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Layoffs, the HP Way

By Peter Burrows On Tuesday, July 19, new Hewlett-Packard (HPQ) CEO Mark V. Hurd announced a long-awaited layoff: HP will hand out 14,500 pink slips over the next 18 months to reduce its total workforce by 10% to around 136,000.

Despite those big numbers, the day isn't likely to go down at HP as "Black Tuesday." In interviews in recent weeks, insiders ranging from rank-and-file workers to long-time executives -- all of whom requested anonymity -- have said they knew big cuts were necessary if HP is to end a funk that's now nearly a decade old. "We need to do this, and we've needed to do it for a long time," says one veteran manager.

Most employees said they'll continue to stand behind the new guy in the corner office as long as he mades a compelling case that the belt-tightening would solve some of HP's persistent problems. What's more, many want Hurd to keep up efforts to refresh top management by hiring more outsiders.

A MANY-LAYERED SOUP. Hurd likely succeeded in making just such a case. The bulk of the cuts are aimed at squeezing out fat from administrative functions that have been overweight for years and by undoing much of the complexity and centralization introduced by former Chief Executive Carly Fiorina. She set out to meld HP's many businesses into one soup-to-nuts technology shop, but instead ended up creating additional layers of bureaucracy that created more overhead and slowed decision-making.

As BusinessWeek reported on June 27 (see "The Un-Carly Unveils His Game Plan"), Hurd will nix this approach and instead give each of HP's major product groups its own sales force, a move analysts say should help it compete against more focused rivals. Indeed, Hurd says there will be negligible pruning of the overall sales force, or of the R&D corps charged with creating stand-out wares for them to sell. Most of the cuts will come out of staff functions, including human resources, finance, info tech, and marketing.

Hurd made a compelling case that the moves are the result of a thoughtful plan to change the way HP operates. His goal is to find ways to more efficiently do work that needs to be done. One example: HP will pare the number of internal technology projects, to get its IT spending more in line with that of rivals. He's also on the warpath to identify tasks that don't need to be done at all. "Does the work add value to our customers or to our markets? If the answer is no, stop doing the dog-gone work!," he says in an interview with BusinessWeek Online.

"NO ONE-MAN SHOW." Hurd argues that rather than just cost-cutting, the increased efficiency will ultimately boost sales by helping HP better serve its customers. Account reps will no longer have to wait for as many approvals from sales managers to address a customer's demand. "Cost structure and revenue growth go hand in hand," he says.

Hurd's management of the cost-cutting moves could also win him some points with HPers. For starters, he made sure to point out that much of the work had started before he arrived. "This was in no way a one-man show," he told analysts. What's more, the savings, which should total $1.9 billion a year in coming years, were designed to enable HP to hit Hurd's growth and profit goals for 2008 -- not to give a near-term lift to the stock.

Why 2008? Because it's close enough to be doable, but not so close as to immediately create a pressure-cooker environment for HP's managers. "This way, the discussion isn't about hitting the Q3 forecast," Hurd says. "It enables people to start thinking about the future with a little less emotion and a little more analytics."

"TERMINAL NICENESS"? That's sure to resonate with many HP employees, many of whom have been frustrated for years with management's refusal or inability to push meaningful changes throughout the company. When Fiorina announced her intention to lay off 1,600 members of HP's bloated marketing staff in early 2000 -- by far the biggest cutback in years -- she received dozens of e-mails from the troops expressing their support. The only caveat: that the cuts had to be accompanied by real operating changes that improved HP's marketing effectiveness. When her "Marketing Reinvention" got off to a slow start, many staffers were demoralized.

This pragmatism is an inherent trait of HP's culture, often described as "The HP Way" and misunderstood by outside observers. The conventional view is that HP suffers from "terminal niceness" -- that employees are much too busy thinking about their collegial work environment and cushy benefits to worry too much about whipping the competition.

But many HPers long for a return to the uncompromising business discipline once enforced by founders Bill Hewlett and Dave Packard. They continually preached that perks and job security were only possible so long as HP delivered big profits -- and so were quick to kill off money-losing ventures or to ask workers to take temporary pay-cuts to get through cyclical downturns.

SUPERSTAR HIRE. The sense is widespread inside HP that mediocre performance in recent years is less about the performance of the rank and file, and more the result of ineffectiveness among senior managers. As such, many insiders hope turnover will continue on HP's nine-person executive committee. "There are lots of complaints about the EC, about it being weak," says one long-time manager. "The sense is that they nodded when Carly was here, and they're nodding now."

Hurd, however, is making remarkably fast work to revamp his top team. Fiorina brought in just one top executive during her five-year tenure -- to replace a retiring human-resources chief. But in his four months on the job, Hurd has hired a new head for the PC division and recently ponied up a $15 million pay package to lure former Dell (DELL) Chief Information Officer Randall D. "Randy" Mott to HP as well. Mott, who bought NCR (NCR) gear from Hurd both at Dell and before that at Wal-Mart Stores (WMT), is the kind of superstar that's likely to create significant changes -- maybe even to help HP finally make good on promises to boost the portion of products that are sold directly to customers, Dell-style.

Of course, even Hurd admits that announcing plans is the easy part. Just as Fiorina won the hearts of HPers when she first arrived, he could still run into trouble if he doesn't execute his game plan.

PENSION GAMBLE. Many employees still aren't totally sold on the new boss. Most have spent enough time Googling "Mark Hurd and NCR Corp." to know that many of his former employees felt he was little more than an Al Dunlop-style cost-cutter. Certainly, Hurd's decision to cancel HP's future pension benefits for most workers will cause such fears to linger for many. As an olive branch, HP will match 401(k) contributions of as much as 6% of their pay, up from 4% in the past. But that's not likely to bridge the gap for many workers. Says Goldman Sachs analyst Laura Conigliaro: "It's hard to imagine that it won't have a serious impact on morale."

Hurd points out that few companies founded in recent decades -- a group that includes almost all tech companies -- even offer a pension benefit. But "we found a middle ground" by grandfathering in some long-time employees, who will continue to accrue pension benefits. "It's a tough subject," says Hurd. "Many people would say [HP] can't afford this competitive disadvantage -- but we decided that we couldn't afford to entirely walk away from a benefit that was never [guaranteed] but had become a part of the informal contract employees had with the company."

Conigliaro believes Hurd has given employees enough reasons to continue to hope, rather than despair. "For the first time in a long time, HP management is taking the practical, realistic steps they need to take." The approach may lack much when it comes to snazziness. But even after imposing a first big dose of tough medicine, Hurd seems to have maintained the trust of HP's investors and, most important, the bulk of its employees.

Burrows is BusinessWeek's Computer editor in Silicon Valley

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