HP battles to make its services business work

News analysis

HP battles to make its services business work

Cliff Saran

Nine months ago, former HP CEO Leo Apotheker tried to sell off the company's PC business, for many its crown jewels, and was promptly dismissed.

At the supplier's Global Influencer Summit in Shanghai in May, HP attempted to rebuild the reputation of its PC business and re-establish its credibility in the enterprise.

45749_Meg-Whitman.jpg

But amidst rumours of further jobs cuts, HP is having to reassess its approach to corporate IT, and the balance of software, hardware and services in its product portfolio. Earlier this month Apotheker's successor as CEO, former eBay chief executive Meg Whitman (pictured), said, "We have to look at how we spend money and everything is on the table."

HP expects 2.3 billion PCs to ship globally by 2015, making the PC market a significant area for future growth.

Whitman joined HP during a troubled time for the company, and quickly set about establishing new priorities. 

"PCs are an essential part of HP. We want to make it easier for customers to deal with HP. We have confirmed our commitment to products, but this a journey, and it will take time to restore the HP business," said Whitman.

The company is battling with the consumerisation of IT, which is seeing its core business value being eroded by the likes of Apple as consumers bring their own devices to work, rather than use the standard corporate laptop or desktop.

HP is banking on the success of Intel's Ultrabook design to woo business users. Intel is making Ultrabooks its top priority for 2012, and HP is looking to the Ultrabook to bridge the divide between the corporate world and the home user.

At the same time the company is attempting to tackle costs, consolidating business units and datacentres and slashing jobs. Whitman said, "We are looking at every business process."

This has led to the recent change where the printing and PC businesses were combined.

In HP's quarterly filing to the US Securities and Exchange Commission (SEC) from March 2012, it stated: "The restructuring plan includes severance costs related to eliminating approximately 25,000 positions. As of October 31, 2011, all planned eliminations had occurred and the vast majority of the associated severance costs had been paid out. The infrastructure charges in the restructuring plan include facility closure and consolidation costs and the costs associated with early termination of certain contractual obligations."

However, reports suggest that HP is planning further cuts, with an announcement possible as early as this week when the firm unveils its latest quarterly financial results. Industry experts believes its services business will bear the brunt of the job losses, leading to some questioning the company's commitment to enterprise services, the former EDS business.

Why  HP is the first of many

The tier-one outsourcing providers, IBM, CSC, HP and Accenture, have not faced up to the realities of their success in commoditising and standardising the IT outsourcing market. Many organisations are now in the fourth or fifth generation of outsourcing. The large savings from transforming IT services have gone.

At the same time, cloud computing is cannibalising existing revenues, levelling all suppliers to commodity status. and totally demystified IT for decision-making client executives. Cloud computing offers service portability so IT chiefs do no have to think about long-term contracts or commitment. In addition, commodity IT does not command a premium nor loyalty or respect. 

Robert Morgan, director, outsourcing advisory firm Burnt Oak Partners.

Changes to Enterprise Services

The boardroom fiasco that led to Apotheker's departure has meant the company is battling to re-establish its credentials in the enterprise and rebuild investor confidence. Robert Morgan, director at outsourcing advisory firm Burn Oak partners, said, "To blame the iPad and other tablets for the decline in HP's PC sales is one thing, but the majority of the cuts seem, from leaked reports, to be levelled at the services division."

Morgan believes the problem for HP's enterprise services division is that Whitman is not focused on services.

Thomas Reuner, principal analyst at Ovum, adds, "We are not seeing larger [outsourcing] deals and there is no growth trajectory [in services]."

Whitman is committing the company to three years of research and development (R&D) to re-establish HP as a technology-focused hardware company. For comparison, its nearest rival, IBM, effectively sells technology powered business transformations, through IBM Global Services, using IBM hardware and software.

Organisational changes

HP is looking closely at budgets to ensure it can continue to invest in its core products areas of PCs, servers, storage and networking. Whitman said: "We are doubling our innovation efforts in storage and networking for better performance and easier-to-manage converged infrastructures."

