May 4, 2009

Is HP’s CEO, Mark Hurd, stifling innovation?

When I worked at Xerox many years ago, our division (unsuccessfully) competed with HP’s printer division. HP was the king of that sector, and all we could do was idolize the company and grapple for the dust they left behind. As masters of innovation, they drew the maps for everyone else to follow.

I hadn’t followed HP closely for some time, so when I ran into a profile of the company and its CEO in NY Times recently, I was a bit perplexed. Mark Hurd, who was brought in as the anti-Carly from NCR (not exactly the beacon of innovation), is known as a calculating left-brainer, obsessed with operational efficiency, and someone who would rather talk in numbers than words.

This worked out well for some time. Silicon Valley companies are not known for their operational efficiency, and this helped HP stay lean. But there’s more in the article. Since he arrived at HP, the HP Labs “has whittled down the number of projects it tackles at any given time to 30, from about 150”, and according to some employees “the willingness to take risks has faded”.

Really?! Is this HP, the “innovation company”? What did ever happen to the “HP Invent” mantra?

The core of HP’s products are in mature, highly commoditized sectors: printers, PCs, servers, storage devices, etc. And the problem with commoditization is the vicious cycle of continual price reductions feeding back into commoditization. Cost cutting becomes essential if the company is to survive, but the way to break this cycle is to feed innovation, to develop new technologies and product lines in order to ensure future revenue growth.

I thought I’d compare HP’s R&D expenditures to a couple of other companies: IBM, a tech behemoth, and Apple, the poster child for cutting edge products; and the results are quite surprising.

Here’s a look at how much each company spends on R&D as a % of revenues (common benchmark).

IBM: 6%
HP: 3% (lowered from 4% a year earlier)
Apple: 4%

Not a pretty picture for HP. IBM’s % is double that of HP’s. In fact, IBM spends over $6B in R&D annually (vs. HP’s $3.5B), and the result was that in 2008, IBM was awarded more patents than any other company. Apple has increased R&D expenditure by over 20% year-over-year but its % looks low because revenues also accelerated at a healthy pace.

And here’s a look at another (less popular) metric, the amount of R&D each company spends per employee.

IBM: $15,600/employee
HP: $10,900/employee
Apple: $40,600/employee

Even an uglier picture for HP, and a big WOW for Apple (this also shows that Apple has significantly higher revenues per employee – talk about efficiency!). But even if we assume Apple is an anomaly, IBM spends about 45% more in R&D per employee than HP does – those patents didn’t come out of thin air.

By the time Hurd took over in 05, HP’s stock was already on an upward swing, and it continued its upwards move. Reasons for the rise: general market conditions, Hurd’s cost cutting measures, and top-line improvements from the Compaq acquisition, among other factors.

But there’s only so much fat a company can cut out, and right-sizing can help a company’s balance sheet and stock price for only so long. HP has lagged its peers in new and exciting market development. Is it counting on acquisitions to refresh its product portfolio? If not, where will its stock price end up 2-3 years from now? Is HP forced into cost cutting because of its commoditized markets or is it unintentionally digging itself deeper and deeper into the cycle?

Finally, is HP competing on operational efficiency or on an innovation platform? At its extreme, excessive sandbox experimenting can waste valuable corporate resources, but intense efficiency measures and streamlining work better on factory assembly lines, and not necessarily so with high-tech R&D organizations.

This is HP’s post-post-Carly era, and the company needs to plan and execute accordingly. Perhaps Mike Hurd can allow himself to unleash innovation on a massive scale at HP, and allow HP’s talent to start drawing the maps like they used to. It’ll be good for him, and even better for HP.


  1. Some random comments in no particular order:

    HP Invent was a slogan *way* before Mark Hurd became CEO. The new tagline is "better business outcomes". Hurd is all about results (outcomes), not invention for the sake of invention.

