Hewlett-Packard's Taskmaster

Two days before becoming heir to Hewlett-Packard's chairmanship, CEO Mark Hurd strides to a lectern at the InformationWeek Fall Conference in Rancho Mirage, Calif., to address an audience of 300 IT executives--and 100 support staff and sponsors. "Wow, a lot of overhead," he says as an aside before taking the stage. Hurd then steps up to a flip chart and draws a triangle marked by three words: Growth, Efficiency, and Capital. They're what HP is all about these days.

As he emerges from a boardroom spying scandal with more power consolidated in his office, Hurd lives up to his reputation as a maestro of metrics with a sharp eye for inefficiency. HP's boardroom is in turmoil over the unethical--and possibly illegal--surveillance of board members' and journalists' phone records to root out information leaks, a lapse that cost board member Patricia Dunn her position as chairman, which Hurd will assume in January. Two other directors resigned--one in protest.

Yet HP's business is better than it's been in years. Analysts forecast HP will hit $91.2 billion in revenue for the fiscal year that ends Oct. 31, growing more than 5% and eclipsing IBM as the world's largest tech company. Net income could double to $5.7 billion, though IBM is still three times more profitable. HP is gaining ground in PC sales while market-leader Dell grapples with collapsing profits, quality problems, and a federal accounting probe (see story, "Former PC Industry Darling Tries For Comeback As Dell 2.0"). HP's operating profits are growing faster than revenue, as Hurd has extracted $1.9 billion in costs via 15,300 layoffs, benefits cutbacks, and other money-saving measures. HP's stock is up 85% since Hurd became CEO in April 2005, and the company has exceeded Wall Street earnings estimates every quarter in that time.

Act two will be harder. To keep growing and to establish itself as a supplier of business technology more compelling than PCs, low-cost servers, and high-margin printers, HP will need to find new places to cut expenses, so it can plow that money into research and development. Those questions will be front and center as HP opens its biggest IT user conference of the year this week in Houston.

"It's just been an amazing story since Mark Hurd has been there," says Gary Scholten, CIO at Principal Financial Group, a $9 billion-a-year company that manages health and retirement benefits and is a big buyer of HP gear. "The challenge is, so many parts of their business are commoditized now." HP is milking its cash-cow printer business for nearly half of its profits while trying to develop new products such as data center software for managing large groups of computer equipment and more sophisticated IT consulting services. "They're trying to reinvent themselves, but it's going to be a hard road to create value," Scholten says.

Repeat Performance

That's where CIO Randy Mott comes in. Hurd has identified three major growth areas for HP: managing networks of printers for business clients and getting into commercial printing, selling more laptops and handheld computers paired with better data security software, and selling servers and software that can automate more tasks in corporate data centers. Hurd hired Mott, who appeared with him at the InformationWeek Conference, away from Dell last summer. While at Dell, and before that as CIO at Wal-Mart, Mott scored big with large-scale data warehouses that could help executives spot sales opportunities and better target what customers wanted. Now he's trying to repeat that success at HP.

The company is assembling a 300-terabyte data warehouse on HP's own technology--and not NCR's Teradata system. That's notable because Hurd was CEO of NCR before coming to HP, and Mott has been a Teradata customer in the past. "We only have one religion here--it's got to be Hewlett-Packard infrastructure," Hurd says. Using the system, HP hopes to figure out what accounts it isn't reaching and identify new sales leads at the ones it is. It's hiring hundreds of salespeople to try to cash in on the insights. "His job isn't just to get us lower costs," Hurd says of Mott. "His job is to get us better information to help the company grow."

At the same time, Mott is taking on a radical centralization of HP's sprawling IT operations, consolidating 100 worldwide work sites to 29, cutting IT staff to 8,000 from 19,000 when he arrived, slicing applications in use from 5,000 to 1,500, and collapsing 85 data centers into six. And it's clear he's got support from the top. Says Hurd: "This isn't Randy Mott's IT strategy--this is HP's IT strategy."