Speaking in Shanghai, she said HPs strategy is focused on hardware, which represents 70% of the company's revenue.

Software is the second area of the business. But in spite of HP's £7bn acquisition of Autonomy in August 2011, Whitman said: "We will not transform HP into a software company."

She said HP's software supports the hardware business, while its services division, built from the £7.13bn acquisition of EDS in 2008, will be used to support HP products.

"Our software enables us to manage and secure heterogeneous infrastructure. HP Services is critical to our future to wrap our products together," said Whitman.

She said HP increased R&D spending in 2012, adding: "We will do so again in 2013 and 2014. We are creating the commitment and financial capability to invest in R&D."

The company generates the majority of its revenue from hardware sales. For the three months to 31 January 2012, HP's hardware businesses, covering the personal systems group, imaging and printing, enterprise servers, storage and networks, reported revenue of $20bn. Its infrastructure technology outsourcing businesses reported revenue of $3.7bn, while its enterprise server, storage and networking business units reported revenue of $5bn.

Gartner's latest vendor rating report on HP notes: "In 2010, HP made much-needed investments to revitalise the service portfolio, with much of the focus on its infrastructure outsourcing competitiveness. HP's preference for a more standardised and homogeneous delivery model is a significant change for many long-time EDS clients that express concerns and/or unwillingness to adopt the new service line models. Gaining long-term success for its IT outsourcing business will require HP to fine-tune its ability to serve clients through smaller deals and an ongoing shift toward cloud/utility consumption." The latest market data from Gartner puts HP as second to IBM in the IT outsourcing market:

Worldwide top 5 IT outsourcing providers (millions of dollars)

2011

Rank

 

Vendor

2011 Revenue 2011 Market Share (%) Revenue Growth 2010-2011 (%)
1 IBM 26,923 10.9 7.8
2 HP 15,107 6.1 2.0
3 Fujitsu 10,981 4.5 10.3
4 CSC 10,374 4.2 0.0
5 Accenture 6, 530 2.6 18.2
  Others 176,640 71.7 8.3
  Total Market 246,555 100.0 7.8

Source: Gartner (May 2012)

Gartner distinguished analyst Mark Fabbi said recent organisational changes illustrate how HP sees enterprise services. 

"We see more hardware-led sales," he said.

"The enterprise sales organisation has moved under Dave Donatelli, executive vice president and general manager of enterprise servers, storage and networking for HP Enterprise Business. This is an indication that sales will be led by server, storage and networking products with associated services."

Fabbi positions HP as a tactical supplier of IT products and services. 

"We would recommend having HP on the shortlist for evaluation of products. But one of the challenges is HP is not regarded as strategic. Most CIOs see HP as tactical," he said. 

For comparison, CIOs and business leaders would seek business strategy advice from its rival, IBM, which offers product and services connected to business strategy, he said: "HP is a big supplier. It is a good fit for infrastructure outsourcing, but higher up the [services] stack, HP is not as strong."

For CIOs, Fabbi said the question HP must answer is how well the sales force ties into enterprise services specialists.

"The challenge for HP services is significant margin pressure. Even when HP is renewing contracts it is under pressure from a price perspective, so it is not winning long-term business," he said.

"HP is also consolidating sites in Europe with 140 datacentres being reduced so it can push work to other parts of the globe."

There is a strong sentiment among the IT experts Computer Weekly has spoken to that HP's enterprise services business is being shaken up. The company is looking to increase efficiency and will be focusing on an industrial approach to services. Making services more efficient can drive down margins and make HP's internal resources more applicable to the wider customer base, said Fabbi. Previously its services resources were highly customised for individual large enterprises.

The challenge for HP's existing customers is that their relationship with HP is changing. In an outsourcing contract, internal staff may have been transferred out of the company to HP under a Tupe agreement, but the staff transferred were effectively the same people who used to work internally. And an organisation's data centre would have been transferred over to HP. Now HP will push out the work to different people at different sites. At the same time HP may start selling IT to smaller enterprises.

CIOs who are HP customers will see a change to their relationship with their supplier. They may have their outsourced IT services from HP now supplied by different people at different locations. 


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