Hewlett-Packard aims to divide and conquer

13 Mar 1999 View Comments
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'History is bunk,' wrote Aldous Huxley in Brave New World. By dumping what chief executive Lewis Platt described this week as 'our heritage', computer giant Hewlett-Packard (HP) seems ruefully to accept this lesson by splitting in two to restore its fortunes.

HP said last week it would spin off its testing, medical and chemical products businesses to form a new measurement company, that will represent $7.6 billion (#4.75bn) of its total revenue of $47.1 billion in fiscal 1998. Edward Barnholt, chief executive of the new company, describes it as 'an eight billion dollar startup.'

The bulk of the 60-year-old company, the computer and imaging businesses, will retain the HP name and provide their business units with greater autonomy in their markets.

Platt called the split an 'exciting new chapter in HP's history', and said it would allow greater public accountability, freedom, capital, and ability to make acquisitions. He hopes that HP will now be able to compete more effectively with rivals, which over the last two years have chipped away at its markets, he said.

Even from a stock market point of view, the company needed something 'radical' - HP's share price has underperformed compared to most other technology stocks by around 50% over the past three years.

In December last year, HP failed to ship a single K-class server - its key mid-range server product that generates 60% plus of its hardware revenue - because of production problems. Growth in HP's core businesses was around two per cent. The company's overall revenue growth rate has been over 25% every year since it was formed, but recently this figure has dropped.

Platt expects the restructure to be completed in March next year. But while the split is seen as radical by HP, some analysts say it is still not enough.

'I would describe it as a very good start, but no more,' said GartnerGroup analyst Andy Butler. 'Within the organisation that's left there are still great variations in margins, go-to-market models and cultures that still have to be resolved.'

Another analyst, who wished to remain anonymous, was more damning. 'HP has been suffering from the three Bs - it is big, bloated and bureaucratic.

This might be one step on the path to correction,' he said.

Peter Bradley, general manager of the HP UK computer users' association, agreed that the vendor lost its way over the past two years. He argues that Platt's departure is also necessary to to turn around HP's recent dip in performance

'People have to feel with a ship this size that it is under control from the top, and it has not felt that way recently,' said Bradley.

IDC analyst Martin Hingley says Platt has always been concerned about the difficulties of getting high growth rates from a company with more than 100,000 employees. This split should mean a reduction in the number employees from the current 130,000, he said.

'Smaller, focused companies have tended to do better - Dell's direct relationship marketing is a good example, or Compaq another - than the larger ones, completely outstripping (in their areas) Siemens and IBM, who are full range suppliers,' he said.

However, Hingley says HP's product reliability program and a strong chip design strategy should improve its competitiveness.

'HP's reputation has been somewhat tarnished for hot boxes and low-end servers - Sun Microsystems has had a better image the last few quarters for quality and performance of boxes,' he added.

HP recently combined its services and computer units into the enterprise computing solutions organisation (ECSO), but the company is further expected to restructure its HP 9000 high-end Unix business, with other reorganisations possible in the PC and printer businesses.

The company began moving hundreds of marketing and administration staff into a more outward facing sales role last year, and analysts predict more reorganisations to come.

Platt called in management consultants McKinsey at the end of last year to examine the company from top to bottom, and this week's announcement is probably only the first of the recommendations to arise from this exercise.

'HP has to get it right and get it right quickly,' said Bradley.

Butler suggested two further actions HP may be considering: spinning off the printer business to run autonomously; or following the IBM and Unisys models with its services organisation to extend beyond what is essentially an HP platform business into the worlds of multi-vendor outsourcing and system integration.

HP also announced belated plans for jumping on the Internet bandwagon - at the beginning of what Platt describes as 'Internet Chapter Two'.

The company will sell new products and services under the banner of Eservices, hoping to benefit from the predicted trend where companies will buy applications such as services over the Internet.

'The new HP will have a rich menu of choices for growth and profits,' said Platt. But what users are waiting for is when the new HP will be revealed, and how long it will take.

Divesting itself of its history is just the first step.

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