The Radical

Carly Fiorina's Bold Management Experiment At HP

Since taking over as chief executive of Hewlett-Packard Co. 18 months ago, Carleton S. "Carly" Fiorina has pushed the company to the limit to recapture the form that made it a management icon for six decades. Last November, it looked like she might have pushed too hard. After weeks of promising that HP would meet its quarterly numbers, Fiorina got grim news from the finance department. While sales growth beat expectations, profits had fallen $230 million short. The culprit, in large part, was Fiorina's aggressive management makeover. With HP's 88,000 staffers adjusting to the biggest reorganization in the company's history, expenses had risen out of control. And since new computer systems to track the changes weren't yet in place, HP's bean counters didn't detect the problem until 10 days after the quarter was over. "It was frantic. The financial folks were running all around looking for more dollars," says one HP manager.

One might expect a CEO in this spot to dial down on such a massive overhaul. Not Fiorina. After crunching numbers in an all-day session on Saturday and offering apologies for missing the forecast to HP's board at an emergency meeting Sunday, Fiorina told analysts she was raising HP's sales growth target for fiscal 2001 from 15% to as much as 17%. "We hit a speed bump--a big speed bump--this quarter," she said in a speech broadcast to employees a few days later. "But does it mean, `Gee, this is too hard?' No way. In blackjack, you double down when you have an increasing probability of winning. And we're going to double down."

The stakes couldn't be higher--both for Fiorina and for the Silicon Valley pioneer started in a Palo Alto garage in 1938. Just as founders Bill Hewlett and David Packard broke the mold back then by eliminating hierarchies and introducing innovations such as profit-sharing and cubicles, Fiorina is betting on an approach so radical that experts say it has never been tried before at a company of HP's size and complexity. What's more, management gurus haven't a clue as to whether it will work--though the early signs suggest it may be too much, too fast. Not content to tackle one problem at a time, Fiorina is out to transform all aspects of HP at once, current economic slowdown be damned. That means strategy, structure, culture, compensation--everything from how to spark innovation to how to streamline internal processes. Such sweeping change is tough anywhere, and doubly so at tradition-bound HP. The reorganization will be "hard to do--and there's not much DNA for it at HP," says Jay R. Galbraith, professor at the Institute for Management Development in Lausanne, Switzerland.

Fiorina believes she has little choice. Her goal is to mix up a powerful cocktail of changes that will lift HP from its slow-growth funk of recent years before the company suffers a near-death experience similar to the one IBM endured 10 years ago and that Xerox and others are going through now. The conundrum for these behemoths: how to put the full force of the company behind winning in today's fiercely competitive technology business when they must also cook up brand-new megamarkets? It's a riddle, says Fiorina, that she can solve only by sweeping action that will ready HP for the next stage of the technology revolution, when companies latch on to the Internet to transform their operations. "We looked in the mirror and saw a great company that was becoming a failure," Fiorina told employees. "This is the vision Bill and Dave would have had if they were sitting here today."

At its core lies a conviction that HP must become "ambidextrous." Like a constantly mutating organism, the new HP is supposed to strike a balance: It should excel at short-term execution while pursuing long-term visions that create new markets. It should increase sales and profits in harmony rather than sacrifice one to gain the other. And HP will emphasize it all--technology, software, and consulting in every corner of computing, combining the product excellence of a Sun Microsystems Inc. with IBM's services strength.

To achieve this, Fiorina has dismantled the decentralized approach honed throughout HP's 64-year history. Until last year, HP was a collection of 83 independently run units, each focused on a product such as scanners or security software. Fiorina has collapsed those into four sprawling organizations. One so-called back-end unit develops and builds computers, and another focuses on printers and imaging equipment. The back-end divisions hand products off to two "front-end" sales and marketing groups that peddle the wares--one to consumers, the other to corporations. The theory: The new structure will boost collaboration, giving sales and marketing execs a direct pipeline to engineers so products are developed from the ground up to solve customer problems. This is the first time a company with thousands of product lines and scores of businesses has attempted a front-back approach, a strategy that requires laser focus and superb coordination.

