Mark Hurd, HP’s new president and CEO, hosted a series of calls with Wall Street analysts and the media to explain HP’s reorganization plan, which hit about dead center of expectations.
Oddly, the number of employees that HP plans to cut – 14,500 worldwide – is the same number that rival IBM announced it would be laying off as part of its reorganization. If the idea of firing 29,000 people weren’t so grim, one might say one IT vendor is copying from the homework of the other, or that, if IBM jumped off the Brooklyn Bridge, then HP would do it too, and vice versa.
But, while IBM and HP may be roughly equal in size in terms of revenues (around $88 billion a year for calendar 2005), after all of IBM’s divestitures, Big Blue will have about 314,500 employees worldwide following its cuts, whereas HP will have about 136,500. IBM’s services and software units are more people-intensive, even if they are higher-margin products, than PCs and servers, which have razor-thin margins except at the high-end of any vendor’s product lines. IBM and HP are similar in many ways, and different in many others.
In late March, when Mr Hurd was brought in after the ousting of Carly Fiorina as chairman and CEO, he said he was going to analyze the situation. And in May, when Mr Hurd discussed the results for HP’s second fiscal quarter and sat in the Wall Street hot-seat for the first time, he didn’t give much indication of what his plan was.
In the conference calls, the CEO said HP’s executives had already done a lot of the work in identifying ways to make changes in the way HP is organized and how the pieces fit together long before he came on board, and that what he did was look over the plans and galvanize them. He is probably being modest to a certain degree, but Mr Hurd also doesn’t want to look like he has all the answers. As the captain of HP, what he has to do is know a good idea when he sees it and find the right person to understand that idea and make it happen. This requires teamwork and cooperation.
Mr Hurd’s claim that a lot of work had already been done would seem to indicate that Ms Fiorina’s downfall at HP was that she was not executing to the HP plan fast enough, or that she was unable, politically, to pull off some of the maneuvers that the company’s new CEO is to try.
Mr Hurd has already split off the Imaging and Printing Group and the Personal Systems Group. Ms Fiorina had smashed these two units together, putting one man in charge of both.
Mr Hurd came in and one of the first things he did was look for someone to run the PC business, eventually selecting palmOne’s former president and CEO, Todd Bradley. More recently, HP hired Randy Mott, rival Dell’s chief information officer and the former CIO of retailer Wal-Mart, in an effort to get its own IT house in order.
HP said one of the areas it would be cutting down on in the layoffs was in IT. Mr Mott, meanwhile will receive a $15.3 million package, including $690,000 base salary with possible 100% bonuses for the next two years, and more. For a cost-cutter to pay that kind of money for a CIO, he has to believe he will be able to deliver far more in return to HP.
Mr Hurd and HP’s CFO, Bob Wayman, explained that HP did not know exactly where the 14,500 cuts would come from and they estimated it would take as long as six quarters for them to be completed. HP cannot be specific about where the cuts will be because in many cases they will come after consultation with work councils and employee representatives in European countries and through voluntary layoffs.
The layoffs will drag on because in some countries you have to give one year’s notice of dismissal. HP said half of the workforce reductions would be in support functions, such as IT operations, human resources, and finance, and that the majority of the reductions would be involuntary. And because these white collar jobs are heavily based in the US, it is reasonable to assume that HP’s US employee count will suffer proportionately.
No matter where in the HP organization or in the world a job is being axed, Mr Hurd said HP didn’t start out with a headcount target, but rather analyzed the work of its employees and sought to remove redundancies as well as to simply eliminate work deemed unnecessary. The job cuts will have little effect on HP’s research, development, and sales organizations, and Mr Hurd was emphatic that HP would not increase its use of outsourcing as a way to save money.
Mr Wayman, who said he had no plans to retire any time soon, also said HP would be changing its benefits plans in the US, shifting some workers from a pension plan to a 401(k) plan with an increased contributions from HP. Starting in January 2006, HP will freeze pension and retiree medical benefits based on criteria such as age and years of employment.
When you do the math on the reorganization, HP will record a pretax restructuring charge of $1.1 billion over the next six quarters, and the company expects the bulk of this charge to be taken in the fiscal fourth quarter. HP has already announced it would have a $100 million restructuring charge to take in the third quarter for prior workforce reductions.
The ongoing annual savings from the restructuring is expected to be around $1.9 billion, with $1.6 billion coming from the layoffs and $300 million from the winding down of pension plans. Mr Hurd said about half of these savings would be plowed back into the company for development and acquisitions, and half would drop to the bottom line. In fiscal 2006, HP expects the savings to be about $900 million to $1.05 billion, and that about $500 million will drop to the bottom line.
The plan Mr Hurd and his team have put together clearly shows that they have no plans to significantly remold HP. They just want the HP they have to run better.
