HP Is Falling Apart

When Mark Hurd left the CEO chair of Hewlett-Packard (NYSE: HPQ  ) (or was forced out of it, depending on your sources), it was easy to panic. Hurd is, after all, widely credited with bringing fiscal responsibility and a new lease on life to the previously floundering tech giant.

You can go on and panic, but not over losing Hurd. The problems with HP run much deeper than that. The whole mess isn't Hurd's fault -- but a lot of it is.

What else is wrong?
To me, Mark Hurd's alleged improprieties just form the slashing tip of a massive iceberg. If anything, this scandal forced a few of the company's other shortcomings back into the light.

  • The company is under investigation by government arms here and in Germany over alleged attempts to land contracts in Russia by bribing the right people. The amounts on the table are small by HP standards, but this shouldn't even have been an issue to begin with. Intel (Nasdaq: INTC  ) may bend the limits of ethical business from time to time, but this is a clean break.
  • While HP now has plenty of money in the bank, the company is bankrupt in the innovation department. The annual R&D budget has declined under Hurd and his predecessor Carly Fiorina: When Fiorina took the helm, HP spent 5.8% of its annual revenue on research and development, which is the lifeblood of any self-respecting technology business. Hurd took over at a 4% R&D ratio, but at least Fiorina increased the dollar amounts spent on R&D. Now it's a paltry 2.3% -- and a lower total budget. HP is doing the lobster walk.
  • Insiders complain loudly about low morale as the old "HP way" has evaporated over the years. There's no budget for important projects, cost-cutting in all the wrong places, and a veritable exodus of top talent. When HP bought Palm this spring, I thought it was a great deal -- until the brains that made Palm a compelling buy started jumping ship. HP isn't exactly destroying a legend here, but it also isn't getting what it paid for.

Who's really at fault?
The list goes on, but those are the top complaints. In the end, it all comes back to a decade of lacking leadership. Hurd is gone, but the damage is already done, and I blame the board of directors. Actually, scratch that -- I blame Mark Hurd for the spineless board of directors he created.

Most of HP's board members joined the steering committee under Hurd, who served as chairman of the board in addition to his CEO duties. You have to assume that the chairman has a significant say in who does and doesn't get one of those cherished board seats.

The entire board now consists of members appointed under either Hurd or Fiorina, two leaders whose sense of grand strategy leaves a lot to be desired. The fact that Hurd's supposed buddies then turned on him unanimously says something about his ability to pick friends, as well. Oh, and then they turned around and gave the supposed miscreant a generous parting gift. I don't think we're talking about a great judge of character here.

In other words, the board is a legacy of two failed empires -- the first in a business sense and the second in moral code. What are the chances that their appointee for the vacant CEO and chairman positions will be ready and able to fix the many cracks that have formed in HP's armor over the last decade? Not good. If I were a shareholder, I'd be calling for a brand-new board. And then the new crew gets to pick a new CEO.

Who can fix it?
So whoever gets the thankless job of running Hewlett-Packard next is facing a monumental task:

  • Repair the damage inflicted on HP's culture by two failed leaders.
  • Inject a strategic vision into a lifeless hulk of too many moving parts.
  • Inspire top talent to flock to HP again after many years of the opposite effect.
  • Do all of this under a low enough budget to keep shareholders from running elsewhere and messing the whole plan up.

This sinking ship may be beyond repair. It would take a leader with truly epic credentials to get HP out of this mess, like John Chambers of Cisco Systems (Nasdaq: CSCO  ) , Sam Palmisano from IBM (NYSE: IBM  ) , or maybe Oracle (Nasdaq: ORCL  ) CEO Larry Ellison. But all of these people already have great jobs with companies they love, and they won't come to HP's rescue.

The best HP can hope for is some relatively unknown lower-level executive with grand career ambitions or another technology leader's unwanted leftovers. If Steve Jobs isn't going anywhere, perhaps Tim Cook would leave Apple (Nasdaq: AAPL  ) for a bigger job at a paradoxically smaller company. Or perhaps a merger with EMC (NYSE: EMC  ) would let HP raid the storage expert's rich locker of quality leadership.

Empires fall all the time. Barring a miracle, I think HP is the next one in line.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel is a Motley Fool Inside Value recommendation. Apple is a Motley Fool Stock Advisor pick. The Fool owns shares of and has written puts on Intel. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (7) | Recommend This Article (28)

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  • Report this Comment On August 16, 2010, at 9:33 PM, tsvieps wrote:

    As an alumnus of HP who did product development there for more than 25 years, I am forced to agree with this article...with great sadness. Bill Hewlett and Dave Packard were princes and yet humble. I never heard anyone says a negative word about their integrity, character or vision.

    They must both be spinning in their graves now. Their more recent successors know the cost of everything but the value of nothing. Leadership matters. Google appears to be the HP of this century.

  • Report this Comment On August 17, 2010, at 5:23 AM, TMFZahrim wrote:

    Well spoken, tsvieps. Couldn't agree more from my outsider's view.

    Anders

  • Report this Comment On August 17, 2010, at 6:59 AM, AnalystSSG wrote:

    Anders, thank you for article.

