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Commentary: Tough road for new HP chief

Forrester analysts say the to-do list for the incoming CEO starts with a big question: Is HP better together?

Commentary: Tough road for new HP chief
By Forrester Research
Special to CNET News.com
March 31, 2005, 3:03PM PT

by Ted Schadler, Frank E. Gillett, Laura Koetzle, analysts

Hewlett-Packard's new CEO, Mark Hurd, is a straight shooter, a personable leader and an operations wonk.

Forrester believes that he will demand and get performance from each of HP's businesses--or he'll put the underperforming unit on the block. His big challenge in 2005 is to prove the power of HP's portfolio in delivering supplier efficiency, channel efficiency and product efficiency. If Hurd can't demonstrate HP's efficiencies or synergies, then there's no reason to keep the businesses under one roof.

Forrester spoke with Hurd to get his views on where HP will go next. He brings with him a solid track record as CEO of $6 billion NCR. But can he be successful with an $80 billion HP? We believe that Hurd has what it takes as he:


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Analysis and comment-
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• Demands performance, because HP needs financial accountability in every business. Hurd is an operations-focused executive. He may not light up the stage in Hollywood, but he will create a business structure that delegates authority to executives like Vyomesh Joshi, head of the Imaging and Personal Systems Group. Hurd will focus on metrics like return on invested capital and sales-to-gross-margin ratio, and he'll hold the enterprise, printer and PC businesses to those metrics equally.

• Focuses on growth, because HP needs to grow to project confidence. CIOs make million-dollar bets on technology every week. Unless those executives are confident that HP will innovate and improve to serve them, they'll look to IBM or Sun Microsystems for hardware, data center management tools and services. Growth will require HP to invest in a more targeted and accountable sales organization, distribute decision-making, and wring more efficiencies from shared supplier management, manufacturing and marketing resources.

• Listens to stakeholder concerns, because HP needs to heal itself. Hurd inherits a company in which employees are discouraged, investors are impatient, suppliers and partners are skittish, and customers are nervous. Putting these stakeholders at ease while simultaneously trimming costs, implementing financial accountability and streamlining processes won't be easy. Thus, HP should lie low until fall to do the hard work out of the spotlight.

"The biggest challenge"
Forrester believes that HP's acquisition of Compaq Computer was the right move--but we're still waiting for proof that the portfolio approach will work for the long haul. In our experience with enterprise buyers, HP's customers don't worry too much about whether HP is a single $80 billion company or three smaller companies. But investors certainly care. And competition in each business is hardly slowing down--IBM and an ever-expanding Dell continue to ramp up the pressure.

Hurd told Forrester that "business complexity is the biggest challenge." He signaled to us that he has no current plans to break the company up--but Forrester believes that Hurd won't be afraid to make that decision if it proves necessary. To justify keeping the enterprise, PC and printer businesses together, HP must demonstrate:

• Supply chain efficiency. HP's supply chain is huge and diverse--which it says gives it the ability to gain better economies of scale and scope than either Dell or IBM. But it has been unable to demonstrate this convincingly through lower prices, higher profits or truly differentiated servers, PCs and devices.

• Channel efficiency. Unlike IBM, HP sells to two customer segments--businesses and consumers. Unlike Dell, HP sells two kinds of products--commodity and premium. Few companies other than General Electric attempt to manage this "two by two" portfolio--and no other large high-technology companies do. HP must prove that there are channel efficiencies that justify its complex portfolio.

• Product synergy. HP argues that it can make diverse products that work together to create a better customer experience than the customer would receive if she assembled products from multiple sources on her own. Apple Computer and Microsoft succeed with complementary products, while IBM does it with solutions that combine product and professional services. HP has done this for consumers with the combination of dockable digital cameras and photo printers, but not for enterprises. That's because enterprise vendors are already so focused on interoperability that it's hard to demonstrate real product synergy across PCs, servers, storage and management software.

© 2005, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.