Smaller HP still drawing post-merger road map

Now that new Hewlett-Packard (HP) Chief Executive Officer Mark Hurd has taken the first step in his plan to improve the company's uneven performance in recent quarters, he must decide what kind of company HP will become as it approaches its 70th birthday at the end of this decade.

Should it become a lean, efficient, commodity-product supplier? Or perhaps an innovative consultant to the major IT departments of the world? Can HP attempt to do both, as it has done since its acquisition of Compaq in 2002, while fending off challenges from Dell and IBM?

Those questions were not addressed on Tuesday, when Hurd unveiled a much-discussed restructuring plan that keeps the company's sales and research and development teams largely intact, while heavily cutting jobs in IT, human resources and finance.

"What you get is a lot of questions like that on a day like today, 'What's coming next?'" Hurd said in an interview after the announcement. "Right now where we really are is focused on making HP the best HP that we're going to make it."

The cuts will improve HP's profitability to the tune of US$1.9 billion in cost savings by its 2007 fiscal year, which begins in late 2006. Hurd also dissolved HP's Customer Solutions Group and moved those salespeople into the product groups they already serve. This is in line with several of Hurd's initial operational moves to give executives and employees focused roles, such as the separation of IT and the company's global supply chain.

Financial analysts and shareholders were initially unsure of what to make of Hurd's actions, sending HP's stock (HPQ) up slightly in early trading on the New York Stock Exchange, but those gains were erased by midafternoon. The company's stock price was US$24.56, down US$0.36 or 1.4 percent, 45 minutes before the close of trading Tuesday. The financial community might have been hoping for larger cuts, said Cindy Shaw, senior analyst with Moors & Cabot, in a research note distributed Tuesday.

"This whole year has been internally focused for HP. Now they can focus on executing," said Sam Bhavnani, senior analyst with Current Analysis.

Even before Hurd arrived at HP, the company's management team had begun to address the need for cost-savings and improved efficiency, he said.

"There's a perception that I came in and did the work. But I came here and asked questions, and [the management team] would say, 'Interesting question, and here's some work we've done on the subject," Hurd said.

The long-term strategic issues will need to be publicly aired at some point soon, said Charles King, principal analyst with Pund-IT Research.

"What seemed to me was missing [Tuesday] was an overarching sense of what the company is doing strategically. This was more a matter of, 'We're cutting staff, getting expenses under control, and moving forward.' But 'where are you going' was pretty much unaddressed," King said.

After Hurd's predecessor Carly Fiorina brought Compaq into the fold, HP became the market-share leader or second-place competitor in a broad array of categories across PCs, servers and printers. But the company has thus far been unable to translate that market share into consistent profits amid multiple structural changes and repeated layoffs.

Fiorina created new groups, combined old groups, and eliminated others in hopes of finding the right mix of people and products. HP's board ultimately decided that she was not the best person for that job, and hired Hurd in late March to focus on creating an "execution-oriented culture" at HP. In the language of business-speak, that basically means a company that gets things done without making mistakes.

HP did not release many details about layoffs within specific product groups during separate conference calls for reporters and analysts Tuesday, making it hard to judge the impact of the layoffs on customers. Hurd promised to leave sales and research largely intact.

"We are one of the few remaining hardware companies that delivers innovation that customers value and we'll continue to invest in compelling products that can be differentiated in the market," Hurd said during the call. And in the interview, he reiterated his commitment to HP's current strategy of offering a broad portfolio of products to businesses and consumers.

However, there will be at least a few cuts to product development groups, and "with the loss of two or three people from the wrong team, you can hobble product development," King said.

What is unavoidable is the impact of additional layoffs on the battered HP workforce. Two HP employees contacted Tuesday said they had not received word of specific cuts within their departments, but they expected to know more within a week.

The company has seen several rounds of layoffs, reorganizations and executive departures since 2002, but many current employees are willing to give Hurd the benefit of the doubt in his early days steering the ship, according to one HP insider.

"Obviously, deep, deep cuts are never going to be that popular," said one HP employee who requested anonymity. Hurd seems to be holding those around him to accountable standards, the employee said, adding, "I think that's what largely made him most popular."

That popularity will be tested as HP moves forward with the cuts, said Gordon Haff, senior analyst with Illuminata Inc. in Nashua, New Hampshire.

"This kind of thing does take a morale and energy toll on a company. Which isn't to say this isn't something he has to do, but it doesn't come without an intangible cost to pair with the tangible savings," Haff said.

(Robert McMillan in San Francisco contributed to this report.)

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