HP and the IT Wars: Spreading itself too thin?

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Mon, 05/03/2010 – 3:23pm — Paul Burns

Larry Dignan posted an interesting question and related blog post here: http://blogs.zdnet.com/BTL/?p=33911

I love article titles that include a question mark. So inviting for response! So that is just what I’ve done here:

However, before answering the large question, a number of smaller questions raised in the article must also be addressed. A couple more points also need to be made.

The article states:
>Add it up and HP owns a piece of every part of the information technology stack now.

There remains at least one major hole in the HP stack: software. True, the article said HP owns a *piece* of every part of the IT stack. However, that is mostly IT management software and systems software sold with its hardware. HP is greatly lacking when it comes to applications as well as middleware. Yet it would seem that software is one of the greatest opportunities for revenue growth as well as increasing margins for HP. Strange they aren’t doing more here it? More on this later…

The article also nicely went through a “lay of the land” – essentially a look at HP competitors up and down the IT stack it offers. That stack didn’t even list software from HP. It did however list a bunch of mobile device players. So far HP has floundered in the smart phone market. And, with the acquisition of Palm, HP execs have gone to some length to emphasize that they are really after the broader mobile device market which includes tablets (and according to HP, many other types of mobile devices that have yet to emerge). My interpretation of HP’s commentary is that they don’t really expect to become leaders in the smart phone space where Palm currently plays. Instead, they plan to invest and extends Palm’s WebOS to other emerging mobile devices.

From the article:
>At the Gartner conference last year, HP CEO Mark Hurd chided IBM for getting out of the PC business. He said you need to be credible in all parts of the enterprise IT stack. Hurd wasn’t kidding. He now has the everything from the data center to the roughly 3-inch screen in your hand.

Well… he did say that. But he still doesn’t have anything close to a broad software offering.

From the article:
>Is that really true though? After all, IBM is doing just fine being a software and services company. IBM bet big on software—Cognos, Rational Software and others— and Big Blue has reinvented itself by ditching low-margin businesses.

Ahem… Good point.

>Can HP deliver? Financially, there’s no indication that HP is about to slip.

There is no doubt that financial performance is *the* key indicator of a company’s success. HOWEVER, that needs to be long term financial performance. Not just quarter to quarter and not just year to year. It must include different time periods, different economic conditions, different competitive environments, shifts in technology, and so on. Hurd is still early in his tenure and thus has not experienced many of the listed challenges. What he has indeed shown so far is his ability to cut costs and commoditize. Yet, that process is not complete. And that process can only work for so long. Then revenue growth, for one, will dramatically surpass cost cutting in terms of contribution to the bottom line of net profit.

The revenue growth could come in various forms including organic and acquisitions. Hurd has already been involved in large acquisitions including EDS, 3COM and Palm. Yet the integration strategies for EDS been, once again, to acquire and cut. Cut, cut, cut. The writing seems to be on the wall for 3COM as well. Hurd has emphasized his commoditization approach for lower cost per port in the datacenter. That means costs cutting.

So, what we have so far is: new CEO comes in and initiates cuts on a highly inefficient company. These cuts immediately start turning to increased profits. Hurd, as a truly masterful cost cutter, is able to keep this going for years. He also made a couple great moves (in my opinion) in terms of acquiring EDS and 3COM. EDS has been profitable and he has extended the profit improvements through more cost cutting. Chop, chop, chop.

Cost cutting alone can only last so long before it breaks a company. Hypothetically, Hurd could continue acquiring companies and cutting costs somewhat indefinitely. But that is not completely realistic. There are only so many companies to buy and commoditize. Snip, snip, snip.

Somewhere along the line, the cost cutting must end and the organic revenue growth must begin. HP has suffered a bit in this area. Of course the last couple years have not been all that conducive to growing hardware revenue. Still, substantial organic revenue growth must eventually start for the company to continue its earnings growth trajectory. For instance, HP will not be able to compete *long term* or *broadly* against Cisco in the network without substantial investment and innovation. Of course much of HP’s innovation and investment DNA has been obliterated through cost cutting. Perhaps it will return. Only time will tell.

The article also talked about some of the strategy Hurd laid in February:
strategy:
>The next-generation data center will be delivered by the Company that can best leverage scale, industry standard hardware that is differentiated into software, and financed and delivered via global services.

Take careful note of the sentence above. That is the HP datacenter strategy. It has 3 parts:

1.Commoditize all things hardware. Trim, trim, trim.
2.Use software to help differentiate hardware.
3.Leverage hardware for creating services revenue.

And now I can finally address the question from the title of this article. Is HP spreading itself too thin in the IT wars? I believe the answer is “yes and no.” The “yes” is that HP does not have sufficient market power in some segments such as networking to establish a leadership position without partnering for certain critical elements. The article does well on this point. The “no” is that the Palm acquisition does not appear to push HP over any particular scope or focus boundary. That would be like saying “Sony is spreading itself too thin by getting in to e-readers.” Sony is going to go after all types of emerging consumer devices; that is what it does. Likewise for HP: Mobile devices are going to be of growing importance for the enterprise. Therefore HP has acquired an asset in Palm it believes will help with that.

To sum it up, HP is a hardware company. Hardware. Lots and lots of hardware. But what about software? Yes, we are back to the software discussion that started this entire response. That is the real question mark. Well, sort of. Even though software is the true missing link for HP, the company does not seem to be addressing it. So the question has been answered and it didn’t have the word “software” in it. The strategic statements and actions all suggest that HP has finally given up its bid to deliver a broad software portfolio. While the company hired Tom Hogan to lead HP Software a few years back, he is no longer heading HP Software. In fact, there no longer appears to be a single individual (as in one VP) at HP that can be said to solely own the entire HP Software business. HP Software now appears to be co-mingled sufficiently with services that the hope for a real software push outside of IT management (aka Business Technology Optimization; aka OpenView) appears to be lost. Some may recall the days when Lew Platt was still CEO of HP… The saying then for HP was “Hardware is Job 1 and Software is Job 2.” The idea was that HP was only interested in software to the degree that it drove hardware sells. Welcome back to the early 1990s HP. When it comes to competing against IBM — the company which HP has historically measured itself against most often – it isn’t so much whether HP is spreading itself too thin in hardware. It is simply that HP is a non-starter in the software game.

HP and the IT Wars: Spreading itself too thin? | IT Industry Analyst Firm, Neovise

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