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HP: Corroding Carly's Clout

By Ben Elgin With Hewlett-Packard (HPQ) struggling to keep pace with key rivals Dell (DELL) and IBM (IBM), the computing giant's board of directors is increasingly asserting itself in an attempt to bolster the Silicon Valley concern's prospects. In its latest move, HP's board is driving a plan to shuffle the company's management ranks, while pushing CEO Carleton S. Fiorina to hand more operating power to key lieutenants.

Although the implementation of the changes and their likely timetable aren't certain, the board's plan would promote Executive Vice-President Ann M. Livermore and Chief Technology Officer Shane V. Robison to newly created positions as co-presidents of HP's Technology Solutions Group, according to a company insider and a source familiar with the plans. The business unit, which sells tech gear and services to corporations, generated $30 billion in sales last year -- 38% of HP's total -- but has struggled to boost profits.

PERKINS' RETURN. HP's board is also insisting that Fiorina yield more day-to-day operating clout to key lieutenants, according to the sources. This would translate into more pivotal roles for Livermore and Robison, as well as Vyomesh Joshi, who runs HP's $49 billion Imaging and Personal Systems Group, which spans everything from printers to PCs.

The computing giant doesn't have a chief operating officer, a position that a growing number of analysts and investors have urged it to fill. The last person who came close to fitting that role was HP's former president, Michael Capellas, who left it in 2002. Fiorina has publicly rejected calls for a COO.

In addition, HP's board is planning to bring back Thomas J. Perkins, a former director, according to the sources. Perkins, a founder of prestigious Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers, had joined HP's board through the 2002 acquisition of Compaq Computer before leaving in 2004. He is expected to rejoin the board in March.

MAJOR SHIFTS. It's unclear what the shift in power and an increasingly active board portend for Fiorina's future at HP. The 50-year-old CEO is more than five years into her efforts to reinvent HP, but the results have thus far been mixed (see BW, 12/13/04, "Carly's Challenge").

HP spokesperson Robert Sherbin says no management changes are imminent: "Boards discuss a wide range of topics consistent with their fiduciary responsibilities, and any speculation about these discussions is just that -- pure speculation." He adds, "While the board did discuss structural changes at its recent meeting, these were announced on Friday, Jan. 14."

The plan would mark HP's second major management shift in 2005. On Jan. 14, the outfit announced that it would combine its printing and PC businesses, tapping printers chief Joshi to run the combined operations (see BW Online, 1/18/05, "A Pep Pill for HP's PCs?"). Duane Zitzner, longtime leader of HP's PC division, is retiring.

STILL SQUEEZED. The flurry of activity appears to be the result of HP's ongoing efforts to find a winning formula. The giant has a lucrative printing and imaging business, which generates over three-quarters of its operating profits on just 30% of its sales. But most other key businesses, from storage and software to PCs, have struggled to generate profits. HP has been caught in a competitive squeeze: Outgunned in the prices of commodity products by ultraefficient Dell, while unable to match IBM's prowess in selling high-end computing solutions to corporations.

HP's acquisition of Compaq in 2002, although far from the disaster predicted by many of the deal's opponents, has done little to free the computing concern from this competitive vice. In 2004, its PC business notched razor-thin operating margins of 0.9%, with enterprise storage and servers only slightly better, at 1.1%. Since the deal closed in May, 2002, HP's stock is up 15%, vs. 24% for IBM and 69% for Dell.

Over the past several quarters, a growing number of analysts and investors have been calling on HP to bring in more operations talent. These calls picked up steam after the company missed financial targets for a fiscal quarter that ended last July, its most disappointing quarter in over a decade.

RESTLESS BOARD. "HP could benefit from a strong operations person," Goldman Sachs analyst Laura Conigliaro told BusinessWeek after the miss. "That's not calling them on the carpet, it's just reality."

It's unclear whether these expected changes will do much to quell such concerns. But it's a sign that the status quo won't suffice for HP's board. Elgin is a correspondent in BusinessWeek's San Mateo bureau

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