Doing business the HP way

Leaving the company he co-founded 60 years earlier, David Packard gave his employees one final piece of advice: "Don't ever gloat about anything you've done," he said. "Go and find something better to do."

Sixty-one years after Packard and William Hewlett founded Hewlett Packard (HP) in a California garage, the world's second largest computer company has found something new: the internet. Faced with shrinking margins in the PC market and falling sales in the server market at the hands of IBM and Sun Microsystems, Silicon Valley's oldest startup is betting its business on the next generation of internet services.

Making a mark
The woman charged with making this transformation is new president and chief executive Carleton 'Carly' Fiorina, a 45-year-old former president of Lucent Technologies. And Fiorina has wasted no time in putting her stamp on HP: within six months of her appointment last July, she appeared on TV screens everywhere, standing next to the garage where it all started and evangelising about HP's future.

Even before the ad hit the airwaves, Fiorina had plastered the walls of HP's Palo Alto headquarters with posters proclaiming 'The Rules of the Garage'. The rules in question, known as the HP Way, are those of the company's founders: respect for employees and customers, entrepreneurial business methods and a focus on invention.

Fiorina's respect for these foundations make her a worthy successor to Hewlett and Packard. The HP Way is epitomised in a visit William Hewlett once made to the company's offices. Finding a stock cupboard padlocked, Hewlett took to the lock with bolt cutters. The remains of the chain were left on a manager's desk, together with a note explaining it was not the HP Way to treat employees as thieves. This integrity was extended to the men's private lives: the duo donated more than $5bn (£3.1bn) to various good causes, from marine biology to digitising the Library of Congress.

Similarly, Fiorina tries to temper her manic work rate with a human touch. When the wife of one of her Lucent employees fell ill, Fiorina was on hand to organise medical care and time off work. She is also known for presenting staff with balloons, flowers and other gifts to celebrate winning contracts.

But this is the HP Way polished up for the 21st century, where brand and marketing matter just as much as products and people. At Comdex in November, Fiorina summarily dumped HP's logo, ushering in a $200m corporate advertising campaign. But it isn't the cost that's revolutionary. "Before this campaign we spent more per year on advertising than Nike," says Jos Brenkel, general manager of commercial business products. "But we have never before had a single brand across the whole company."

What about the products?
Users wonder if the marketing push will translate into products. "I have doubts about some of the things Fiorina is doing," comments Peter Bradley, general manager of the HP User Group. "She is spending a lot of time schmoozing with analysts, but I'm not sure how this translates into great products."

Propelling a company into the internet age is a feat Fiorina pulled off once before. At Lucent, she managed the spin-off of AT&T's sluggish communications business and its $90m marketing campaign.

As president of the global service provider business, she revived product development at Bell Labs, putting Lucent at the heart of the internet infrastructure market.

Reviving HP's staid brand will be a challenge. The company is widely seen to have missed the internet boat, while companies such as Sun have gained reputations as leaders of the new economy. HP failed to predict the consulting boom surrounding the scramble to get online. IBM benefited from that boom to the tune of $23bn in 1998.

Cutting costs
While the 'Rules of the Garage' portray HP as the kind of company your grandma would invite in for tea, Fiorina has taken a ruthless approach to cutting costs. One of her first decisions was to axe 250 sales people who consistently missed their sales quotas, putting the fear of God into the rest of them. "We will see a lot of middle management go," predicts Brenkel. "A lot of people worried about their jobs when Carly arrived."

New compensation programmes for the company's top executives will be extended to the rest of the company this year. Managers who used to receive bonuses based on profits are now rewarded for revenue. Fiorina believes that rewarding profit encouraged managers to neglect research and development in favour of incremental product developments with faster returns.

As chief executive, her biggest battle is against the bureaucracy that has plagued HP in recent years. Ironically, this is a bureaucracy borne of the system designed to prevent it. When the company grew in size in the 1970s, product divisions were spun off to prevent the creation of a monolithic giant. But by 1990, there were more than 130 different product groups, many selling to the same customers. When one US corporate entered into negotiations with HP, no fewer than 50 HP sales people turned up to the first meeting.

These problems also extend to UK customers, says Bradley. "Our members biggest problems with HP are incomprehensible contracts and poor execution of the sale," he says.

Fiorina's solution was to strip out layers of management, specifying that all managers in HP must manage at least 10 people. This reduces the culture of power and control that dominated the company until recently, Brenkel explains. "We didn't have a bureaucracy problem, we had a policing problem."

Long-time customers such as Hans Karlsen, managing director of aerospace engineers ADS, believe this culture can impinge on service. "HP builds reliable hardware, but the service just isn't there," he says. "It is guilty of throwing software over the wall for the market to test on their behalf.?