Just as radical is Fiorina's plan for unleashing creativity. She calls it "inventing at the intersection." Until now, HP has made stand-alone products, from $20 ink cartridges to $3 million Internet servers. By tying them all together, HP hopes to sniff out new markets at the junctions where the products meet. The new HP, she says, will excel at dreaming up new e-services and then making the gear to deliver them. By yearend, for example, HP customers should be able to call up a photo stored on the Net using a handheld gizmo and then wirelessly zap it to a nearby printer. To create such opportunities, HP has launched three "cross-company initiatives"--wireless services, digital imaging, and commercial printing--that are the first formal effort to get all of HP's warring tribes working together.

Will her grand plan work? It's still the petri-dish phase of the experiment, so it's too soon to say. But the initial results are troubling. While she had early success, the reorganization started to run aground nine months ago. Cushy commissions intended to light a fire under HP's sales force boosted sales, but mostly for low-margin products that did little for corporate profits. A more fundamental problem stems directly from the front-back structure: It doesn't clearly assign responsibility for profits and losses, meaning it's tough to diagnose and fix earnings screwups--especially since no individual manager will take the heat for missed numbers. And with staffers in 120 countries, redrawing the lines of communication and getting veterans of rival divisions to work together is proving nettlesome. "The people who deal with Carly directly feel very empowered, but everyone else is running around saying, `What do we do now?"' says one HP manager. Another problem: Much of the burden of running HP lands squarely on Fiorina's shoulders. Some insiders and analysts say she needs a second-in-command to manage day-to-day operations. "She's playing CEO, visionary, and COO, and that's too hard to do," says Sanford C. Bernstein analyst Toni Sacconaghi.

Fiorina gets frosty at the notion that her restructuring is hitting snags. "This is a multiyear effort," she says. "I always would have characterized Year Two as harder than Year One because this is when the change really gets binding. I actually think our fourth-quarter miss and the current slowing economy are galvanizing us. When things are going well, you can convince yourself that change isn't as necessary as you thought." Fiorina also dismisses the need for a COO: "I'm running the business the way I think it ought to be run."

If Fiorina pulls this off, she'll be tech's newest hero. The 46-year-old CEO already has earned top marks for zeroing in on HP's core problems--and for having the courage to tackle them head-on. And she did raise HP's growth to 15% in fiscal 2000 from 7% in 1999. If she keeps it up, a reinvigorated HP could become a blueprint for others trying to transform technology dinosaurs into dynamos. "There isn't a major technology company in the world that has solved the problem she's trying to address, and we're all going to learn from her experience," says Stanford Business School professor Robert Burgelman.

Fiorina needs results--and fast. For all its internal changes, HP today is more dependent than ever on maturing markets. While PCs and printers contributed 69% of HP's sales and three-fourths of its earnings last year, those businesses are expected to slow to single-digit growth in coming years, with falling profitability. Last year, HP was tied with Compaq as the leading U.S. maker of home PCs and sold 60% of home printers, according to IDC. Those numbers make it hard to boost market share. In corporate computing--where the company is banking on huge growth--HP has made only minor strides toward capturing lucrative business such as consulting services, storage, and software. And the failure of Fiorina's $16 billion bid to buy the consulting arm of PricewaterhouseCoopers LLP leaves her without a strong services division to help transform HP from high tech's old reliable boxmaker into a Net powerhouse, offering e-business solutions.

CAREENING. With the tech sector slowing, this may be the wrong time to make a miracle. In January, HP said its revenue and earnings would fall short of targets for the first quarter, and Fiorina cut her sales-growth estimates to about 5%--a far cry from the mid-teens she had been promising. In late January, the company announced it was laying off 1,700 marketing workers. HP's stock, which has dropped from a split-adjusted $67 in July to less than $40, is 19% below its level when Fiorina took the helm.

It's not just Fiorina's lofty goals that are so radical, but the way she's trying to achieve them. She's careening along at Net speed, ordering changes she hopes are right--but which may need adjustment later. That goes even for the front-back management structure. "When you sail, you don't get there in a straight line," Fiorina argues. "You adjust your course to fit the times and the current conditions." Insiders say that before the current slowdown, she expected HP to clock sales growth of 20% in 2002 and thereafter--a record clip for a $50 billion company. Fiorina won't confirm specific growth goals but says the downturn doesn't change her long-term plan.

