inflated sticker price. Some poor slob just overpaid for a doomed vehicle.

That junker that is about to start trailing smoke is HP. Carly is finding huge cost savings at HP. She has laid off many of the support staff, hold times are through the roof, and those customers that have yet to defect are mad as hell. Other levels of service are similarly in the toilet, and more cuts are coming.

Development is also almost gone. Alpha was killed, VMS has scared off all the customers able to leave, and the rest are sweating bullets. The printer division is going through the same outsourcing for development that support just went through, and unless there has been a radical change of heart in the last two weeks, will probably go just as disastrously. The company is simply being devastated.

The few brave souls who are left have had their workloads massively increased, morale is about as low as humanly possible, and Carly is blaming the workers for the company's poor performance. Her last memo on the subject would have been funny if it wasn't so painful and sad. The floggings will continue until morale improves.

So, where is this cunning plan? Well, those performance targets I mentioned earlier are the key. Want to bet that when the merger was announced, the contract for Carly stated that she needed to cut headcount by a certain amount, reduce costs by more, and make the company much more efficient. They are doing this, and doing it quite well, and she will probably get multi-million dollar bonuses after a certain time.

Once these goals are met, Carly and a few senior managers will 'retire', or move on to the next challenge. At the going away party, it will be pointed out what a good job they did, how much money they saved, and how they will probably do well 'saving' the next company.

Meanwhile, the company, held together with bubble gum and baling wire, may be teetering on its last legs. People are overworked and quitting, customers are jumping ship at an exponentially increasing rate, and the reputation of the products is mud. The new CEO was handed a bag of doodoo, and it is starting to leak. The old beater is smoking, and will blow up any second. The former management knew when to get out, and did.

All is going according to plan. µ

See Also
Most of the HPQ Outsauce stories


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