RealTime IT News

HP's Execution Under Fire

HP's recent financial woes have rivals and analysts alike pointing to problems with the company's integration strategy.

But their suggested changes and fixes may not be what the Palo Alto, Calif.-based company has in mind.

The computer and printer maker is still managing the fallout from last week's financial news. After informing Wall Street of lower revenue expectations for its third quarter, HP's CEO Carly Fiorina fired three executives, including former Compaq executive Peter Blackmore. (The company is expected to file its quarterly financial statement this Wednesday.)

Enterprise Systems was the stated culprit, where HP pointed to a revenue shortfall of about $400 million and profit hit of $225 million. But technology industry analyst Steven Milunovich of Merrill Lynch suggested there were actually three problems contributing to HP's woes: storage sales lost to primary rival EMC ; European channel management issues; and a U.S. migration to an SAP system for order processing and supply chain management that resulted in a six week disruption rather than the expected three weeks.

"The big issue was execution," Milunovich wrote in a note to investors. "Although the SAP transition and channel issues could be termed onetime, investors have to be concerned about HP's inconsistency. Announced management changes likely don't solve the problem," he continued.

"We think HP needs to take more drastic actions including hiring a COO from the outside to manage operations, considering a breakup of the company, which we think would unlock value, and looking at more aggressively giving cash back to shareholders."

David Booth, HP's senior vice president sales and marketing, told customers and supporters during its HP World 2004 in Chicago this week that HP has addressed the operational issues and made some management changes.

"We are absolutely positioned for growth and we are ready for vigorous completion," Booth said. "When we look at where Dell, IBM, EMC and Sun are, we clearly have our eyes set on where we will be able to take and gain share from each one of those competitors."

But the competition is not sitting idly by. For example, Sun Microsystems , in a bid to pluck some of HP's customers, announced an expanded "HP Away" program that highlights its AMD Opteron processor-based workstations and servers.

In addition to offering price cuts and software bundling, Sun trumpeted two former HP customers that had recently switched to Sun servers: Tsann Kuen Group, the leader of small home appliances and 3C retail chain store businesses in Taiwan and China; and the Universidade Luterana do Brasil, a hospital that was looking for new servers to run a new set of applications.

IBM was similarly critical of HP's troubles. The Armonk, N.Y.-based tech giant pointed out that it has gained 7 points of Unix market share in the last three years, while HP has lost 3 points of market share.

Would the management shuffle suggested by analysts help HP's situation? Tom Rosenwald, who leads the Consumer Products Practices for Ray & Berndtson, an executive search firm, doesn't think so. He told internetnews.com a new COO at HP would cause more problems than it might solve.

"Bringing in more management means more costs," Rosenwald said. "If [Fiorina] is spending too much time worrying about internal details instead of driving revenue for the company, then I would say yes."

If HP were to consider a COO, Milunovich suggested the company bring in someone from the outside.

"This quarter's execution problems highlight how much HP lost when [former Compaq CEO and HP COO Michael] Capellas resigned," Milunovich wrote. "HP is a huge company in more businesses than IBM. Given Carly's strength in marketing externally, HP needs an inside expert. Someone from the outside would make sense since current management essentially is the same HP management pre-Compaq."

Milunovich wrote that a possible break-up of the company would force tough questions, "perhaps resulting in the sale or exit of some segments. We hope that disgruntled investors force management to consider this alternative."