HP chief wounded by divided attention

Hurd has transformed HP into a growth company, but the success is being overshadowed by scandal.

7 min read
PALO ALTO, Calif.--Mark Hurd sat at the head of the table in the HP boardroom, the room that had been the source of leaks and the starting point of a misguided and ultimately embarrassing attempt to plug them.

Hurd, the chief executive, had wanted to talk about the transformation inside HP, how it was becoming a lean Silicon Valley growth company instead of a cash cow content to thrive on the high profit margins of its ink and toner cartridges.

But instead, in his first public interview since the spying operation was revealed in early September, Hurd needed to talk first about the spying investigation that has sullied the company's reputation as well as his own.

"This is just a horrible thing that has happened," Hurd said Wednesday afternoon, his rimless glasses perched on the end of his nose, "and we have to fix it." He echoed that sentiment in a news conference on Friday at which he expressed regret and then apologized for the actions of company investigators and the detectives they hired.

Hurd also apologized for his own inaction. As shocking as it has been to hear the methods used--obtaining private phone records, or trying to plant tracking software on a journalist's computer --it is almost as surprising that Hurd sat on the sidelines while the company's Clouseaus drew up plans to infiltrate newsrooms with spies masquerading as secretaries or janitors.

Hurd, 49, is known as an operations expert who asks lot of questions. "Mark is very rigorous on operational details," said Shane V. Robison, an executive vice president and chief strategy and technology officer. "He knows what to ask and he knows when to step back and listen," Robison said in an interview in late August before the furor erupted.

At least twice when he had the opportunity--at meetings in July 2005 and in March 2006-- Hurd failed to ask critical questions about the methods in the leak investigation.

But some people close to him suggest--though they do not know for certain--that he failed to focus on the leak investigation partly because he was focused on getting the company fixed and partly because he regarded the search as the project of Patricia Dunn, the chairman.

At Friday's event and in the interview, Hurd chose not to explain that inattention.

"He said nothing in effect, but he said it very well," said Charles Wolf, a securities analyst who follows HP for Needham & Company. Hurd may explain more when he testifies Thursday at a House subcommittee hearing.

The mood inside HP grew more apprehensive in midweek after Hurd's name surfaced in documents about the spying operation. And a few corporate governance analysts have wondered whether he might become a victim of the scandal, like Dunn, whom he succeeded as chairman after her resignation from the board on Friday.

But what has won him the benefit of the doubt within the company and among investors is that he has done so well fixing the company. He was transforming NCR when he was hired in March 2005 to take on the task of righting HP.

At the time, most analysts and investors said its best days were behind it. But the stock has risen 77.4 percent as he cut costs, restructured operations, hired more salespeople and pushed employees to find new opportunities for growth, like commercial printers, energy-saving blade servers and software to manage data centers.

"He doesn't promise much, but he's delivered five quarters of upside surprises," Wolf said.

The reason Wall Street remains enamored of him and the company is what Hurd has done with a business model that employees have taken to calling the Triangle, a regular feature on company whiteboards and PowerPoint presentations.

On one corner is Efficiency. At first that meant reducing headcount. Shortly after Hurd arrived, he announced that the company would shed 14,500 employees, or about 10 percent of its work force, for about $2 billion a year in savings. But he is not done cutting. The company continues to find places to cut costs, like disposing of some of its real estate.

On another corner is Capital Strategy, which is the $16 billion HP has hoarded.

On the third corner is Targeted Growth, which is where the savings and the cash hoard are spent.

Growing animated when the Triangle was mentioned, Hurd said, "It's not rocket science." But as for execution, Robison, the chief strategist, said, "You have to do all three at the same time, and that is really hard."

The point Hurd makes to employees is that cutting costs is not enough. "Management's job is to explain that cost-cutting and growth are not two things," he said. "They are really one thing."

A good example is HP's data centers. It had 85 of them spread around the world. The company is building six of them in two cities to handle all the data processing. It will close the existing centers, sell the real estate and lay off more employees to save $1 billion.

Lower personnel and operating costs free up money to develop the software and equipment that will make the centers more efficient. But there is also a growth opportunity, because HP will sell similar data centers to other companies that also want to cut costs.

Knowing that cost-cutting and growth are the same objective helps to cushion the pain of never-ending cost-cutting. "The person knows we aren't just taking costs out, we are helping the company grow," Hurd said. "The employees have to know the plan. Then it is a different attitude. They want to be on a winning team."

"That's what's so horrible about the current situation," he said, returning to the spying scandal. "They want to know they are making progress. The people in the company are working very hard. We've done some tough stuff. I don't want to forget we took 15,000 jobs out of the company and told a lot of employees to go home and tell their families they that no longer have jobs."

The concept could be an important model for any aging behemoth--think of Ford, Coca-Cola or Time Warner--that wants to grow but needs to cut first. He has been at it less than 20 months, and not everyone thinks it can be sustained.

"The jury is very much out on whether Hurd has made any notable progress on growth yet," said A. M. Sacconaghi, a securities analyst with Sanford C. Bernstein & Company. "That is his next big challenge, and materially boosting revenue growth on a $90 billon company will be much tougher than cutting costs."

The distractions of the spying scandal are certain to test the concentration of the company's top executives. But those who have known Hurd say they think he can keep morale at the company high.

Dipak C. Jain, the dean of the Kellogg School of Management at Northwestern University, who has known Hurd for more than a decade, said his style was not to bully or humiliate his lieutenants. "People don't get intimidated working with him," Jain said. "He believes that if people get intimidated, their best doesn't come out."

Hurd recognized, for instance, how anxiety-ridden top executives become when they discuss the current quarter. "They get defensive," he said. So when he arrived at the company in 2005, one of his first management meetings was about 2010. "We would take the short-term emotion out of the equation and work backwards," he said.

At the same time, he is not bothered by people who say Carleton S. Fiorina, the former chief executive and chairwoman, should get some credit for the company's current success. "I don't look at things as binary," he said. "It just needed a bit of crystallization."

There is another aspect of his management style that may account for the paradox of his success in running the company's business and his failure to stop the managers overseeing the detectives from getting so far off track. Hurd trusts his executives to make decisions.

He said he discovered after he arrived at HP that he was being asked to make too many decisions. For instance, he was mediating disputes between the computer division and the printing division, which shared a sales force. He tore up that matrix system of management and made division executives responsible for their own sales.

Pushing down responsibility and accountability develops products faster, gets them to market faster and makes for more satisfied customers, Hurd said. That new structure freed Vyomesh Joshi, executive vice president for the printing division, to invest heavily in new areas--like the online photo service Snapfish, copiers, commercial printing and a teleconferencing service called Halo--that have added $1.3 billion in revenue over 12 months.

Does distributing responsibility have another cost--more detachment from the oversight by the chief executive? It is another unanswered question. But as Hurd explained a sketch about bureaucracy and how information is shared in an organization, he noted: "The problem isn't at the bottom. It is near the top."

He says he thinks a lot about process. To help repair the damage from the scandal, he has appointed Bart M. Schwartz, a former federal prosecutor, to examine the company's process for investigations.

"We are working as hard as we can to get through this," Hurd said Wednesday.

Matt Richtel contributed reporting from San Francisco.