Yankee Group: HP Needs to Split Products Post-Fiorina

February 9, 2005

The resignation of Carly Fiorina as CEO of HP signals a "new era for the company," according to the Yankee Group.

The following is excerpted from Yankee Group's news release from today, outlining key lessons and recommendations for HP:

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HP has performed admirably as a commodity technology services business and has maintained a leadership position in peripherals in recent years. But the company has clearly slipped behind some of its chief competitors with its moves into business process outsourcing and providing a service-oriented platform that decouples business processes.

HP needs to refine its approach and internal structure to develop a stronger position in these markets. The incoming CEO will have to make quick decisions on further acquisitions to propel HP into these growing markets and work fast on finalizing the integration of Compaq's business units. HP now has an opportunity to regain momentum as a technology and business integration pioneer, and the change of leadership might just provide this opening.

The Yankee Group believes there are some key takeaways from this event:

1. At the time of the HP/Compaq merger, HP was split between those who felt that HP was good at peripherals (printers and cameras, etc.) and should not waste its money on Compaq and those that tried to rationalize an outdated set of computer offerings (servers and desktop). Fiorina was on the other side; she felt there would be great opportunities in rationalizing the product lines. HP has had difficulty attracting support to its new product lines. For example, the Itanium chip set has had difficulty achieving volumes or attracting software developers to support the chip set.

The merger was a mistake--period. There were not sufficient synergies to make that deal worthwhile.

2. To drive the merger efforts, Fiorina pushed the workforce. Morale was poor and the skill sets of the workers were relatively unique, culminating in deteriorating performance and weak results. Last December, HP announced an anticipated 8% workforce layoff, which further reduced overall morale.

3. Fiorina and HP view the IT industry as a commodity business (as opposed to IBM or Accenture, which view it as complex and non-commoditized). HP has positioned its professional services form the "infrastructure up" as opposed the "business process down." Yankee Group believes that puts HP in an awkward position--it cannot succeed while still investing in technology development.

4. HP has committed to some very large outsourcing contracts. It remains to be seen whether they bought the business and will be able to profitably execute on these contracts.

Recommendations:

1. HP needs to reconsider its product roadmap: We believe HP will have to aggressively consider a split-up. The split-up, if it occurs, needs to segregate peripherals and the data center environment. If it cannot achieve client buy-in (i.e., volume) for its platforms such as Itanium, it will continue to struggle.

2. Culture counts: HP needs to hire a new CEO who can rally the troops in this time of need.

3. HP needs to focus its services on product attached and integration services: Large scale Outsourcing carries too much risk and at this point is a diversion to their core business.