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An OPEN Client Edition
Updated 6/18/04, 2:20 p.m. PDT (adds "No Skirts, Please!")
Echoes from Hewlett Packard’s
Conference for Global Consultants
CEO, Other Execs, Outline Their Roadmap to Long-term Success for HP
– Perhaps the most poignant thought during the two-day conference for
global consultants that Hewlett Packard staged last week in San Jose, CA,
was the very last comment that its CEO, Carly Fiorina, made at the end of
the executive Q&A session on June 9.
“IBM is now more vertically integrated than
it ever was before” (Gerstner’s era), Fiorina said, summing up her
answer to a question. “We
consider it our competitive advantage.”
What the HP CEO said is something that we have
been repeating almost ad nauseum for 11 years now (i.e., ever since
Gerstner decided he would not break up IBM).
We said that is that IBM’s centralized, imperial structure is
ill-suited for the modern marketplace in which nimbleness and flexibility
carry more weight than bigness
[size] (see “Louis
XIX of Armonk,” Aug 1996).
Fiorina set up this conclusion earlier that
morning in a speech with which she kicked off the global event that
attracted about 150 analysts and consultants from around the world.
Citing HP’s own experience with the Compaq merger that produced
more than double the savings originally projected ($3 billion over two
years), Fiorina said that the value is now being delivered horizontally
across an enterprise (i.e., by automating business processes globally,
instead of within individual organizational stacks).
Which means that geographic or product-related
vertical stacks are obstacles to efficient delivery of global
solutions, both with the IT vendors’ organizations, as well as their
The same point was reiterated by several other
HP executives who talked about, what HP calls, the “adaptive
enterprise” concept (also see "IT
Industry: Whither Goeth It?", Jan 2004). Besides
being an indication they were all playing from the same sheet of music,
the notion suggested that flattening out HP is a statement of fact, not
just some futuristic mantra. That
the idea has traction at HP was confirmed to us in numerous real world,
Marc Schwarz, for example, an HP vice
president who was recently hired from Deloitte to head up HP Services’
Business Process Outsourcing practice, said he expected to have to move to
California if he were to join HP.
“No, you can stay where you are,” he was
told in an interview during the hiring process.
Schwarz lives in New Jersey.
Another marketing executive we met is based in Texas.
His assistant is based in Massachusetts.
So it goes…
HP’s accounts payable fulfillment is done in
India, though its mailing address is in Colorado. So it goes…
The head of HP Services worldwide sales and
marketing is based in Munich, Germany.
His direct reports hail from all over the U.S. and the world.
So it goes…
Unlike the imperial courts of Armonk, which
Lou Gerstner expanded in late 1990s by adding a Versailles to the original
Louvre, HP evidently has no real “worldwide headquarters.” WW HQ is a virtual notion, not a dwelling.
Nor even a notion worth dwelling on. J
Fiorina said that the IT industry imperatives
of the 1980s were “cost and stability.”
In the 1990s, they changed to “speed and flexibility.”
Now, she says, “simplicity, manageability and adaptability” is
what the customers are seeking (see the chart).
Well, since adaptability entails both speed
and flexibility, and simplicity and manageability have always been
promises IT vendors had made but rarely delivered, it appears that not
much has changed since the 1990s. Which
means that the “new news” is that the IT vendors are finally figuring
out how to deliver adaptability.
And the answer is horizontally, as HP has shown with its own
“It’s excellent that you’d practiced before preaching, and that you’re using your own merger experience as a reference,” this writer told Fiorina during the Q&A. “But I wonder if there are some pitfalls in that approach?”
Just as Fiorina was set to answer the question, we elaborated on the reasons for it. It was the presentation that HP’s CIO, Gilles Bouchard, had just made. He proudly boasted how HP reduced its own IT spending from the pre-merger 4.6% of revenue, to less than 3% (goal in phase 2).
“Let’s assume you’re wildly successful with your ‘adaptive
enterprise’ pitch using yourself as a reference,” this writer continued.
“Wouldn’t it mean that you would help shrink your customers’
IT budgets, and thus reduce your revenue opportunities in the future?
