HP to Lay Off 10 Percent

Hewlett-Packard Co. (NYSE: HPQ) today outlined a sweeping plan to "streamline the company" by eliminating benefits and cutting headcount by 14,500 people, nearly 10 percent of its worldwide workforce.

Over the next six quarters, HP will eliminate pension and medical benefits for future retirees and engage in ongoing layoffs in all divisions. The cuts will save the company $1.9 billion annually, execs say. By fiscal 2007 (HP's fiscal quarters pretty much match the calendar), the pension reduction should save $300 million annually; the layoffs will save $1.6 billion.

New CEO Mark Hurd, appointed in March to replace Carly Fiorina, isn't taking any credit or blame for the changes (see High Hopes in Palo Alto). "I don't want this to be viewed as Mark came in and did all this work... There was a lot of work done by this company before I got here to look at these issues. I focused to bring it to conclusion and maybe added a bit of energy to it," Hurd told journalists on a call today.

Still, Hurd has effectively completed a reversal of Fiorina's key decisions. The controversial Customer Solutions Group (CSG) Fiorina created to unify sales across divisions has been dissolved (see HP Reorg Highlights Storage). Instead, salespeople will be merged back into the company's three main divisions -- the Technology Solutions Group (TSG), which includes Enterprise Storage and Servers (ESS), HP Services, and Software; the Imaging and Printing Group (IPG); and the Personal Systems Group (PSG).

In June, HP also split PSG from IPG, reversing Fiorina's mandate to unify them five months earlier.The changes were widely anticipated and some expect even more fallout. Hurd says he's done for a few quarters. But he's clearly leaving his options open: "We will never stop focusing on how to be more efficient," he said today.

No specific division was targeted in the reorg except CSG. Here's what HP's public statement says:

On today's media call, Hurd reiterated that layoffs won't be aimed at specific businesses or geographies. Instead, cuts will happen wherever work doesn't need to be done, where there are inefficiences, and where there are too many people doing the same thing.

He refused to specify where work might not be needed. Though he indicated HP would reevaluate where it spends money, he isn't redesigning the structure of the company. "I have focused my efforts on optimizing HP as it is today," he said.

This hasn't stopped analysts from speculating. Some say HP could sell its the PSG or IPG groups, though others think otherwise.Questions remain about how HP will handle its Enterprise Servers and Storage division within TSG. For now, the division seems solidly placed. Of HP's total $43.5 billion in revenue for the first six months of fiscal 2005, TSG accounted for nearly 38 percent, or $16.5 billion (see HP Reports Earnings). Imaging and Personal Systems, still combined when HP announced earnings in May, accounted for nearly 60 percent, or $25.6 billion, for the first six months.

Within TSG, ESS accounted for nearly 50 percent of net revenues for the first half of 2005. ESS net revenues for the first half were $8.2 billion, of which roughly 23 percent came from business-critical systems (high-end servers); about 57 percent came from Proliant and other "industry standard" servers; and about 20 percent came from storage products.

Servers do better than storage at HP. For the six months ended April 30, 2005, net revenues from Proliant servers were up 13 percent over the first six months of fiscal 2004. For the same period, net revenues from high-end servers were flat; and net revenues from HP-UX based servers were up 6 percent year-on-year.

In contrast, net revenue in storage declined 4 percent for the first six months, year-on-year. HP blamed "weakness ahead of new product introductions and slower than expected progress in sales specialist hiring." Though HP recently revamped its storage products, analysts are still ambivalent about HP's storage direction (see HP Hoists New Storage Products).

Whatever the future holds, it won't happen overnight. It could take more than a year for HP to perform U.S. layoffs, sift the results of voluntary employee termination packages, and negotiate with employee groups in Europe and other regions prior to laying off there. In the meantime, Mark Hurd plans to reinvest half the savings from the restructuring in the business, an action he feels will get HP back into fighting shape. "Much of our success lies within our own hands," he said.Mary Jander, Site Editor, Byte and Switch