Boom bang-a-bang
Up until the mid-1990s, HP business was booming, with sales in its printer and PC division soaring from $13.2bn in 1990 to $38.2bn in 1996. But two years of falling sales and inconsistent profits followed, with quarterly growth slipping from 20 per cent in 1995 to less than five per cent from mid-1998 onwards.

Fiorina has tried to address slipping performance by giving chief executive powers to four divisional managers who will bring together the diverse product groups. Anne Livermore, chief executive of the enterprise computing group, will continue to oversee e-services while also managing the enterprise and commercial customer divisions, HP's top 100 accounts and professional services.

Digital imaging, a key growth area for HP, will be brought together with consumer business under the control of Antonio Perez, former chief executive of inkjet imaging solutions. Meanwhile, printing technologies will be united into a single group headed by Carolyn Ticknor, former chief executive and president of Laserjet Imaging Systems. Finally, Duane Zitzner, chief executive and president of computer products, will lead Unix, Windows NT and storage products, in addition to overseeing enterprise systems and software.

These changes are key because they will give large customers a single point of contact within HP, no matter how many product groups they are dealing with. "There is now only one set of customer details, and the customer's manager is responsible for all their needs, from inkjet cartridges to high-end servers," says Tino Canegrati, European business marketing manager.

Another key change is that HP has shifted, albeit tentatively, to the direct sales model of Dell. Companies will be able to order direct from HP over the internet, instead of inviting bids from resellers through HP's website. "We found that a lot of customers wanted to buy from us," explains Canegrati. "They got confused by the pricing of different resellers and 60 per cent of them left without making a purchase."

But HP is tiptoeing its way online to avoid undermining the retailers and resellers that provide 80 per cent of the company's sales. Even though corporate clients can order from the web, Canegrati estimates that only four to six per cent of businesses will buy their desktop systems in this way and even those pioneers must rely on resellers for installation and service.

The move, however, is still crucial, argues Andy Butler, a research director with analyst GartnerGroup. "They were compelled to move to the direct model, to maintain a complete portfolio." A second motivation, Butler says, was to explore ways of cutting costs in the PC business, with its wafer thin margins.

The PC market
At present, HP takes fourth place in the PC market, behind Dell, Compaq and IBM. Operating profits for HP's PC division are only three cents on the dollar, compared with Dell's 11 cents. Zitzner has driven selling costs in the division to two thirds of the company average, and slashed costs by outsourcing assembly to SCI Systems. The next challenge was to cut inventory, which now stands at two weeks. "I want to use the channel, not choke it," says Zitzner.

The success of these changes depends on them gaining the support of HPers. Many inside the company believe Fiorina has the touchy-feely skills to carry this off where Lew Platt failed.

In 1997, Platt stood up at the annual general managers meeting and lambasted managers for their pipe and slippers approach to business. He asked each manager to submit two things that they would do differently on Monday, and then flew into a rage when the results did not meet his expectations. "We left that meeting, which was disastrous, thinking 'what a joke'," remembers Brenkel. "But when Carly stood up and told us what needed to be changed and why, we left the meeting saying 'she's going to be president one day'."

Speaking to industry analysts in November, Fiorina pledged that HP would grow revenue and profit by 15 per cent in 2000 by growing market share in the key areas of servers, storage, PCs, appliances, software and printing. At that stage, HP was already showing signs of recovery thanks to a slate of new products in 1999 and recovering sales in Asia. By the end of the year, growth stood at 13 per cent. The PC division posted 4.6 per cent growth and healthy profits, while Compaq and IBM suffered painful losses. In the inkjet printer business, HP enjoyed a 42 per cent market share. The exception was the storage business, which took a hit following HP's high profile split with EMC.

Last week, HP announced its results for the quarter ending 31 January. Revenue was up 14 per cent to $11.67bn (£7.2bn) from $10.24bn in the previous year. Net income was $794m compared with last year's $960m.

Innovation - that's what you need
All this is mere window dressing to Fiorina's long-term mission at HP - innovative products and services. HP certainly has a proud pedigree in this respect: early HP products included a bowling alley foul-line indicator and the first electronic harmonica tuner. Today, the company is working to reverse the fortunes of the storage division with atomic resolution, a technology that multiplies chip capacity thousands of times.

HP realises that performance can't be sustained without carving a slice of the lucrative ebusiness market. This means positioning hardware as ecommerce infrastructure and establishing software as the platform for internet services. With this expertise in place, HP would be in a prime position to challenge IBM for the Internet consulting crown.

So, what exactly is HP's idea of e-services? Specifics are in short supply, but Fiorina defines it as "any asset that companies make available via the internet to drive new revenue streams or create new efficiencies".

