HP Gets Practical

In between interviews for the CEO job at Hewlett-Packard, Mark Hurd plowed through The HP Way, David Packard's 1995 book about the company's circuits-and-switches origins and commitment to turning employees' brightest ideas into successful products.

Yet Hurd added some less-enjoyable fare to his reading list before his appointment became official on April 1: HP's Securities and Exchange Commission filings and analyst reports that lay out the financial challenges before him. Hurd appears to have the cost-cutting moxie to whip HP into better shape, based on his recent performance as CEO at NCR Corp. But the question hanging over his head--one even larger than looming decisions about whether to spin off the printer or PC businesses--is whether he can instill discipline without stifling innovation.

Many of HP's greatest successes have come from a culture that values creative thinking over cost-cutting, as well as Bill Hewlett and Dave Packard's faith in "management by walking around" over managing by the numbers. Hurd said last week that he'd do "everything in my power" to live up to the founders' commitment to innovation. "Culture and values are a very important thing for a company."

That may be, but during his two-year tenure as CEO of NCR, the 48-year-old engineered a turnaround by cutting $200 million in costs and 5% of NCR's workforce. "Mark, like the board, is very much a fan of metrics," said HP board chairman Patricia Dunn, who helped oust former CEO Carly Fiorina in February. HP will put together a set of "goals and key performance indicators" meant to get its staff on the financial straight and narrow, Dunn said at a press conference.

Like HP, many technology companies are just now emerging from a profit-sapping recession and wrestling with the margin-cutting commoditization of their products. Then there are rising IT powers in India and elsewhere that offer the high-profit services, in the past dominated by HP and its like, for less money. "It's probably the direction the whole industry is moving," says John Thomas, VP of infrastructure solutions at Perot Systems Corp., which resells HP technology but competes against the company in the outsourcing market. "We're trying to become very strongly metrics-driven as well."But dropping prices alone won't differentiate HP's products, especially in emerging markets like grid computing, Thomas says. "We look to HP for innovation. If they're going to compete against IBM, they've got to provide product differentiation," he says. "Price is certainly a differentiator. But they've got to innovate to keep their place in the market. They're stuck where they've got to do both."

Hurd faces the problem of growing a company that's lodged between two very different competitors. IBM, with deep roots in industries such as aerospace, auto manufacturing, banking, retail, and telecommunications, can design packages of computer systems and consulting services with expertise HP can't match. On the other side is Dell, with about a third of HP's 150,000 employees and a sliver of its $3.5 billion-a-year research-and-development costs, squeezing HP on price. Even HP's vaunted printer business, which supplies about a third of its revenue and three-quarters of its profits, has seen margins shrink.

HP's $19 billion acquisition of Compaq in 2002 expanded the company from less than $50 billion in annual revenue to nearly $80 billion last year, but it hasn't extracted enough costs or delivered enough profits in the competitive PC and enterprise-server businesses.

If HP wants a no-nonsense manager to tackle these problems, Hurd looks like an apt choice. Two weeks before she was fired, Fiorina was hobnobbing at the World Economic Forum in Switzerland with the likes of Bill Clinton and Bono. Hurd, meanwhile, published a book last year called The Value Factor.

HP's sales, manufacturing, and IT operations could all stand some tighter controls, says Rob Enderle, principal at consulting company the Enderle Group. "It's why a company like Dell can be seen as better managed. They live and breathe metrics." But in today's highly competitive tech market, managing by the numbers doesn't always produce hit products. "One of the difficulties you have with R&D and the fuzzy aspects of the business that surround innovation is that you're building for a future that's uncertain," Enderle says. Apple Computer's iPod music player, for example, "would probably not exist if Apple was tied to metrics."That's where things get dicey. By spending aggressively on R&D and elevating its technologists' ideas, HP made itself a mainstay of the tech industry. It virtually created the handheld calculator franchise in the 1970s, made the HP 9000 workstation a staple of business in the '80s, and owned the market for color printers in the '90s. HP's management philosophy always has been ahead of trends, too: It expanded into China 20 years ago and was the first U.S. company to offer employees flextime, in 1973. It has struck some creative partnerships in recent years, working with DreamWorks SKG to supply IT for computer animation and with Apple to resell its iPod and boost PC demand. But there's been a drought of truly blockbuster products from R&D of late.

HP still has a deep technical bench, though: Chief technology officer Shane Robison manages the company's mergers-and-acquisitions activities in addition to HP Labs, and board member Jay Keyworth, who helped conduct the CEO search, was President Reagan's science adviser and still attends HP technical conferences.

Furthermore, HP's best customers likely won't tolerate a big pullback on innovation. "They're in business to make a buck, so yes, they should be managing by the numbers," says Fred Wettling, IT architecture and strategy manager at Bechtel Corp., the $17.4 billion-a-year engineering and construction company, which spends several million dollars annually with HP. But U.S. companies too often have "their eyes glued to the stock ticker," he says. Wettling has been talking with HP management since Fiorina was fired and has made his views known. "My relationship with HP is a long-term thing. I expect them to be an industry leader in the future," he says. "If they're distracted by, 'How am I going to bump up the numbers in this quarter?' that's not the kind of company I want to make the investment in."

Hurd said that creating demand for the results of R&D is "the heartbeat of any technology company." At the same time, "we have to understand our cost of capital and return." That mentality could help HP run a tighter ship, and even halt investors' calls for a spin-off of the printer or PC businesses. But Hurd will have to balance customers' desire for a long-term view as well.