“We’ve reached the halfway point of HP’s turnaround”

In a letter dated June 2014, Rob Binns Vice President, Hewlett-Packard (HP) Investor Relations stated, “We’ve reached the halfway point of HP’s turnaround.”  The turnaround journey began when Meg Whitman joined Hewlett Packard as President and CEO in September 2011.  She was preceded by Carly Fiorina (1999 – 2005); and Mark Hurd (2006 – 2010).  This ten year period prior to Ms. Whitman’s arrival was marked by mergers including Compaq and EDS, headcount reductions, executive attrition, and sending jobs offshore.

Additionally, since 2002 HP transformed from a printing company, where 40% of revenues and 95% of profits came from this line of business; to a diversified technology company today, where printing accounts for only 20% of revenues and 30% of profits at HP.  Even after these changes, it became clear that a Business Turnaround was required.

The clearest indication that a Business Turnaround is required, is after a steady erosion of your business economics.

Since a peak experienced in the fourth quarter of 2010, declines were seen in several key statistics.

Annual Statistics Revenues ($000) Gross Profit ($000) Operating Margin Long-Term Debt ($000)
10.31.2010 $126,033,000 $30,181,000 9% $15,258,000
10.31.2011 $127,245,000 $29,827,000 8% $22,551,000
10.31.2012 $120,357,000 $27,972,000 9% $21,789,000
10.31.2013 $112,298,000 $25,918,000 6% $16,608,000

Source: http://www.nasdaq.com/symbol/hpq/

Once the decision is made to Turnaround a Business, a detailed internal assessment is undertaken to identify areas that require a redesign. 

Fiscal years 2012 and 2013 were the years of assessment at HP.  Problems identified as needing correction included –

Strategy and Planning – As is common in situations where management turnover occurs, strategy becomes inconsistent, which is confusing to customers, negatively impacting sales.  Detailed business unit strategies, tightly linked to desired financial outcomes, are required.   HP needs to assume a focus on customer needs; and competitor offerings.

Cash Flow and Reporting – HP requires a cost management program; as well as a disciplined capital allocation strategy.  Periodic business reviews are required to review success and modify plans, if needed.  A performance management system should be implemented; where compensation and accountability are linked.

Business Processes and Support Functions – Business activities should be streamlined, with inefficiencies and duplications removed.  A consistent level of quality should be established.  Automation should be utilized whenever possible, i.e. labor and contact relationship management systems.

Business Development – Marketing should be centralized to take advantage of unified media buying and the potential for discounting.  Sales – Improve the sales processes.  Implement a renewed focus on solution selling; and re-train, if applicable; Products – Weed out unprofitable products and identify product gaps.  Move faster at commercializing innovations investment; and, Customers – Improve the results from underperforming accounts.

But on October 6, 2014, it was announced that HP will split into two companies.  Hewlett-Packard Enterprise – a company that will compete within the IT market, serving key markets that include – servers, networking, software, converged systems, storage, services, and cloud; and, HP Inc. – a company that will compete within the IT market, serving key markets that include – notebooks, mobility, ink printing, managed print services, desktops, graphics, and laser printing.  The split is slated to be completed by the end of fiscal year 2015.

What will be interesting to see is how these two different approaches will be integrated successfully.  In a perfect world, HP would solve the deficiencies outlined above, prior to the break-up into two companies.  In this way each entity that will be launched will be an efficient entity, with all processes optimized to be profitable.

Author: Regis Quirin
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Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.