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HP Intends To Stay King Of The IT Vendor Hill

Hewlett-Packard (HP) broke into the top 10 Fortune 500 at #9 in 2009 with roughly $115 billion in annual sales. It's an impressive feat, but what's more interesting is where HP goes from here. But before we examine what HP is doing and plans to do, we need a little perspective. IT in its broadest sense is, and will continue to be, one of the major drivers of economic productivity and wealth creation. Yet the number of large IT information infrastructure companies is relatively small, undercutting the conventional 80-20 rule (80% of revenue is generated by 20% of the players in the industry).

In IT, the actual ratio is likely skewed in favor of larger companies in both the generation of revenues and innovation. Not to dismiss the very many smaller companies that create dynamic solutions and serve a valuable role in the IT vendor ecosystem, but the larger companies are the major focus for progress.

Now a lot of similar things could be said about most, at least to some degree, larger IT vendor companies -- good management and people and  investment in R&D and general innovativeness -- among them. But today we will examine HP.

HP held its annual Enterprise Business (EB) Industry Analyst Summit in Boston on March 9th and 10th. Enterprise Business used to be called the Technology Solutions Group (TSG), but that name was changed to reflect the broader role of the organization, most notably services.

Ann Livermore, executive vice president, Enterprise Business, enunciated the organization's strategy. HP's goal is to be #1 or #2 in the businesses where it participates (shades of GE's Jack Welch). Further, HP has integrated 30 companies in the last 42 months, including Mercury Interactive, Peregrine Systems, OpsWare and Tower Software. The planned-for consummation of the 3Com acquisition has taken center stage. However, EDS (which is now Enterprise Services) was, of course, the largest among them, with the result that HP Enterprise Business has become a major player in IT services with 30% of its revenues in services.

Ms. Livermore pointed out that HP has learned a lot from the acquisition of EDS. HP now has a fundamentally different relationship with clients, which results in more relevant sales discussions. HP has also increased its focus on service delivery excellence. According to Livermore, among HP's many priorities are ensuring world class sales coverage, continuing to emphasize customer satisfaction and loyalty, leveraging scale in the supply chain, maximizing the opportunities and benefits of service automation, and continued R&D innovation.

Dave Donatelli, executive vice president and general manager, Enterprise Servers, Storage, and Networking, talked about HP's strategy of converged infrastructure to deliver the "data center of the future," whereby compute, storage, and networking elements will share a common modular infrastructure that uses the same components. That increases the volume of HP components ordered through the supply chain and leads to better pricing that can be passed on to customers. A common infrastructure with common management tools, plus innovative energy-efficiency solutions -- including its sea of sensors -- can be used for real-time systems management and the elimination of over-provisioning of hardware resources. HP feels that it is the only company that has the resources, expertise, and track record of innovation to bring it together from the ground up, as no other company has its breadth in computing, storage, networking, and services. Proof points for this strategy can be found in the company's success stories in vertical markets, including health and life sciences, transportation, public sector and energy.

Abstracting key messages and making conclusions from a meeting is always hard as there is a lot that has to be left out. Here is what I chose to focus on.

People and culture -- This is a topic that HP did not openly discuss, but it permeates such meetings. HP has had corporate objectives and shared values for a long time; some people may be critical, but as a long-time veteran of the IT industry (including working for two Fortune 500 IT vendors), I am simpatico with the cultures of large IT vendors; HP has (and has had) generally good people at the individual contributor, managerial, and executive levels. The problem up to a few years ago was that HP was not able to live up to its potential. The infusion of new blood (obviously starting at the very top!) has not only brought the company some fresh ideas and directions but has also empowered those already in place to take greater advantage of their potential while avoiding the cognitive dissonance that would take place if the basic values were threatened by the changes. Obviously, this is still a work in process, but, frankly, the extent to which HP will continue to be successful depends upon the continued empowerment of people at all levels of the company.

Networking -- What was Cisco thinking? Cisco has a proud and successful history with strong executive management, but when it offered servers in competition with HP, that in effect pulled the sleeping HP tiger's tail. And in its impending acquisition of 3Com, HP plans to strengthen its investment in networking with the avowed goal of being #2 behind Cisco. Hey, competition is good for the customers as it gives them more choice (and the chance for cost savings). What HP plans to use to claw its way more deeply into the networking market should wait until the deal closes. But if (or when) HP continues to disrupt what many assumed was a stodgy, locked-down networking marketplace, hey Cisco, you have no one to blame but yourself.

Supply Chain -- HP believes that leveraging the supply chain gives it an economic advantage and its customers a TCO advantage; the reason is simple; at $50 billion, HP has the largest supply chain in IT and can benefit hugely from quantity discounts. In addition, HP believes it has always been fair in its pricing, so it can pass some of the cost savings along to its customers in the form of lower prices. HP's hardware suppliers benefit because larger volumes enable them to take advantage of the famous Boston Consulting Group's learning curve, which says that cost per unit decreases as volume increases; that is what enables those product suppliers to pass on some of the savings to HP in the form of quantity discounts. Moreover, HP typically does not suffer from parts shortages (except in extreme cases) as common sense suggests that parts suppliers would be reluctant to restrict sales to their largest customer.

Innovation -- Innovation is a must for all IT vendors if they want to thrive, and HP is no exception. For example, HP is working on transforming its application portfolio, recognizing that today's innovation is tomorrow's maintenance. So how can applications be modernized without raising maintenance? One key is HP Labs, which delivers basic research (something that is much needed with the decline in Bell Labs and basic research overall). This is not research for the sake of research but rather targeted on defining the future for HP products and services. The research focuses on the 20 or so customer problems that will need solving over time; that includes understanding the role of federation and the cloud; the use of photonics in the data center to eliminate the need for the data to be close to the computing; reducing the energy footprint, and managing capacities in not just petabytes, but exabytes because the mix of products and services even a few years down the road will be different than current products and services. Such research is vital.

Go To Market Strategy -- HP values its 187,000 channel partners and plans to continue to enhance and develop such relationships. HP also plans to strongly support its strategic alliances, such as the one with Microsoft. It plans to continue targeted customer segmentation and simplified global marketing campaigns (stay tuned) based on analytics. HP is also working on enhancing the capabilities of its direct sales force. Yes, HP is known for its engineering heritage, but that is not stopping it from becoming an ever stronger sales and marketing machine. Of course, now that Oracle has completed its Sun acquisition, picking of the bones of former Sun customers is likely to dry up.

Although the global economy is still only part-way recovered from the world-wide recession, IT vendors such as HP have not focused on it to the exclusion of other critical issues. Although cost efficiencies are still important (and should be), taking a positive -- although realistic -- approach to helping customers gain competitive advantages via new IT products and services is heartening.

No matter how it got there (and acquisitions, such as EDS, certainly figured prominently), HP is now the king of the IT hill, and it plans to stay there. In the IT world where products can become obsolete overnight, continuing to innovate is an imperative. And with its vision of converged infrastructure and everything as a service, HP is moving forward.

But the company also wants to take advantage of its size and is flexing its muscles with its plan to exploit its supply chain even further. As Ann Livermore pointed out, HP wants to help its customers move from information to insight to action. HP wants to help its customers achieve "outcomes that matter." And as Dave Donatelli noted, HP plans to get "better and better" in its go-to-market strategy.

Now being the biggest "kid" on the IT vendor block in terms of revenues is nice (profitability and growth in share price are even nicer), but that goal only matters if customers, partners, and, yes, the economy also benefit. Overall, being the king of the IT vendor hill is not so important. However, what HP can see from its new vantage and what it will do as a result are absolutely critical points by which the company's reign will be judged.