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HP's Executive Brain Drain

By Ben Elgin Even as a steady stream of executives departed Hewlett-Packard (HPQ) over the last two years, the company never wavered from the proud party line oft-repeated to the press: "We haven't lost anyone that we really needed to keep." The claim now appears dubious, considering the sizable shortfall in HP's preliminary third-quarter profits, announced on Aug. 12.

With net earnings coming in 39% below analyst expectations at 19 cents per share, CEO Carly Fiorina immediately pointed the finger at HP's management team. Within hours of the announcement, the resignations of three top execs in HP's enterprise division were announced, including executive Vice-President Peter Blackmore. It's a concession that the computing behemoth's leadership isn't delivering as expected.

And regardless of HP's protestations, the departures of more than three dozen top-level execs since the start of 2003 may have hit its bottom line. "You can't have a brain drain and not backfill and expect to be O.K.," says Steve Duplessie of Enterprise Strategy Group.

Indeed, HP's most underperforming units were among the hardest hit by executive defections. Consider HP's storage division, which notched $709 million in third-quarter revenues -- a hefty 19% below Merrill Lynch estimates. In the last two years, competitor EMC (EMC) has plucked away significant HP storage talent -- including vice-presidents Mark Lewis, Mark Sorenson, and Howard Elias -- as well as Storage Engineering Director Ryan Johnson and Corporate Sales Exec Rainer Erlat.

WHEN WORLDS COLLIDE. HP's broader enterprise division, also hampered by management departures, posted disappointing third-quarter financials as well. Sales of industry-standard servers, for instance, plunged 12% from the prior quarter, according to Merrill Lynch calculations. Key exec losses on the enterprise front include the late 2003 departure of Senior Vice-President of Strategy & Corporate Development Mary McDowell, who was regarded as one of HP's fastest-rising stars. McDowell is now at the helm of Nokia's (NOK) enterprise-solutions unit. Other important exits include last year's departures of longtime Enterprise Vice-President Bill Russell, who retired at 51, and HP's Enterprise Solutions and Marketing Vice-President Janice Chaffin, who now spearheads marketing for Symantec (SYMC).

A number of these managers, well-regarded for their skills and talent, were encouraged to stay, according to several former HP insiders. An HP spokesman declined to address the issue of management attrition, but said the third-quarter shortfall was sparked by several unrelated factors, such as the turmoil caused by a lengthier-than-expected deployment of supply-chain software.

So why did so many execs head for the door? Over the past several months, BusinessWeek has interviewed more than a dozen departed HP bigwigs. Time and again, what came up is that people left as a result of the natural fallout of integrating two management teams into a single leadership group, following the Compaq deal in 2002. In many cases, it created overlap, forcing some execs down the management chain and inducing them to leave.

UNNATURAL MOVEMENT? In other cases, some coveted managers felt HP's slow-moving management style didn't adopt enough of the aggressive Compaq personality. "In the beginning, there was a feeling that Compaq was making a difference in the HP culture," says a former HP executive, who came over from Compaq. "But things started to slow down a bit again."

Indeed, the ranks of Compaq veterans have thinned rapidly (see BW Online, 8/13/04, "HP: Compaq Indigestion?"). Following the merger, such execs were highly touted by Fiorina as injecting a fast-moving streak into HP's management approach. Now, only two of HP's top 13 execs hail from Compaq. Among the departed are Blackmore, McDowell, Elias, Lewis, former HP President Michael Capellas, Operations Chief Jeff Clarke, as well as Mobile Computing Senior Vice-President Alex Gruzen, who departed for rival Dell (DELL) on Aug. 9.

"There has been an exodus of senior Compaq people," confirms Needham & Co. analyst Charlie Wolf. While some of the departures are to be expected, he says, "I don't know that that kind of movement is natural."

That's a bit of an understatement at this point. If Fiorina is going to get HP back on the right track, one glaring challenge seems to be keeping executive talent in-house. Elgin writes for BusinessWeek in San Mateo, Calif.

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