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HP's "solution" appears to be to downsize workforce, rather than pursue new markets

Hewlett-Packard Comp. (HPQ) is the world's top personal computer seller, but the company has appeared lost over the last few years, as it has searched for identity.  From its ill-fated Palm experiment in the mobile market, to its disastrous decision to appoint SAP AG (ETR:SAPreject Léo Apotheker, HP has seemingly created more fires than it has put out.

I. HP Prepares for a Massive "Downsizing"

Now with former eBay, Inc. (EBAY) CEO Meg Whitman at the helm, the company is trying to course correct and return to its core identity as a PC maker.  The New York Times reported late Thursday that Ms. Whitman planned to chop 30,000 jobs next week -- nearly 10 percent of HP's 324,000 person global workforce.

HP reports its earnings next Wednesday and the cuts are expected to be announced then.  A second report from Bloomberg Business Insider pegged the number of expected layoffs slightly lower, at 25,000, which offers an indication that the precise number may be a "game-time decision" of source.  Regardless, the number of layoffs is expected to be large (>20,000) come Wednesday.

Meg Whitman
Meg Whitman reportedly plans to cut around 10 percent of her company's employees.
[Image Source: towleroad]

Comments the NYT's source, "[Whitman] is trying to build a new company.  You can count this as a part of that.”

The electronics giant pulled in $127B USD in 2011, but drew criticism for only posting $7.1B USD in profit, while rivals like Apple, Inc. (AAPL) posted much higher earnings margins.  Part of the issue is thought to be HP failed to go anywhere in potentially lucrative areas such as mobile devices (tablets, smartphones) and cloud computing.

In mobile devices, many of the issues boiled down to HP's decision to pick up a struggling device maker (Palm) and then put little effort into trying to turn it around, and then simply bailing out of the market when the results of its lack of effort hit the metaphorical fan.

In cloud computing, HP has quite a bit of product -- the problem is it's being overlooked.  According to various sources HP has picked the wrong horse in the cloud computing race, betting on ultra-power efficient servers.  Unfortunately, top cloud computing buyers such as, Inc. (AMZN) and Google, Inc. (GOOG) have increasingly prioritized lower prices over higher power efficiency.  As a result HP is seeing Asian competitors who produce cheap commodity cloud servers earning much of the sales it had hoped to capture.

II. Doing More With Less -- a Solution or Just Punting the True Problems?

The layoffs are expected to mostly spare HP's growing Chinese unit, and instead focus on the U.S. and European units.  The cuts are designed to free up cash to invest in restructuring.

The New York Times describes:

Ms. Whitman, who through a spokesman declined to be interviewed, plans to put money into sales technology for things like fast product quotes, customer tracking and servicing, and bill paying. The hope is that the money gained by job cuts will be used for an efficient, better-trained sales force that in turn can generate more cash.

In other words, HP is going to invest in trying to do the same amount of work with a smaller workforce -- a popular move of late in the post-recession U.S. market.  While that approach may indeed improve margins, it may also leave a bad taste in the mouths of some investors that had hoped HP would make more drastic changes to its cloud computing efforts, or invest in resurrecting its dead mobile device lineup.

Punting a football
Some fear HP is punting on its true structural issues. [Image Source: How to Punt a Football]

Another concern is that there's no indication that HP will invest any of the savings in restoring HP Labs to its former glory.  Investors fear that cutbacks to HP Labs, which started during the seemingly prosperous Mark Hurd era, may hurt HP's long-term success prospects.

Long a bastion of electronics industry research, HP Labs has continued to do novel work, such as inventing the memristor -- a long theorized circuit element, which could lead to new cheaper, more power-efficient kinds of storage.  However, the cutbacks have forced the star institution to operate on a shoestring budget, raising questions of whether HP will be able to continue to attract top talent.  The situation is so bad at HP Labs, according to The New York Times, that researchers are forced to use pirated software for their day-to-day work.

There are plenty of questions for HP as it prepares to announce its massive layoffs and restructuring.  HP appears to be choosing the easy answer; an answer many of its corporate colleagues have opted for in the wake of the recession -- cut the workforce, while forcing current employees to work harder and more efficiently.  The question at HP -- as with the other firms who have adopted this approach -- is whether that plan is maintainable as a long-term solution, and whether it really addresses the underlying structural issues that caused the company to go from growing to contracting.

Sources: The New York Times, Bloomberg

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modus operandi
By rdhood on 5/18/2012 4:23:06 PM , Rating: 3
This is merely the way that HP has done business since Lew Platt turned over the reigns to Carly Fiorina. HP has laid of 100,000+ over the last 12 years, through good times and bad. If their cuts were targeted at under performers, then one might admire them. But their cuts are broad and blind. Three years ago, my whole unit, working in Linux and windows high availability, got cut. They left the cash cow product ONLY. Problem was, the cash cow's main reason for existence was high availability for Oracle's DB! Imagine how that is working out for them. HP double downed on IA-64. Imagine how that is working out for them. Before their tablet came out, I said... IN THIS FORUM... that they would orphan their tablet computer customers, like they orphaned nearly all of their consumer electronics. And then they did!

HP is a severely dysfunctional company... going on 15 years now. I don't see it changing in the near future.

RE: modus operandi
By JediJeb on 5/18/2012 5:45:12 PM , Rating: 2
I am glad that HP spun off Agilent years ago, I would hate to see it suffering because of the parent companies terrible management. I know they are not completely separate, but separate enough that Agilent has still made some good progress in their analytical instrument fields. I have been using their equipment for 20+ years now and they still have the best in the business for what we use in the laboratory. I hope these cuts do not run into their group, I would hate to see some of the good service people there gone.

RE: modus operandi
By JohnThacker on 5/19/2012 12:07:10 AM , Rating: 2
Agilent and HP are completely separate. In fact, HP even recently lost the contract to do computer technical support for Agilent. The things that are shared are company traditions, but that's it.

Agilent Labs is entirely separate, and Agilent continues to invest a large percentage of revenue into R&D. Agilent also reported very good 2Q earnings this past week.

RE: modus operandi
By JediJeb on 5/21/2012 2:14:45 PM , Rating: 2
That is good to know. I haven't kept up with the interrelationship there that much lately.

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