Hurd on the Street: HP Cuts 14,500 Jobs in Reorganization

by Timothy Prickett Morgan

As had been rumored for many weeks, Hewlett-Packard last week unveiled its plan to cut its headcount and reorganize itself in an effort to bring more money to the bottom line and get focused on selling the products that the united HP and Compaq have spent billions of dollars in developing. Mark Hurd, HP's new president and CEO, hosted a series of calls with Wall Street analysts and the media to explain HP's reorganization plan, which hit about dead center of expectations.

Oddly, the number of employees that HP plans to cut--14,500 worldwide--is the same number that rival IBM announced yesterday it would be laying off as part of its reorganization and efforts to become able to sustain profitability. If the whole idea of firing 29,000 people weren't so grim, one might say one IT vendor is copying from the homework of the other or that if IBM jumped off the Brooklyn Bridge, then HP would do it too, or vice versa. But while IBM and HP may be roughly equal in size in terms of revenues (around $88 billion a year for calendar 2005) after all of IBM's divestitures, Big Blue will have about 314,500 employees worldwide after its cuts, whereas HP will have about 136,500. IBM's services and software units are more people-intensive, even if they are higher-margin products, than PCs and servers, which have razor-thin margins except at the high-end of any vendor's product lines. IBM and HP are similar in many ways, and different in many others.

In late March, when Hurd was brought in as president and CEO of HP after the ouster of Carly Fiorina as chairman and CEO, he said he was going to analyze the situation. And in May, when Hurd discussed the results for HP's second fiscal quarter and sat in the Wall Street hot seat for the first time, he didn't give much indication of what his plan was. In the calls last week, Hurd said HP's executives had already done a lot of the work in identifying ways to make changes in the way HP is organized and how the pieces fit together long before he came on board the company, and that what he did was look over the plans and "galvanize" them. He is probably being modest to a certain degree, but Hurd also doesn't want to look like he has all the answers. As the captain of HP, what Hurd has to do is know a good idea when he sees it and find the right person to understand that idea and make it happen. This takes teamwork and cooperation. "I don't want this to be viewed as Mark came in and did all this work," he explained. "When I came aboard, there was a lot of work already done. This was not a one person show." That would seem to indicate that Fiorina's downfall at HP was that she was not executing to the HP plan fast enough or that she was unable to politically pull off some of the maneuvers that Hurd is going to try.

Hurd has already split off the Imaging and Printing Group, which makes printers, scanners, cameras and other products, and the Personal Systems Group, which makes business and consumer PCs. Fiorina had smashed these two units together and put Vyomesh Joshi, the executive vice president in charge of IPG, in charge of both. Hurd came in and one of the first things he did was look for someone to run the PC business, eventually choosing Todd Bradley, the former president and CEO of PDA supplier palmOne. Last week, HP hired away Randy Mott, the chief information officer of rival Dell and the former CIO of retailer Wal-Mart, in an effort to get its own IT house in order. HP said one of the areas it would be focusing on cutting in the layoffs was in IT, and Mott, who is being paid a $15.3 million compensation package, including $690,000 base salary with possible 100 percent bonuses for the next two years, a $1 million moving bonus to get some real estate in the San Francisco bay area, a $2.2 million signing bonus, and options on 500,000 shares of HP common stock and 285,000 shares of restricted stock. For a cost-cutter to pay that kind of money for a CIO, he has to believe he will be able to deliver far more in return to HP.

Hurd also announced last week that he has hired Cathy Lyons, a 26-year veteran of HP, to become its vice president and chief marketing officer, and that Mike Winkler, who had headed up HP's Customer Solutions Group marketing organization, was retiring at the end of the month after Hurd dissolved that organization and pushed marketing responsibilities back down into the various HP business units. Lyons will coordinate the marketing efforts across those units now and each unit will get a senior sales executive who is directly accountable. Now, HP is comprised of the Technology Solutions Group, headed up by Ann Livermore, the IPG headed up by Joshi, and the PSG headed up by Bradley. TSG will take over responsibility for marketing in the public sector and to enterprises, PSG will pick up marketing to the SMB space, and IPG will pick up marketing to consumers. Exactly how these three units will coordinate so-called solution selling, where HP focuses on selling a particular solution, not products, remains unclear. But, to be fair, how solution selling should work was not always obvious when the Customer Solutions Group was in place and was formally charged with this task.

Hurd and HP's chief financial officer, Bob Wayman, explained HP did not know exactly where the 14,500 cuts would come from and they estimated it would take as long as six quarters for them to be completed. HP cannot be specific about where the cuts will be because in many cases they will come after consultation with work councils and employee representatives in European countries and through voluntary layoffs. The layoffs will drag on, he explained, because in some countries you have to give one year's notice of dismissal. HP said half of the workforce reductions would be in support functions, such as IT operations, human resources, and finance, and that the majority of the reductions would be involuntary. And because these white collar jobs are heavily based in the United States, it is reasonable to assume that HP's U.S. employee count will suffer proportionately. No matter where in the HP organization or in the world a job is being removed, Hurd said HP didn't start out with a headcount target, but rather analyzed the work of its employees and sought to remove redundancies as well as to simply eliminate work that is deemed unnecessary. The job cuts will have little effect on HP's research, development, and sales organizations, and Hurd was emphatic that HP would not increase its use of outsourcing as a way to save money.

Wayman, who said he had no plans to retire any time soon, also said HP would be changing its benefits plans in the United States, shifting some workers from a pension plan to a 401(k) plan with an increased contributions from HP. Starting in January 2006, HP will freeze pension and retiree medical benefits based on criteria such as age and years of employment. Employees are being told to invest in a 401(k), and HP says it will boost its contributions into 401(k) plans from 4 percent to 6 percent.

When you do the math on the reorganization, HP will record a pretax restructuring charge of $1.1 billion over the next six quarters, and the company expects the bulk of this charge to be taken in the fiscal fourth quarter. HP has already announced it would have a $100 million restructuring charge to take in the third quarter for prior workforce reductions. The ongoing annual savings from the restructuring is expected to be around $1.9 billion, with $1.6 billion coming from the layoffs and $300 million from the winding down of pension plans. Hurd said about half of these savings would be plowed back into the company for development and acquisitions, and half would drop to the bottom line. In fiscal 2006, HP expects the savings to be about $900 million to $1.05 billion, and that about $500 million will drop to the bottom line.

The plan Hurd and his team have put together clearly shows that they have no plans to significantly remold HP. They just want the HP they have to run better.