So wouldn’t it be better not to give up the ownership of your
‘adaptive enterprise’ concept so easily, and work with your customers
on some sort of revenue-sharing basis, such as Capgemini did, for example,
at TXU?” (see “Capgemini
Hits Texas-size Home Run,” May 2004).
“That’s a great question; I am glad you asked it,” the HP CEO replied. She then proceeded to explain that she didn’t
think the HP approach would lead to a contraction of IT budgets in absolute terms, and
thus would not reduce HP revenue opportunities.
First, customers have to consolidate and
standardize the technology they already have, she said, before starting to
invest in innovation to drive revenue growth in the future.
“And that’s where we have an opportunity to gain market share,” she added.
But HP’s own merger results speak to the contrary.
The “$3.5 billion savings” that Fiorina cited in her own
presentation, and the “$1 billion+ annual cost reduction machine” that
Bouchard quoted, are pretty absolute figures (see the chart).
So, while violently agreeing with Fiorina that
IT is the “main event,” as she put it, or that, “IT is it!,”
the slogan we had coined before, we reiterated that HP’s interests might
be better served by creating new enterprises with their customers, and
thus sharing with them the benefits of ownership, including future
revenues and profits (as we also pointed out in our January Annex Bulletin
Industry: Whither Goeth It?").
Fiorina agreed. Sort of…
“Absolutely, there are opportunities to do
that” (revenue sharing), she said.
She added that in some deals HP is already doing it. In others, HP contracts to provide innovation during the
course of a deal, she said.
What Fiorina did not say, however, was that
such deals are far and few between; that a vast majority of the deals
being done in the IT services sector is still based on old cost saving
formulas and fee-based services. Which
means that innovative deal-making may be the next challenge facing
the IT services vendors, including HP, if they are to make their
“adaptive enterprises,” “OnDemand,” or “transformational
outsourcing” concepts work to the mutual benefit of both the
vendor and the customer.
Otherwise, they may do all the innovating while their customers get most of the benefits.
No Big Acquisitions
going to make fewer large bets,” said Shane Robison, the chief strategy
and technology officer, speaking of possible future acquisitions.
During the Q&A, Fiorina seemed exasperated that she had to
answer the same question again.
“We’re not going to buy EDS,” she said
emphatically. “We’ve not
going to buy Capgemini.”
Fiorina justified such an attitude on the
basis that acquiring a traditional outsourcer like EDS, for example, would
be “looking back.” She
felt the outsourcing game needed to change, and HP wanted to “look forward” instead and
lead such a change (we
agree… see changing roles of clients and vendors in "IT
Industry: Whither Goeth It?", Jan 2004).
We also agree that acquiring a company like
Capgemini would not make sense on account of cultural differences.
And that buying EDS at this stage would be foolhardy, given the
cans of worms among its contracts, and its still relatively high stock
market price ($17.64).
But everything has its price… including the cans of worms. They can be de-wormed or written-off for the right price. So a contrarian argument is that acquiring a traditional outsourcer like EDS would give HP a global delivery channel, and legitimize its claim that it is an alternative to IBM, which has been HP’s stated goal.
HP Services is having to slug it out with IBM on a deal-by-deal basis.
It’s a slower but safer way of achieving the goal.
And it’s working, according to Ann Livermore, the head of
Technology Solutions Group, which includes HP Services.
“We outgrew IBM in every single
sub-category,” she said during her presentation, referring to horizontal
lines of business as “sub-categories.”
Livermore also said that in its “drive to
gain market share” and achieve “profitable growth,” HP has already
racked up over 100 wins in taking out the IBM mainframes.
Lagging Government Business
Considering that the government business has been the fastest growing segment of most of the IT companies we follow in the global war economy, we asked Fiorina in a one-on-one conversation why HP seems to be lagging behind, relatively speaking (HP’s public sector accounts for about $9 billion in revenues; it is growing at about 5% per year; HP’s market share of the $118 billion market is 7.6%, according to Fiorina – see the chart).
We said we realized that there may be moral
reasons why HP isn’t pursuing it more aggressively – so as not to end
up being labeled as one of the “death merchants.”