At the core of the strategy is eSpeak - HP middleware that allows e-services to interact spontaneously, without human intervention. Devices with eSpeak, be they handhelds, PCs or smartphones, could find and link services from multiple websites. The source code for the technology has been posted on HP's website for developers to work on applications. Early examples are an engineer dispatch service from Ericsson and a multimedia broker for training services from Helsinki Telephone.

HP has made some significant service deals with the likes of Qwest Communications and Yahoo, and has partnered with or acquired several other dot com businesses.

Despite this, Fiorina is unlikely to temper her new-found enthusiasm for invention. Since her appointment, the majority of her time in Palo Alto has been spent wandering the company's labs, which are widely acknowledged as some of the finest in the world. "Carly has challenged us not to do the mundane engineering but to work on more disruptive technologies," says Howard Taub, director of technology programs. This cheered up HP's 750 scientists, who felt neglected in the Platt era. "We were done in by our own success," cites Taub. Executives were keener to work on small improvements to existing products than take on new, expensive projects, he adds.

The bottom line
The new chief executive is determined not to repeat Platt's mistakes, whose focus on the bottom line led to some embarrassing research and development decisions. In 1996, Platt cut back development of new microprocessor chips and operating software, banking on the release of Merced and the new version of Windows for effective competition against Sun. Merced and Windows 2000 remained dots on the horizon, with the result that HP's sales against Sun fell six per cent in 1998. "Platt put money before growth," agrees Brenkel. "And quite simply, it was wrong."

Perhaps more embarrassing is the knowledge that the internet so nearly belonged to HP. In 1993 - two years before Netscape Navigator was launched - Platt was shown a prototype web browser by lab researcher Ira Goldstein. The project never made it through HP's lengthy approval process. "HP has always been years ahead of the competition in the labs," observes Butler. "But it was too hierarchical for that to come through."

Customers are unsure whether HP can carry off the internet transformation. "They are staking a lot on it," says Bradley, "But while there has been a lot of talk, very little has been delivered." Bradley is also aware that e-services is not quite the Fiorina triumph that is portrayed. The concept was devised by Anne Livermore and developed by Platt. "It's like Tony Blair living off the successes of the Tory's economic policies," Bradley says. "Anyway, the vast majority of the business isn't part of e-services, it's the other stuff."

Credit where credit's due?
Butler agrees that Platt's contribution to the company is being rewritten in the flush of Fiorina's arrival. "She has inherited a great legacy," he says. "A lot of what is going right for the company today is a direct result of Platt's actions."

As a result of all these changes, HP's labs are more integrated with the business than ever before. "We are trying to understand the strategy of the business a lot more," says Taub. "Carly understands that you cannot succeed just by evolving the existing business." Researchers are now encouraged to 'think bigger thoughts, propose bigger things'.

One of the first products to emerge from Cool Town, the division of the laboratories dedicated to Internet technologies, is the HP-UX server for wireless application protocol (Wap). "We will sell the server, bundled with software from Nokia," says Emmett Hayes, European business development manager for mobile platforms.

"For corporates, this is where HP will be a player - with secure servers and software to take the call." The company will show its first working demonstrations of Wap services at this year's Cebit, Hayes says.

The move to reinvent its servers comes at an opportune moment, says Butler. "HP has suffered for years at the hands of Sun," he says. "But with Sun in technology transfer mode, HP can capitalise and recover lost ground." The services on Wap servers are only a fraction of HP's vision for the next chapter of the internet. It's all part of Fiorina's promise to make using the internet "more friendly, more personal and more intimate".

Basic Wap phones, for example, can alert users when shares hit a certain level. But HP's eSquirt technology, currently being developed at Cool Town makes that look like a child's toy in comparison. The same service, combined with eSquirt software, would send an alert together with a URL. The phone would 'squirt' this URL to another enabled device such as a printer, which would retrieve the web page and print off customised background information on the relevant stock.

HP's vision of eSquirt goes far beyond consumer gadgets. It is intended that the technology will be licensed to ebusinesses, which will use it to offer services to their customers. Cool Town engineers have developed an extension to eSquirt called Beacon, which spontaneously sends messages to devices carrying the eSquirt software. "This would mean that in a bookstore, the beacon could send a message to the customer's phone or handheld letting them know their favourite magazine was out of stock," explains Becker. "If the technology is combined with eSpeak, the beacon could go out onto the web and find a service that would deliver the magazine to your home address."

While there are already working demonstrations of eSquirt technology, it could be another five years before a beacon at the bus stop can stop you having to stand in the rain for the number 19. But the aim - improving the user's experience of the internet - is one HP believes in. "It's about changing the way we use technology and view the world," says Becker. "But HP is doing it in a way even my grandmother will enjoy using."

Fiorina certainly isn't following the Silicon Valley herd - something which her illustrious predecessor, David Packard, was renowned for.