HP: The Adaptive Enterprise that can't adapt
SAP hardly to blame
Opinion For quite some time now, HP has been hawking its Adaptive Enterprise idea to anyone that would listen. The basic concept being that companies need to use technology as a tool for making quick, fluid changes in their businesses. But after HP blamed a disastrous SAP roll-out for its third quarter failings, you have to wonder exactly how adaptive HP's own enterprise really is.
In brief, HP's server and storage division yesterday reported a loss of $208m. Three executives were fired as a result of the loss, and HP's shares shed close to 15 percent of their value on the news. All in all, a pretty bad day.
Now much of HP's hardware woes were due to an EMC pounding. In its most recent quarter, EMC grew hardware revenue by 33 percent year-over-year and partner Dell enjoyed 60 percent storage growth. HP admitted that its storage business did not perform up to snuff in the last three months and that much revenue was lost.
Oddly, however, HP seemed to place more blame for the weak third quarter on an SAP implementation. The company struggled to get new SAP supply-chain software up and running with the process taking six weeks instead of the predicted three. HP's ordering system became chaotic. HP had to tap the channel to make sure deliveries were met and even missed some sales. "The migration was more disruptive than we'd anticipated," Fiorina said. All told, HP's hardware and software failings cost it $400m in revenue and $275m in operating profit in Q3.
On one hand, you have to believe the SAP problem did have a material impact. HP and SAP work together on numerous large revenue deals. One would think this relationship would prevent HP from outing SAP publicly as a culprit unless it really had no where else to turn.
Conversely, you have to peg the SAP gig for the red herring it is.
If it's true that an SAP rollout caused HP enough grief to merit a public skewering, then the company is in more trouble than many people think. HP has based its entire corporate strategy around the Adaptive Enterprise notion - something meant to be better than IBM's On-Demand Computing schtick and meant to slove exactly these types of software problems.
HP claims to be the leader in walking customers through difficult technology rollouts. It specializes in making complex software work on the cheapest hardware possible and in having a top-class services organization to sort any problems out. HP can help customers change their data centers in an instant to deal, for example, with unexpected spikes in transaction processing demands or sudden failures in an ordering system.
"The HP Adaptive Enterprise vision leverages IT to not only support change but to embrace and assert change," HP says. "It's about driving business strategy and business processes into the underlying applications and infrastructure to fuel business success."
Wouldn't you know, HP even has an Adaptive Enterprise "solution" specifically designed for complex SAP supply-chain software rollouts.
How tempting does this "solution" look though, if you consider that HP can't even get SAP software up and running within HP. The promise of moving quickly to help businesses adjust to gwana-gwana . . . appears less tenable than HP would have you believe. Hell, HP cost itself $400m in revenue by not being adaptive. Few companies can afford losses on that scale.
Is this really what HP wants customers and investors to focus on? A bad trip with SAP? Wouldn't it be more responsible to confess to a longer term slide at the company that needs correcting?
Adapting to extinction
Since HP acquired Compaq, its executive ranks have been gutted.
On the storage side of the house, where HP suffered the biggest revenue losses, HP has lost Mark Lewis, Mark Sorenson and Howard Elias - all ex-VPs - to rival EMC. In addition, former HP engineering director Ryan Johnson and ex-EMEA sales exec Rainer Erlat have joined EMC. Just as a point of interest, EMC's revenue in EMEA was up 45 percent last quarter.
HP's enterprise division as a whole has not been able to keep executives either. The once beloved SVP of corporate strategy Mary McDowell now works at Nokia. Another EVP Bill Russell retired at the tender age of 51 and marketing veep Janice Chaffin now works at Symantec. Former Compaq CFO Jeff Clarke recently left HP as well to serve as CA's CFO.
Just yesterday, CEO Carly Fiorina fired Peter Blackmore, who served in the highest of positions at both Compaq and HP and was seen as a seasoned hardware executive.
Executive exits are often overrated, but this stunning number of departures must make it tough to drive any level of consistency at HP. Even at an Adaptive Enterprise like HP, you need top staffers to stick around and push the company toward long-term strategies.
Away from the top ranks, workers have been forced to deal with a culture rife with Fear and Loathing. They never know when the next round of layoffs will hit and suspect the upper management is overpaid and inefficient.
The staffers can still find joy in working for a top-flight technology company, but even on that level you have to wonder if the management isn't undermining the efforts of the engineers.
On the printing front, all seems to be going well. HP produces great kit, the revenue pours in and workers and management alike are happy.
In hardware, however, HP has largely failed to innovate or invent anything spectacular in some time. It has fallen behind EMC with few refreshes to Compaq's once prized EVA systems and now has HItachi making its high-end storage kit. On the low-end, Dell, EMC and Network Appliance cause plenty of trouble.
With servers, HP purposefully stopped innovating the PA-RISC and Alpha processors, deciding to pick Intel's Itanium processor instead. This has tied HP to the slowest selling processor in the enterprise market and challenged customers to either migrate their entire software portfolios to Itanic or jump ship to IBM and Sun Microsystems. IBM, for the record, has enjoyed major server market share growth over the past year. Not a surprise.
HP likes to say that it's not trapped between IBM and Dell, which is true. They've both been generating profits from their server and storage divisions, leaving HP behind.
Fiorina has no equal in the IT world from a marketing point of view. When HP's Q3 bombed, she demanded this was an execution issue - an SAP implementation gone wrong and a bad run in storage. Overall, a one-time deal.
But starting at HP's third quarter in 2002 the hardware units' results are as follows: a $422m loss, a $152m loss, a $83m loss, a $7m loss, a $70m loss, a $106m profit, a $108m profit, a $120m profit and yesterday's $208m loss. These results don't compare terribly well with Dell's consistently massive revenue gains over the same period or IBM's solid gains. This isn't one quarter of poor execution; it's a tradition of poor execution with blips of success.
Analysts have caught onto this trend of poor execution too.
"Although the SAP transition and channel issues could be termed one-time, investors have to be concerned about HP's inconsistency," said Merrill Lynch. "Announced management changes likely don't solve the problem. We think HP needs to take more drastic actions including hiring a COO from the outside to manage operations, considering a breakup of the company, which we think would unlock value, and looking at more aggressively giving cash back to shareholders."
Simply put, if HP is an Adaptive Enterprise, it's one heading toward extinction in its current form. Fiorina cannot afford to keep fingering others for HP's failings much longer. ®
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