So we were wondering what her position on that was?
Fiorina’s answer was quite surprising.
It had to do with HP’s history and lore.
“When I got here (in July 1999), I found
that when David Packard (the “P” in HP and the company’s co-founder)
returned from his stint at the Pentagon, he was so disgusted that he
issued a decree that HP would not do business with the government,”
(Packard left HP in 1969
to become U.S. Deputy Secretary of Defense in the first Nixon
administration. He served in this capacity for almost three years and
resigned his post in 1971, at the height of the Vietnam war. In
1985, Packard was appointed by former President Reagan to chair the Blue
Ribbon Commission on Defense Management. Packard died in 1996).
“So we didn’t, except for some ‘black
ops’ that we inherited when we acquired Compaq.”
“You know… the very specialized CIA- and
NSA-type of work that we can’t talk about.
Most of it goes back to the time Compaq acquired Tandem.”
Well, it appears that since Fiorina has
“lifted Packard’s restraining order” against doing government work,
the company may indeed become more aggressive in this area. The appointment of Juergen Rottler earlier this year as the head of the public
sector unit certainly hints in that direction. Rottler was formerly
HP Services sales and marketing executive.
Robison: “Chief Creative Officer?”
“Innovation will drive (our) growth,” said
Robison, the chief strategy officer, during his presentation.
He added that more than half of the company’s R&D investments
goes into software. “For the rest, we partner.”
Among the companies that HP considers its
partners Robison counted (and showed on a slide) Accenture, Capgemini,
BearingPoint, Deloitte… among others – all vendors with whom HP also
competes in the IT services arena.
Clearly, the lines between partners and
competitors are blurred, especially when it comes to big outsourcing or
systems integration contracts. One
deal’s partner may be the next deal’s competitor.
Robison (and Fiorina later on, during the
Q&A) thinks that such partnering is a more efficient way of investing
in innovation than trying to do it all in-house.
Robison and Fiorina showed some “cool”
applications in which HP has played an important part, such as in
production of the Shrek movies at DreamWorks, or with Starbuck’s new
“product line” – the music CDs.
“We want to be high-tech, low-cost, best TCE
(Total Customer Experience) provider in the industry,” Robison summed
“He is your Chief Creative Officer at HP,” suggested one HP executive in a subsequent conversation, referring to our Holy Grail piece ("IT Industry: Whither Goeth It?", Jan 2004).
So now we have at least two nominations – John Wilder of TXU, and now Shane Robison of HP.
“We’re larger than IBM in Europe,”
boasted Peter Blackmore, HP’s executive vice president who gave a
presentation on the company’s international markets.
Indeed, HP’s $30 billion European revenues surpassed IBM’s ($29
billion) last year.
Blackmore also highlighted HP’s sales model designed to increase the company’s “share of wallet,” as he put it. After focusing on 107 largest named accounts, HP is not extending its coverage to some 1,700 next-tier enterprises (see the chart).
HP is also expanding internationally.
Blackmore highlighted China, Middle East and Russia, as three fast growth
examples. But some of the
things he said about the three markets were downright startling.
So we talked to him one-on-one during the break that followed his
“The growth rates you showed us in China looked quite impressive,”
this writer said. “But I
wonder why all IT executives around the industry keep talking about
revenues or shipments growth, and none mention profits?
How profitable is your China operation, and how do you repatriate
any profits in a country that doesn’t allow it?”
Blackmore said that HP is profitable in China,
without quantifying it. As to
the repatriation question, he said that HP has been in China for 22 years
“We have very good relations with Chinese
government officials,” he said. “We
have no problems repatriating profits.”
Hm… An interesting answer, we thought.
Then we jumped from China to one of its
neighbors. “How do you
explain the fact that HP gets only $750 million in revenues from the
largest country in the world?”, this writer asked.
“You’re talking about Russia,” Blackmore
said, smiling. “Well,
Russia is a complex country.”
