HP
Strategizes
In
the last month I’ve been entirely updated on HP. That’s
because in addition to three teleconferences I’ve attended their
Annual Analyst Briefing in San Jose and their Customer Software
Forum in Montreal. All that, in such short order, made me
think about just how to think about HP.
A Financial Point Of View
Usually
Financial Analysts from Wall Street take this perspective, but I’m
convinced you can’t understand HP, particularly HP as it relates
to competitors like IBM, Sun, and Dell, without understanding HP
financially.
This
means remembering that while IBM and Sun, for example, are all about
selling to business, HP’s revenues are divided between the
consumer and business markets. (If we assumed that half of
HP’s printing revenues were in the consumer market that would put
45% of HP’s revenues in the consumer segment.) And where IBM
now makes more than half of its revenue from software and services,
HP makes 80% of its revenues selling hardware and (printing)
supplies. This isn’t a question of better or worse, but
rather of different.
The
news is generally good. HP is proud of its progress since the
Compaq merger, managing to save $3.5 Billion on the cost side of the
balance sheet. It believes it has rationalized its product
offerings and
it’s profitable in most of its market segments, except software
(much more on that to follow).
HP’s
Services market (62% customer support, 20% consulting and systems
integration, 18% managed services) is continuing to grow; customer
support revenue is up 9%, consulting and integration up 8%, and
managed services up 50%.
CEO
Carly Fiorina likes to say that they’ve gone from looking at the
glass half empty to the glass half full, competing better with
important competitors (Dell on PCs, IBM on servers), and finding a
better balance between its various businesses in profitability; for
example, its all-important printing and imaging segment is now only
30% of HP revenue and 70% of its profit.
Since
HP realigned its management structure and set new priorities at the
beginning of this year, it has focused on customer priorities,
speed, and efficiency. It is already seeing the results
of the realignment into a Customer Solutions Group (sales and
business development, organized by customer segments) under Peter
Blackmore, and a Technology Solutions Group (software and systems
services) under Anne Livermore.
There
is a sharpened focus on the consumer segment, with Imaging and
Printing Group VP V.J. Joshi now in charge. VJ says forget the
rumors that Dell’s decision to go with first Lexmark and then a
collection of OEM printer vendors has hurt HP’s market share.
He points out that HP sells more printers every week than Dell has
sold since they stopped their HP relationship more than a year ago.
The Shape Of The
Business
Fiorina
likes to refer to HP’s current business strategy as
“horizontal,” comparing it to IBM’s strategy, which she
describes as “vertical.” It took me a while to figure out
exactly what HP meant.
-
HP
means that today businesses need horizontal integration (across
the business enterprise in all of its locations, and then across
the value chain and all of its partners) to be flexible and
efficient. We’d agree. Of course, that’s still
more of a goal than a reality for many companies.
-
When
HP says it’s a bad idea to get stuck in vertical stacks, it
means that creating tightly integrated IT organizations within
locations or enterprises, unable to easily connect to their
partners’ applications, gets in the way of a modern business.
That’s true, but no one wants to be in that situation – they
simply find themselves there as the result of years of trying to
solve past IT problems.
We’d
observe that every large IT vendor has a strategy or is
trying to provide a complete
solution (HP refers to them, as does most of the industry, as
“vertical stacks”), or as complete a solution as they offer at a
moment in time; where they decide to draw the line may be a matter
of tactics, strategy, or timing. So for example, HP chooses to
provide a broad portfolio of systems management tools, but partners
for data bases and application servers. IBM offers both but
not applications. Both of them – and many others – use
open standards to allow customers to choose to select some products
from them and still use other products from another vendor.
-
Vendors
like vertical implementations because (1) they’re more
profitable and (2) if you own each piece of the implementation
you can provide a higher level of integration more easily; but
-
Vendors
recognize the market move toward increasingly horizontal value
chains and those who don’t recognize this trend and adapt to
it will find themselves increasingly unpopular with customers.
HP is surely on the right track here, they’re just not the
only vendor who’s discovered it’s the right track.
Software
In
the Software sector it’s hard to decide just how to judge HP’s
importance. On the one hand, their 2003 sales were $700
million, at a loss of about $190 million, moving up
to an estimated $900 million in 2004 (still at some loss). HP
expects software sales to continue to grow at this 28% rate (or
more) and bring them well over a billion dollars a year in software
sales, and to profitability,
by the end of 2005.
On
the other hand, in spite of HP’s broad portfolio of system’s
management and infrastructure software, total revenues are less than
1% today of HP’s total balance sheet. (We suspect that it
might be more relevant to look at HP’s Software sector as a per
cent of its Enterprise revenue, since nearly all of that software is
enterprise focused. Twenty per cent of HP’s revenues are in
Enterprise offerings; that would put their software at 5.6% of their
enterprise revenue. To put things in perspective, IBM’s
software business (at $14 billion) is about 15.5% of revenue; but
IBM’s software numbers include operating systems that were, at
some point in the past, priced as part of their hardware platforms.
We’d suspect the “real” IBM number, for comparison purposes to
HP, would be more like 8-10% of revenue.
(Note:
I’m suggesting this digression because HP, unlike IBM, has almost
half of its business in the consumer space. If I understood
just what part of their Services and Printing and Imaging business
belonged to Enterprise customers, I’d move that number up and
we’d probably end up with a percentage for HP higher than the
current 1% but lower than the 5.6% I just arrived at. I’d
guess it might be 4 %.)
HP
continues to unveil new versions of existing software products and
new products. We were particularly struck by their
announcement of HP
OpenView Business Process Insight which monitors business processes
and expresses the impact of IT in business terms,
and HP OpenView Route Analytics Management System which understands
real-time network behavior without polling, allowing failures to be
identified and fixed up to 80 percent faster. The emphasis is
on helping IT management deliver IT as a service to the business
organization.
HP
OpenView Business Process Insight
The
intent of OpenView Business Process Insight is to map
enterprise-critical business processes to IT resources, so that IT
performance can be calculated and communicated in terms based on
real financial data. Business processes and their relationships to
the applications, and IT resources on which they depend are
monitored so that the business managers themselves can understand
their status and its consequences.
Since
the cost of a failure or delay in the IT system is expressed in
terms of its cost to the business, HP OpenView Business Process
Insight provides insight into how to assign
IT resources and priorities based on actual business value.
For example, the system can offer the dollar value of a failed
network or slow e-commerce response time, based on current financial
data provided by the line of business (for example, “You are
loosing five orders, with an average value of $250, for every minute
of down time. We have been down for seven minutes.).
In the future, the information
provided in HP OpenView Business Process Insight can support a
system that can automatically adjust IT resources to meet business
requirements, allowing better optimization of overall IT performance
while improving customer service delivery.
HP OpenView Route
Analytics Management System
The
network supports companies’ plans to become more adaptive.
HP’s new Route Analytics Management System software optimizes
networks in real time. It changes how networks are managed, managing
the network as a service, not as IT infrastructure, by enabling the
solution to better track network protocol and communicate
information about the network’s status. It also prioritizes
problem solving through impact analysis, by understanding how data
is moving through the network and communicating information in real
time. The solution collects data and provides insight every 15
seconds, speeding problem identification and resolution.
To
summarize, HP is becoming more of a factor in the enterprise
software market and in the services market, while continuing to
maintain (and even gain) market share in the printing and PC
markets. They have become a standard vendor to include in
nearly any selection process where comparisons will be made.
Once, HP was considered a company of great engineers with nearly no
marketing skill. HP’s marketing skills have increased since
the Compaq merger and we are seeing them more often now, competing
harder and for bigger and more complex deals.
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