HP Reorg Highlights Storage

HP is launching a new division combining storage hardware sales with services UPDATED 2:30PM

December 11, 2003

3 Min Read
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Hewlett-Packard Co. (NYSE: HPQ) is folding its Enterprise Systems Group (ESG), including its range of storage products, into its HP Services division, creating a new Technology Solutions Group (TSG).

The move could increase already fierce competition among top SAN vendors, resulting in better deals for enterprise customers.

HP revealed its plans in a meeting of execs with financial analysts in New York City yesterday, during which the company was optimistic about its outlook (see HP's Hot on Storage). But references to TSG at the meeting were oblique, and HP would not officially confirm the move until today.

Ann Livermore, who is now executive VP of HP Services, will head up the new division, and Peter Blackmore, executive VP of ESG, who came to HP from Compaq, will be chief of the Customer Solutions Group (CSG), which will be the sales arm of TSG.

The new TSG group will be the largest of HP's divisions, representing over $9 billion in quarterly sales, to judge from the company's fourth-quarter 2003 results, released November 19. In those results, HP Services accounted for $3.2 billion in revenues and ESG for $4 billion.

Figure 2: (Totals in $Million)

On the storage front, the move will harden HP's stance against IBM Corp. (NYSE: IBM) and EMC Corp. (NYSE: EMC), which HP cites as its chief rivals in enterprise storage -- an observation supported by a recently published survey from Heavy Reading, the market research division of Light Reading Inc., Byte and Switch's parent company.

Figure 1: Top Fibre Channel SAN Vendors by Recognition

Source: Heavy Reading

IBM already relies substantially on services revenues and isn't likely to cede business graciously. During the quarter ended September 30, 2003, IBM earned $10.4 billion (48 percent) of its $21.5 billion in revenue from services. Storage, for which revenues also are increasing for Big Blue, could help differentiate providers.

Indeed, storage is viewed as a linchpin of HP's strategy. In a prepared statement accompanying last month's earnings report, CEO Carly Fiorina referred to "a strong performance in the fastest growing segment of the storage market" as key to ESG's return to the black.And in yesterday's presentation in New York, Blackmore said that "innovation around SANs and modular smart arrays will propel us in 2004."

HP could use the ammo in its battle for enterprise storage wins. IBM and EMC already have been upping the ante, as in IBM's recent anti-EMC program (see IBM Attacks EMC Customer Base). HP's consolidation of divisions could result in even lower pricing, and possibly a better range of deals for prospective customers.

HP's been working on its storage strategy, which should help it stay focused during the consolidation of divisions. It bought Persist Technologies to improve its information lifecycle management (ILM) position (see HP Buys Archive Guys). And it's been cutting prices as well (see HP Underprices IBM, EMC on Low End).

Now, the move to consolidate divisions could bolster the storage strategy as well as helping both HP Services and ESG with their individual vulnerabilities.

Despite its profitability, for instance, HP Services has its soft spots. While the segment overall grew 5 percent year-over-year last quarter, consulting services declined 10 percent year-over-year. But managed services, which includes hands-on provision of technology with outsourced supervision, grew 36 percent year-over-year.Meanwhile, HP's Enterprise Systems Group returned to profitability after being loss leader at this time in 2002. In fourth-quarter results, the group reported an operating profit of $109 million. That contrasts with its $129 million loss at the end of last year.

HP's consolidation could help compensate for these issues, but there are risks involved, too. Integrating the units, especially after the enormous amount of cost-cutting that ESG has undergone, could further stress management and morale. The fierceness of SAN competition ensures IBM and EMC will take advantage of any sign of weakness.

Mary Jander, Site Editor, and Dave Raffo, Senior Editor, Byte and Switch

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