We know. That’s an old British imperial view of Russia (Blackmore is
Churchill said in 1939 that, “Russia is a riddle wrapped in mystery
inside an enigma.” But
Churchill also thought he had found a key – “Russian national
interest.” So he used it, managing to strike an alliance with Russia in
the hopes of defeating Hitler.
And what’s HP’s key?
There doesn’t appear to be one.
As is the case with so many western multinationals, Blackmore
offered us excuses rather solutions (also see “China
Now Bigger Than the U.S.”, Jan 2004).
“Moscow and St. Petersburg account for 60%
of Russia’s GDP,” he said, implying that was some sort of a problem.
“Actually, that should make it easier to
sell to Russia,” we opined. “But
what about Russia’s energy sector, for example?
Russia is one of the world’s largest oil and gas producers and
“Well, we do participate in it through BP”
(British Petroleum), Blackmore replied.
He added that HP’s overall growth in Russia has been about 15%
Which is not bad, of course, compared to the
growth rates in “Old Europe” (as Donald Rumsfeld called established
European economies), or relative to the U.S. market.
But compared to the explosive growth in China or other emerging
countries, including some smaller nations in Eastern Europe, getting only
$750 million out of the bustling Russian economy is simply a dismal
But if the HP shareholders are happy with such
meager pickings, who are we to question its strategy?
So we changed the subject.
“Speaking of explosive growth,” we told
Blackmore that we were stunned by his comment that the “Middle East is
one of the fastest growing markets in the world.”
“For what products?”, we wondered.
“Caskets and hearses?” J
Blackmore laughed. He then replied that he was actually referring to a growing
demand in some oil-producing countries, such as Saudi Arabia.
Well, isn’t that “looking back” instead
of “looking forward?” - to borrow the phrases Fiorina used in
reference to a possible EDS acquisition.
What’s going to happen to such demand when (not if!) some of
those repressive regimes collapse?
Given the human and material carnage that seems to be occurring daily in that part of the world, including the rising casualties among the western executives, an exit strategy seems to be a prudent one. For a U.S.-based multinational, anyway.
Vyomesh Joshi, the head of HP’s printing and imaging group, who goes by
the nickname “VJ,” can probably relate to Rodney (“I get no
respect”) Dangerfield. He
happens to lead a $24 billion operation that adds $2 billion to HP
revenues a year; that generates profit margins of 15%+; that
ships more than one million printers a week… In short, that's very
successful. Yet VJ and his business still get knocked around by
ignorant analysts and/or the media, such as in a June 10 Street.com
To which we replied:
“I hear so much about Dell entering the printing business (in June
2002), and affecting our business model,” VJ said. “Frankly, I am a little tired of hearing that.
The fact is, they have not done that.
The fact is, we are improving our profitability.”
VJ went on to point out that Dell’s market
share went from zero in 2002 to 17% in 4Q03.
But Lexmark’s dropped from 32% to 14% in the same period.
So Dell is winning market share from Lexmark, not HP, he asserted.
“Dell is not really affecting our
business,” VJ concluded. That’s
because “from an IP (intellectual property) point of view, Dell has
nothing.” (i.e., Dell is distributing other companies’ technology).
Nor is printing and imaging some sort of a
low-tech operation – the image that it perhaps acquired when IBM was in
that business with “dumb” printers were run by mainframes.
“We have 9,000 patents, and we add 2,000
patents every year,” VJ said on the subject of intellectual property.
“And that’s very important for our business… We think that
the core technology that we have will be used to build new multi-billion
dollar businesses as we move forward.”
And that includes many of the “cool”
applications in the media and entertainment business where HP plays a
major role. From creation, to
distribution, to consumption, HP is the “trusted content broker,” VJ
Yet even within the HP conference, we could not help but notice that VJ and the head of HP’s PC business, Duane Zitzner, were relegated to the poorly-attended afternoon session. Undaunted, the two executives gave some of the most lively presentations of the day.
The after-lunch customer panel played to a
half-full ballroom. Yet it
was one of the more lively sessions, especially during the Q&A.
After D. Krishnamurthy, general manager of
technology at the Bank of India, John Dean, CIO of Steelcase, and Linda
Clement-Holmes, director of infrastructure services at Procter &
Gamble (P&G), finished making their canned pitches about why they
chose HP, this writer asked them each a question.