Her overambitious targets have cost her credibility with Wall Street, too. While she earned kudos for increasing sales growth and meeting expectations early on, she has damaged her reputation by trying to put a positive spin on more troubled recent quarters. HP insiders say that while former CEO Lewis E. Platt spent a few hours reviewing the results at the end of each quarter, Fiorina holds marathon, multiday sessions to figure out how to cast financials in the best light. Not everyone is impressed. "I grew up with HP calculators, but they don't work right anymore," jokes Edward J. Zander, president of rival Sun Microsystems. "Everything they mention seems to be growing 50%, but the company as a whole only grows 10%." Fiorina says HP has accurately reported all segments of its business and that she makes no special effort to spin the results. "The calculators still work fine," she says.

Fiorina was well aware of the challenges when she joined HP, but she also saw the huge untapped potential. She had grown to admire the company while working as an HP intern during her years studying medieval history at Stanford University. Later, as president of the largest division of telecommunications equipment maker Lucent Technologies Inc., she learned the frustrations of buying products from highly decentralized HP. When HP's board asked her to take over, she jumped at the chance to show off her management chops. While she had spearheaded the company's spin-off from AT&T in 1996, then CEO Richard A. McGinn got all the credit.

"PERFECTLY POSITIONED." Soon after signing on, Fiorina decided the front-back structure was the salve for HP's ills. With the help of consultants, she tailored the framework to HP's needs and developed a multiyear plan for rejuvenating the company. Step One would be to shake up complacent troops. Next, Fiorina set out to refine a strategy and "reinvent" HP from the ground up, a task she expected would take most of 2000. Only then--meaning about now--would HP be ready to unleash its potential as a top supplier of technology for companies revamping their businesses around the Web.

That's where the cross-company initiatives come in. So far, HP has identified three. There's the digital-imaging effort to make photos, drawings, and videos as easy to create, store, and send as e-mail. A commercial-printing thrust aims to capture business that now goes to offset presses. And a wireless services effort might, say, turn a wristwatch into a full-function Net device that tracks the wearer's heart rate and transmits that info to a hospital. "All the great technology companies got great by seeing trends and getting there first--and they're always misunderstood initially," says Fiorina. "We think we see where the market is going and that we're perfectly positioned."

The first chapters of Fiorina's plan came off as scripted. When she replaced 33-year HP veteran Platt on a balmy July day in 1999, Fiorina swept in with a rush of fresh thinking and made headway--for a time. She ordered unit chiefs to justify why HP should continue in that line of business. And she gave her marketers just six weeks to revamp advertising and relaunch the brand. After a few days on the job, she met with researchers who feared that Fiorina--a career salesperson--would move HP away from its engineering roots. She wowed them. In sharp contrast to the phlegmatic Platt, Fiorina moved through the crowd, microphone in hand, exhorting them to change the world. "There was a lot of skepticism about her," says Stan Williams, director of HP's quantum science research program. "But she was fantastic."

If she was a hit with engineers, it took a bit longer to win over HP's executive council. For years, these top execs had measured HP's performance against its ability to meet internal goals, but rarely compared its growth rates to those of rivals. In August, Fiorina rocked their cozy world when she shared details of her reorganization--and of her sky-high growth targets. She went to a whiteboard and compared HP with better-performing competitors: Dell Computer in PCs, Sun in servers, and IBM in services. She issued a challenge: If the executives could show her another way to hit her 20% growth target by 2002, she would postpone the restructuring, insiders say. Five weeks later, the best alternative was a plan for just 16% growth. The restructuring would start by yearend.