    I would challenge your statement "The fact that Hurd's supposed buddies then turned on him unanimously says something about his ability to pick friends, as well". Actually Hurd's resignation was expected (as he is unable to bring any more value to the company, and started to damage it), but resignation conditions matter. In this case allegations made so far towards Hurd are relatively light and have no solid proofs. In meatime it will be proven that most of them are untruth (or too much exaggerated), but anyway Hurd went out with parachute. From my point of view very favourable conditions for leaving the company.

    That's logical but those who were under Hurd - Livermore, Joshi, Robison etc should go out too. They are the second line of most unrespected and blamed individuals (I would say idols) at HP.

    Those guys you mentioned and many others will not go to HP. That's serious political risk, and risk to the reputation. There was too much damage and too low morale.

    Why did you say "executive" in the "lower-level executive with grand career ambitions"? At some point in their lifes great people become "executive" and make a turnaround. I think we should give a chance.

  • Report this Comment On August 17, 2010, at 8:56 AM, TMFZahrim wrote:

    AnalystSSG, you do have a point: if every CEO search ended up grabbing a former CEO somewhere else, the pool would grow shallow pretty quick. Still, this is a mighty big stage on which to launch a top-level career -- probably too big.

    Anders

  • Report this Comment On August 17, 2010, at 9:46 AM, pthammond wrote:

    I am a big fan of the "old" HP as it was a great company which made many great products. Recently I have been working with their EDS service business and it has been very under whelming. The have good people but they have no empowerment as their decisions have to be validated by the beauracratic "head office" which is focused on low cost and the contract vs. customer service. When given business they have been unable to deliver in terms of planning or resources. A very sad situation for a great company.

  • Report this Comment On August 17, 2010, at 4:05 PM, plusaf68 wrote:

    Thanks, everyone, for reiterating most of my list of criticisms of HP before Carly bought me and my wife out and sent us packing in '00 and '02.

    the HP cost-cutting affected salaries as well as morale of the "worker-bees," while, as Mr. Hurd has exemplified, upper management suffered little or not at all. they might take a small cut in salary for show, but make it up in spades with stock options not available to the lower classes.

    as an ex-HP alum recently emailed me and some others with HP history [i was only there from '78 to '02...]:

    ==========================

    I would suggest that any CEO wannabe look for a book written by a guy who really knew the best way to run HP, and who had the successful results to back up that approach. Kinda like a _How to Run HP for Dummies_ book.

    I wonder if I could find such a book... ummm...

    yes! I found one called _The HP Way_ by this guy named David Packard. Hey, and guess what... you can buy that book on Amazon.

    http://www.amazon.com/HP-Way-Hewlett-Built-Company/dp/088730...

    =======================

    restoring things like profit sharing and stock purchase is nice, but in the "old days" HP folks contributed at all levels as if they felt they owned the company.

    in the past decades, the feeling was lost as B-schools churned out "you'll be CEO in five years, and don't worry about screwing anyone on the way to get there..." graduates.

    without employees that have the feeling that they "own the whole company" and get treated and rewarded for their contributions, it may be impossible to resurrect the "Old HP."

    without the ethos that the Founders were known for, it WILL be impossible for HP to really recover.

    Carly tried to downsize to success; Mark's idea seemed to be "acquire to success" and both had no clue as to how to treat or reward their employees.

    Ellison? don't be silly.

  • Report this Comment On August 25, 2010, at 5:31 PM, pilottwoten wrote:

    I am a more recent alumnus of HP, by way of an acquisition, sent packing in 2009 with 28 combined years of service and a pile of patent and other award plaques after a re-org. of my division left a new VP in charge who got rid of anyone not from the legacy HP Classic. HP is full of the allegiances left over from the remnants of merged companies, competing within. Much more attention is paid to competing within than externally. My "package" was a lot lighter than those of the Carly era, as Hurd shrank severance in several rounds, the most severe of which happened just as the EDS acquisition occurred, so that HP could avoid a bigger charge to earnings due to the merger. The example set by Hurd & his executive team has been the higher you go, the greedier you get. Obscenely rich rewards for those at the CxO and EVP level, tailing off, but still pretty decent at the middle management level encouraging the decision makers to take whatever steps necessary to hit short term financial goals. Encouraged to sacrifice the rank and file, who are viewed only as expense line items, not people or someone who can contribute something, middle management is a war zone of petty bureaucrats, political climbers, and sharks. Innovation has long gone out the window, anyone foolishly trying to innovate ends up beating their heads against the wall until they leave or are pushed out. While trying to look for another job within HP, I was told by a SVP that his best advice for me was to take the package and run, as HP no longer is in the innovation business. Morale is incredibly bad within HP, many people are staying only until the job market gets better, and are looking forward to giving HP the same shaft it has been giving them during the downturn (cuts in salary & benefits, forced relocations, etc.). With the recent slight upturn in Silicon Valley hiring, the best people are already heading for the exits. Any new CEO has a huge uphill battle ahead to transform that organization and culture back to something resembling an innovative one.

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