“My question to the gentleman from the Bank
of India is,” we said, addressing the panel moderator, Jim Milton of HP,
“was your award of the business to HP a political decision, given that
outsourcing of American jobs to India has become a political football in
the U.S. presidential election?” (also see "A
India", Mar 2004).
“Okay then, maybe I should ask all three
questions at once to give you all a chance to think?,” this writer
The HP moderator nodded in approval.
“To the gentleman from Steelcase,” we
continued, “do you consider yourself an ‘adaptive enterprise’
customer, and if so, can you envisage a point in time in the future when
you might enter into some sort of revenue sharing or ownership arrangement
“And to the lady from P&G… I think it
was cute that you described your relationship with HP as a courtship that
led to a May engagement and an August marriage.
But why did you then do an HR outsourcing deal with IBM, if you
were already married to HP? Isn’t
that kind of cheating?”
Laughter spread across the ballroom.
“No punches held here,” said Milton, the
moderator. “I warned
you,” he added, looking at the panel.
“That’s more like five questions,” Dean
of Steelcase joked.
“Okay… let me deal with infidelity
first,” the lady from P&G stepped in.
More laughter from the audience, mixed with
Ms. Clement-Holmes said that P&G went to
an extensive selection of vendors for that HR contract, and that in the
end it decided to choose the “best of breed” approach. “So I don’t think it was cheating. I don’t think.”
HP’s Milton agreed. He said that HP had decided not to bid on the “HR”
The following day (June 10), Joe Hogan, vice
president of marketing for HP Services, explained the reason during a
breakout session. “We were
just getting off the ground with our first ($3 billion) deal.
It was our biggest contract. And
we wanted to make sure we did it right.
We did not want anything to distract us from that.” (see “An
HP Hat-trick,” Apr 2003).
Back at the customer panel, Ms. Clement-Holmes
said, “we have common strategies; common processes across all
suppliers.” “So we have
three shared services suppliers,” she added.
“Yes, it is more difficult than having one (partner), but we
still feel this is the best approach.”
So we suggested that perhaps then their
relationship wasn’t really a marriage. “It sounds more like
polygamy,” we joked.
More laughter from the audience.
Then the GM of IT at the Bank of India assured
us theirs was not a political decision. Mr. Krishnamurthy said the bank took 11 months to choose a
supplier from 22 respondents to its original bid invitation.
The Bank of India also used three outside consultants to help it
with the selection process.
Finally, it was John Dean’s turn to speak.
With some prodding by HP’s Milton, Dean said that Steelcase would
consider some sort of revenue sharing arrangements with some HP product
“On the product side,” Dean said,
“you’re talking marriage… we’re more like dating or flirting.”
He evidently didn’t understand the question.
But we had already taken up too much of the panel’s time.
So we let it go.
“Are we an ‘adaptive enterprise’?”
Dean continued. “We have a commitment to be adaptive. The vision is right. Are
we on that journey? Absolutely.
Do we have the right people committed to it?
Absolutely… But it’s a journey.
And I can’t tell you when we will get there because something
will change. But we are
definitely on that journey. And
we are definitely committed.”
Dean sure sounded like a customer sold on the “adaptive enterprise” concept.
Overall, our impression was that Carly Fiorina
does have a clear vision of where she wants to lead HP and how to get
there. As we said in our “Beware
Your CFO!” piece, the HP CEO “was poised, relaxed and confident about her strategy and the HP
“It was the best performance by a CEO we
have seen in a long time,” we wrote.
So you can imagine how stunned we were to read
on June 10 a Street.com column in which Fiorina was pronounced one of the
nation's worst CEOs!? (for more on that, click on “Beware
What the author and his sources needed to do
before writing an off-the-wall piece like that is attend a conference such
as the one HP has just run for worldwide consultants.
“We are a technology company,” Fiorina
said. “We think innovation
matters. We think it will
continue to matter.”
So given HP’s more than 21,000 patents and
650 products introduced just last year alone, Fiorina figures HP has a
good chance of winning against its major competitors.