She dove into the details. While Platt ran HP like a holding company, Fiorina demanded weekly updates on key units and peppered midlevel managers with 3 a.m. voice mails on product details. She injected much needed discipline into HP's computer sales force, which had long gotten away with lowering quotas at the end of each quarter. To raise the stakes, she tied more sales compensation to performance and changed the bonus period from once a year to every six months to prevent salespeople from coasting until the fourth quarter. While some commissions were tied to the number of orders rather than the sales amount and contributed to the earnings miss, Fiorina has fixed the problem and accomplished her larger goal of kick-starting sales. "You can feel the stress her changes are causing," says Kevin P. McManus, a vice-president of Premier Systems Integrators, which installs HP equipment. "These guys know they have to perform."

This play-to-win attitude has started to take root in other areas. Take HP Labs. In recent years, the once proud research and development center made too many incremental improvements to existing products, in part because engineers' bonuses were tied to the number, rather than the impact, of their inventions. Now, Fiorina is focusing HP's R&D dollars on "big bang" projects. Consider Bob Rau's PICO software, which helps automate the design of chips used in electronic gear. Rau had worked for years on the project, but the technology languished. Last spring, Rau told Fiorina that the market for such systems was projected to grow to $300 billion as appliance makers built all sorts of Net-enabled gadgets. Within days, Fiorina created a separate division that operates alongside the two back-end groups and has grown to 250 people. Besides Rau's software, it will sell other HP technologies such as new disk drives to manufacturers. "It was like we'd been smothered for four years and someone was finally kind enough to lift the pillow off our face," says Rau.

ROUGH EDGES. With Phase One of her transformation behind her, Fiorina launched a formal reinvention process last spring. First up: cutting expenses. Over nine days, a 12-person team came up with ways to slash $1 billion by fiscal 2002. HP could save $100 million by outsourcing procurement. It could trim $10 million by letting employees log their hours online rather than on cardboard time cards. And the company could revamp its stodgy marketing by consolidating advertising from 43 agencies into two. That would save money and, better yet, focus HP's campaigns on Fiorina's big Web plans rather than on its various stand-alone products.

But when the big changes really started to kick in, Fiorina's plan started to bog down. In the past, HP's product chieftains ran their own operations, from design to sales and support. Today, they're folded into the two back-end units, leaving product chiefs with a far more limited role. They're still responsible for keeping HP competitive with rivals, hitting cost goals, and getting products to market on time. But they hand those products to the front-end organizations responsible for marketing and selling them.

The arrangement solves a number of long-standing HP problems. For one, it makes HP far easier to do business with. Rather than getting mobbed by salespeople from various divisions, now customers deal with one person. It lets HP's expert product designers focus on what they do best and gives the front-end marketers authority to make the deals that are most profitable for HP as a whole--say, to sell a server at a lower margin to customers who commit to long-term consulting services. "You couldn't miss how silly it was the old way if you were part of the wide-awake club," says Scott Stallard, a vice-president in HP's computing group. "A parade of HP salesmen in Tauruses would pull up and meet for the first time outside of the customer's building."

These advantages, though, aren't enough to convince management experts or many HP veterans that a front-back approach will work at such a complex company. How do back-end product designers stay close enough to customers to know when a new feature becomes a must-have? Will executives, now saddled with thousands of HP products under their supervision, give sufficient attention to each of them to stay competitive? And with shared profit-and-loss responsibility between front and back ends, who has the final say when an engineer wants to take a flier on expensive research? "You just diffuse responsibility and authority," says Sara L. Beckman, a former HP manager who teaches at the Haas Business School at the University of California at Berkeley. "It makes it easier to say, `Hey, that wasn't my problem."'

Indeed, the front-back plan is showing some rough edges. While HP cited many reasons for its troubling fourth-quarter results, the reorganization is probably front and center. Freed from decades-old lines of command, employees spent as if they had already hit hypergrowth. In October alone, the company hired 1,200 people. Even dinner and postage expenses ran far over the norm. Such profligate spending was rare under the old structure where powerful division chiefs kept a tight rein on the purse strings. "They spent too much money on high-fives and setting themselves up to grow the following quarter," says Salomon Smith Barney analyst John B. Jones.