Mott plans to become more self-reliant, too: As he pares down the IT workforce, 90% will be HP employees. Today, half of HP's IT staffers are employees of other companies under contract. Mott believes businesses have missed an opportunity to use IT automation in lieu of people-powered system administration. Businesses "are spending more on people doing things, less on technology doing things," he says. That's about to change at HP.

So HP is directing cash into IT equipment with the goal of saving money down the road. Mott is one year into a three-year IT overhaul. By the time he's finished, the CIO expects to get 80% more computer-processing power with 30% fewer servers. He also wants to double the amount of storage capacity and add 30% more network bandwidth at half the storage and networking costs he inherited.

Mott's mandate is to look for areas of growth at the same time he's scaling back. HP wants to use its IT shop as a showcase for new technologies out of the company's development groups and research labs that customers can see in action. "Randy's basically going to be the beta test site," says Art Data, VP of IT at International Truck and Engine. Mott wants to rev up innovation within HP's IT department, so that by 2009 80% of staff time is spent on new projects and just 20% on maintenance. Today, it's about half and half.

Centralizing and slashing IT isn't revolutionary. Far from it--many U.S. companies spent the dot-com bust years doing exactly that. But it's a necessary step to make HP more competitive on deals. More standardized systems could make HP a more compelling vendor to buy from, says Ralph Szygenda, CIO at General Motors, which will spend about $1 billion on HP services alone over the next five years. GM's IT department has run into different prices, distribution systems, and order-entry methods across HP units in the United States, China, Russia, and Brazil, and that's forcing GM to try to smooth out the variations. "I don't want to manage HP to look like one company," Szygenda says. Decentralized systems at HP meant higher labor costs learning how each group works, and in some cases higher prices--like in China, where HP charged premiums to cover compensation programs for salespeople. "If HP China has a different way of working than HP Brazil, I don't want to do business with them. It slows down General Motors," Szygenda adds, calling Hurd "a CEO that has embraced standardization, honestly, a little late."

Though much remains to be done, Hurd has effected a remarkable turnaround already, largely through a relentless focus on improving operations and raising morale. When Carly Fiorina was CEO, it was unclear whether HP would survive intact without being diced into smaller companies. Hurd has untangled Fiorina's matrix management structure to give salespeople more responsibility and clearer lines of reporting. He's shunned the press interviews and celebrity hobnobbing Fiorina thrived on--no trips to Davos or on-stage appearances with Gwen Stefani. He's even getting HP's researchers down to business, reducing the number of patents HP files to cut back on expenses and focus on quality. HP was awarded 1,797 U.S. patents last year.

Hurd's approach resonates with some customers. Richard Plane, chief technologist at Harris, which makes communications systems for broadcasters and the military, says Hurd's HP publishes product development road maps that look out three years or less, more in line with Harris' budget planning than the 10-year plans under Fiorina. But Plane wants more visibility into HP's research pipeline. "HP is an innovation company, but we're not seeing much of what they're doing in their labs," he says.

HP doesn't really have a technology superstar along the lines of Microsoft's Ray Ozzie or Sun Microsystems' Andy Bechtolsheim. HP Labs director Dick Lampman keeps a low profile, and CTO Shane Robison isn't a household name. HP nanotechnology researcher Stan Williams is a leader in his field, but his work may not bear fruit for a decade or more.

Not A Democracy

Hurd shares at least one trait with predecessor Fiorina: an unstinting belief in his strategy. "I'm not taking a poll here on how we're going to run the place," he says. "At a certain point you have to say, 'Here's what we're going to do.'" At the same time, HP needs to live up to the principles of its legendary founders, William Hewlett and David Packard, he says, conducting layoffs and enacting change while treating employees "with dignity and respect."