“We intend to win against IBM and Dell,”
she put it quite bluntly. Nor
did she limit that just to product competition.
By contrast to IBM, “we think of services as
a technology business; not a people business,” she also said.
The gentlemen from the Bank of India and Steelcase seem to agree, as does the lady from P&G. And those are just three of HP’s 107 targeted top customers.
And the bottom line?
The day before (June 8), the Fiorina told the Wall Street analysts
that she expected her company to generate 20% annual earnings per share
growth, according to a Reuters
So why is the HP stock under-performing the market? (see the chart). That’s a good question for Fiorina to ask her CFO.
Happy bargain hunting!
A P.S. - on a lighter note...
Besides being poised and acting confidently on
stage, Carly Fiorina was also gracious, friendly and personable in
private. As she entered the
ballroom before delivering her talk, she shook the hands of most people in
the first row, both of HP executives/speakers, and of guests –
she went over to the second row, where she worked the crowd of what must
have been second-tier HP executives.
Some male Europeans also got two pecks on their cheeks, as is the
custom in Europe. "When in
A nice touch, we thought; a contrast to the
“ugly American” image that the former IBM CEO Lou Gerstner projected
when he refused to eat Japanese food in Japan, for example.
Which I guess may be only a tad better than what “Bush 41” did
there when he was President – throw up on his host, the Japanese prime
Meanwhile, back to the HP conference, Fiorina
wore an elegant light blue pantsuit with a matching blouse and gold
earrings. A gold necklace
with a turquoise stone and a gold bracelet completed the ensemble that was
both feminine and business-like.
A dress code is a part of most large
companies’ culture. At IBM,
it used to be navy blue pinstriped suits, white shirts and black wing-tip
shoes. The culture descended
from the two founders, Tom Watson, Sr. and Jr.
At Microsoft, it was the pullover sweaters and open-neck shirts,
the casual attire its founder and CEO preferred (Bill Gates).
HP’s old culture used to be the same as that
of many engineering outfits in Silicon Valley – super casual. This
included sandals (Birkenstock, of course) and facial hair among researchers and scientists.
Well, no longer. Not only did HP’s “Chief Creative Officer” (Shane
Robison) wear a suit and tie, but we were struck with another unusual
phenomenon that seemed unique among the IT companies we follow.
Nearly all female HP executives and employees wore pantsuits.
It was almost as if someone had issued a decree, “no skirts or
So over dinner, we broached the subject with
an HP lady whom we shall call Margaret for the purposes of this story.
“Is there some sort of an unwritten or implied code at HP that
requires women to wear pantsuits?”, we asked her.
Margaret seemed taken aback by the question. Before she had a chance to answer it, another consultant who’d overheard the conversation piped in. “I’ve noticed the same thing. I’ve been meaning to ask someone the same question.”
“Really?” Margaret said.
“I have not noticed it.”
“Well, look around,” I suggested.
“Or even better, let me ask you… what are you wearing? (her
legs were not visible as we were all seated around the dinner table).
A pantsuit or a skirt?”
“A pantsuit,” she replied sheepishly.
“Have you ever seen Carly wearing anything
other than pantsuits?”, I asked Margaret, working on a hypothesis that
culture, including fashion, tends to seep into the lower echelons of a
company from the top.
“I guess not. I am not sure.”
That’s when Juergen Rottler, the HP
executive in charge of its public sector business, interjected. “We do have a strict dress code for men: No skirts
“Except for the Scotsmen, I hope?”, this
More laughter followed. It was time to break the bread.
For additional Annex Research reports, check out...
2004: HP: Delivering Value Horizontally (Jun 2004); Accenture: Revving Up a Notch (Jun 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)
A selection from prior years (Global): Greed Bites Back (Nov 29, 2002), Salomon/Gutfreund: Wall Street Casino (June 21, 2002), "From a Nation of Producers, to a Nation of Gamblers " (June 23, 1999), "When Will Wall Street's Bubble Burst?" (1998), "Wall St.'s Conquest of America" (1998), THE GREAT AMERICAN HOOVER (1997)