That situation could improve over time. Fiorina rushed the reorganization into place before the company's information systems were revamped to reflect the changes. Before Fiorina arrived, each product division had its own financial reporting system. It was only on Nov. 1 that HP rolled out a new uber-system so staffers could work off the same books. Although it's too soon to say whether it's a winner, HP claims the system will let it watch earnings in powerful new ways. Rather than just see sales for a product line, managers will be able to track profits from a given customer companywide or by region. That way they can cut deals on some products to boost other sales and wind up with a more lucrative relationship.

Another restructuring red flag is the way Fiorina now sets strategy, a big departure from "The HP Way"--the principles laid out by the founders in 1957. Based on the belief that smart people will make the right choices if given the right tools and authority, "Bill and Dave" pushed strategy down to the managers most involved in each business. The approach worked. Not only did HP dominate most of its markets, but low-level employees unearthed new opportunities for the company. "HP was always the exact opposite of a command-and-control environment," says former CEO Platt. Although Platt wouldn't comment on Fiorina directly, he says, "Bill and Dave did not feel they had to make every decision." HP's $10 billion inkjet printer business, for example, got its start in a broom closet at HP's Corvallis (Ore.) campus, where its inventors had to set up because they had no budget.

EYES ON THE PRIZES. Fiorina isn't waiting for another broom-closet miracle. Since the halcyon mid-'90s, the old HP way hasn't worked quite as well. The last mega-breakthrough product HP introduced was the inkjet printer, in 1984. Growth had slowed to just 4% in the six months before Fiorina took over. To give HP better direction, Fiorina has created a nine-person Strategy Council that meets every month to allocate resources, set priorities, and advise her on acquisitions and partnerships. "This is a company that can do anything," Fiorina says. "But it can't do everything."

Again, the move makes sense on paper. By steering the entire company, the council can focus HP on a few big Internet prizes rather than myriad underfunded pet projects. But this top-down engine could backfire. Experts point out that except for visionaries like Apple Computer's Steve Jobs or IBM's Thomas J. Watson Jr., it's rare for the suits in the corner office to be able to predict the future--especially in a market as fast-changing as the Net. "If we were to go too far toward top-down, it would not be right for this company," acknowledges Debra L. Dunn, HP's vice-president of strategy.

To be sure, Fiorina is quick to embrace ideas from below if she thinks they'll solve a problem. This spring, Sam Mancuso, HP's vice-president of corporate accounts, proposed a team-based plan that advances the front-back approach. Time was, PC salespeople weren't allowed to sell, say, printers. Mancuso has fixed that by pulling together 20-person teams to concentrate on the top 75 corporate customers. The teams create an "opportunity map" for each customer, tracking the total amount of business HP could possibly book. Then the team analyzes what deal would maximize earnings for HP. Mancuso says his operation has boosted sales to top customers by more than 30% since May. "We're taking the handcuffs off, so now we can be more aggressive," Mancuso says.

The shackles may be off, but HP still lags its competitors in many areas. For all HP's talk of becoming a Net power, in the fourth quarter, Sun held 39% of the market for Unix servers preferred by e-businesses, according to IDC. HP is in second place with 23% share, a slight improvement over the year before. But it faces growing competition from third-place IBM, which just introduced a product line that many analysts say handily outperforms HP's servers. "HP is just not making much headway," says Ellen M. Hancock, CEO of Exodus Communications Inc. Her company uses 62,000 servers in its Web hosting centers, virtually none of them from HP. And most of HP's Net schemes, such as Cartogra, a service that lets consumers post pictures on the Web, have failed to catch on.

Even fans of Fiorina acknowledge she has a ways to go. While wireless juggernaut Nokia Corp. just signed a deal to use HP software, Chairman Jorma Ollila questions how successful Fiorina's turnaround is likely to be. "Carly is very impressive," he says. "But the jury is still out on HP." Says Cisco Systems Inc. CEO John T. Chambers, who named Fiorina to his board on Jan. 10: "I'd bet that Carly will be one of the top 5 or 10 CEOs in the nation. But she has still got to get them running faster." Fiorina wouldn't disagree and says she plans to keep upping her bets. "The greatest risk is standing still," she says. She should hope she has picked the right cards, because she's gambling with Silicon Valley's proudest legacy.

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