    HP Labs - I've been there. There are some absolutely brilliant people there working on cutting edge technology. There were also way too many "nutty professor" types working on projects that had no chance of ever becoming a viable commercial product. These people were allowed to continue with their various works, sucking up money and resources because it was "the HP Way". The HP Way is gone. Finished. Done. HP now operates under "The Hurd Way". Don't like it? You're free to go find a job someplace else...that's the current culture...and that's why HP Labs was sacked and pillaged.

    Reasons for the stock rise - you missed a couple of key points. Around this time, HP introduced new blade server technology. IBM had the dominant position in this market but in 18 months or so, HP became the market leader (over 50% share from almost 0%), stealing a huge chunk of market share from IBM & Dell. Around the end of 2008, IBM & Dell finally introduced competitive technology and HP's growth in blade servers slowed way down. Also, I'm not sure why you are including Apple in this comparison. It's a vastly different company than either IBM or HP and sells to a different market (consumer). Apple's stock price or R&D expenditures relative to HP or IBM's doesn't make much sense to me...a company like Dell would be a better fit in this comparison.

    Hurd plans to make up for that margin-killing commoditization by selling high margin software and services that help companies guessed it -- "BETTER BUSINESS OUTCOMES!". Keep in mind that Hurd once ran the TeraData division at NCR, he's all about using software as an analytics tool to help make better business decisions.

    And if you look at HP as a company today, they are not just a hardware company selling commoditized products. Depending on whether you measure by revenue or market share, HP is either the 5th or 6th largest *software* company in the world. And with the EDS acquistion, they are set to become a major player in services and outsourcing.

    Innovation -- HP will continue to develop and introduce some great products. They'll also buy companies that will fill the gaps they have in R&D and these companies will add significant revenue to the bottom line and enhance the current product portfolio.

    Hurd isn't aboout "Invent". He's not about innovation. He's about "better business outcomes" for HP's customers and he's about saving every possible penny along the way.

    I'm no fan of Mark Hurd. Brilliant, engaging speaker. Has an outstanding grasp of his business and where he wants it to go. Ask virtually any CIO who has met him or seen him speak, they rave about him (I've heard it first hand many times). Despite all of the nice comments I've made above, Hurd is, when all is said and done, a penny pincher, a megalomaniac intent on driving every ounce of cost out of his business that he doesn't deem necessary. He also thinks he can treat employees like dirt, whip them like rented mules and get them to produce without complaint.

    The job market is picking up and Hurd is about to see a major exodus of his unhappy, underpaid employees leave for the greener pastures of his competitors.

    I feel very sorry for the old school HP employees who still long for "the HP Way". It was a wonderful thing and people were proud to work for HP and would give 110% because they believed in their company and what they were doing. It's sad to see some of them sitting around, thinking that sooner or later, "the HP Way" is coming back. Carly wounded it, Hurd has it in intensive care and he's going to bury it.

    Sad but true....

  2. You get that right! HP - Horrible Place to work!

  3. Things continue to slide into the abyss. I don't know any one in the company who is happy to be there including the middle management. The incessant WFR cycles have gutted the company and left a brittle shell totally dependent on outsourced asian labor. I and many others are tired of the "you're lucky to have a job mantra" from upper management and the "sorry but you are going to get a 20% pay cut" statements. Personally, I think the company needs to shed Hurd and soon if it hopes to survive the recovery.

  4. Mr. Hurd is such a slave driver and cheap skate he can't even attract and retain low cost employees in India, Mexico, and Costa Rica.

    Everyone on my team is disgusted about being micro managed and evaluated purely by micro metrics. Your performance appraisal at HP looks like an income tax return.

    Every week we are reminded that our jobs are on the line if we don't make whatever the "metric of the week" happens to be.

    The institutional memory of our corporation is walking out the door. Hurd and board couldn't care less. I guess they figure that a company's organics can be replicated in some low cost, offshore database.

    I've been an HP employee for over thirty years and frankly my dear, I don't give a damn anymore.

    Hurd kisses our babies while he is stealing their lollipops in order line our executive's pockets.

  5. Can we hope that today is that day?