Those values will be put to the test as Hurd tries to quell board unrest in the wake of the spying case. To plug leaks around the firing of Fiorina, Dunn hired a private investigation firm that subcontracted some of the work to another company. That company solicited the phone records of board members and journalists by calling the phone company and posing as those people, a practice known as pretexting. The fallout, including the angry resignation of board member Thomas Perkins, the founder of Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers, cost Dunn her position as board chair. Last week, board member George Keyworth, identified as the source of some leaks, resigned. But it's a tough loss--Keyworth was HP's longest-serving director, a former science adviser in the Reagan administration, and was considered a technical asset to HP.

HP isn't out of the woods yet. The Securities and Exchange Commission and California's attorney general are investigating whether the company broke any laws during the espionage, and the Justice Department and Congress last week got involved as well. "People will be skinned alive for this wretched pretexting," said author and management consultant Tom Peters at the InformationWeek conference. Still, users seem willing to give HP the benefit of the doubt. "They get through this board mess, and they should have some momentum," Principal CIO Scholten says.

PC Push

HP is well positioned, but it's facing steady pressure from Dell, IBM, and a newly focused Sun. In PCs, cost cutting has enabled HP to drop prices while pocketing more margin, putting the hurt on Dell. Under the rubric "the computer is personal again" --its largest PC marketing campaign ever--HP is closing in on becoming the top PC supplier. HP shipped 8.1 million PCs in the second quarter, good enough for 15% of the worldwide market, according to Gartner. Sales and profit margins reached their highest point in four years. Dell shipped 9.7 million PCs for a 17.7% share.

International Truck VP Data says Hurd told a group of CIOs at an Aug. 31 meeting in Chicago that HP's retail distribution system--long considered a liability--has helped it capitalize on surging PC demand in Asia and Eastern Europe. In the United States, HP has taken better advantage of the laptop trend than Dell, which is strong in desktop systems.

HP's printing division yields steady returns: Revenue rose 5% to $6.2 billion in the most recent quarter and supplied 48% of profits. The company is trying to expand into selling management contracts for networks of companies' printers, similar to the way hardware vendors manage PCs, as well as expand into commercial printing markets with its Indigo technology. HP's $3 billion outsourcing deal with Procter & Gamble could be a template. Also, HP's one-time laggard software and services businesses are growing profitably as well. The company has focused on consulting deals that yield the most profit, trading off some growth.

But it's the promise of products for "next-generation data centers" that has HP's business customers paying closest attention. In July, HP said it would buy Mercury Interactive for $4.5 billion, one of HP's largest acquisitions ever. Mercury is a leader in software for managing the life cycle of software development projects, but HP's ambitions are larger. Mercury owns registry software that catalogs software components that can be shared among applications in a company's IT portfolio. Oracle and BEA Systems have integrated their software with Mercury's registry, and the technology could drive demand for Web services consulting and HP's OpenView software. "This plays beautifully into my strategy," says Terri Schoenrock, executive director of service-oriented architecture in HP's consulting group.

Hurd goes even further. Buying Mercury is part of HP's plan to capture a major share of the emerging market for virtual servers and storage, in which data and logic from several applications live across common pools of machines. Earlier this month, HP shipped business servers based on Intel's Itanium chips that double the performance of those systems. HP this week will unveil SOA development labs in California, Singapore, and India, and will release a low-cost storage appliance for small companies. "You'll see a heavy blurring between what's a service and what's a product," Hurd says. He identified software for managing blade servers and storage technology as areas of interest for potential future acquisition.

By Hurd's own admission, HP's work is far from finished. "We are a company that's in transition," he says. When Hurd arrived, some managers were patting themselves on the back because HP spent 4% of revenue on IT, same as IBM. Trouble was, IBM is more profitable and efficient. "You still feel good?" Hurd says, recalling how he prodded his management team. "You want to go take a lap around the building?"

If HP reports $9 billion in net income next year, at the high end of its estimates, that still leaves $83 billion in costs, Hurd notes. With more to cut, an IT infrastructure to rebuild, and governance questions flying, no one at HP is doing victory laps yet.