Memo To Mark Hurd

From: Peter Burrows and Ben Elgin

Congratulations, and welcome to the Big Leagues. It must feel pretty good to have beaten out all those better-known names -- although you have undoubtedly got wind of what the Silicon Valley digerati think about your being tapped to become the next CEO of Hewlett-Packard Co. (HPQ ). They say that restoring the $80 billion outfit to glory may be an impossible job for anyone, let alone someone who has never held a position outside the much-tinier NCR Corp. (NCR ), a $6 billion computer company located in sleepy Dayton.

Well, you already know not to expect overnight miracles. Sure, your cost-cutting and detailed business planning helped turn NCR's $220 million loss into a $285 million profit during the two years you manned the helm. But that followed years in which NCR was extricating itself from money-losing PC and computer-services businesses. Even with all the recent success, NCR's stock had only finally returned to the price it boasted when the company was purchased by AT&T (T ) way back in 1991. And the 15% swoon NCR has suffered since you took the HP job put it well below that mark again.

But fear not. If you take it slow and build on HP's still-impressive assets, there's plenty of room to make meaningful progress. Here's how:


The big debate over HP, of course, is whether poor execution is to blame for its woes or whether the company has the wrong strategy. While some analysts believe it's time to spin off the PC or printer divisions, the board continues to argue that, with the right executive, the various businesses are better off under one roof. That's the right call for now. As you said at your first HP press conference in answer to a question about spinning off the printer business: "I would prefer to analyze the situation and see if there are other ways that we can...get this company to its optimal operational performance."

Wall Street is likely to give you some time to get HP firing on all cylinders. But you'll still have to move quickly to prove the doubters wrong. One place to start: Take the board's suggestion to assign some strong executives to run parts of the business -- especially in the consumer world, where you have no experience. In a year or so you should have a good idea as to whether stronger execution is enough to truly lift HP's performance. If not, you may have to consider hiving off a unit. Or you might decide to focus less on your ailing server and storage businesses and more on helping customers make other companies' products work together. By focusing quickly and clearly on improving execution, you will be able to make a far better decision down the road on whether to stick to the strategy.


Let's face it, HP is fast forgetting how to innovate. The company hasn't cooked up an industry-shaking invention since its inkjet printers hit the market two decades ago. Try squaring that reality with the famous "Invent" logo.

HP has strayed from its technology roots as it struggles to keep pace with superefficient Dell Inc. (DELL ). Investment in research and development, which totaled more than 10% of HP sales in the early 1990s, has waned to 4% of sales today. Its R&D-to-sales ratio is lower than virtually every technology competitor, from IBM and EMC to Apple (AAPL ) and Lexmark. The sole exception: Dell and its belt-tightening R&D outlay of 1% of sales.

But HP will never out-Dell Dell. It's a loser's game -- as you found out at NCR, which stopped making PCs years ago. Sure, HP needs to be smarter about how it spends R&D money. But that doesn't mean you can underinvest. Instead, rerun that play you scored with at NCR's Teradata unit. Rather than building computers from scratch, you cranked up the unit's R&D spending to make its sophisticated data-mining software run like the wind on garden-variety hardware. That lowered operating costs and exposed a rich new source of lofty software margins. HP needs to do the same. Hunt down me-too projects and focus on those that will set HP apart in everything from digital entertainment to corporate software.

One more thing: In recent years, HP has used R&D more to maintain market position and less to aggressively pursue new growth areas -- including in the cash-cow printer business. You'd do well to reverse that emphasis, fast. For example, with more focus on its Indigo unit, HP could revolutionize aspects of commercial printing. The company has been talking for years about building a cheaper version of Indigo's high-speed digital printer, which could make inroads against old-school offset printers. The rewards could be huge. If Indigo ever goes mainstream, HP would be able to sell buckets of the pricey liquid toner used in the machine -- helping to compensate for falling margins in the inkjet printer-cartridge business.


Somehow, a company that was once a mecca for talented executives can't lure new people. Just one of HP's current dozen top execs, besides you, was hired from outside HP and Compaq in recent years. The board is similarly underpowered and includes not one chief executive. Meanwhile, talented execs have fled in droves.

Your first challenge will be to prevent more from doing the same, starting with gifted printer chief Vyomesh Joshi. He could leave after being passed up for the top job. But he's a veteran HPer who loves the company, so the right incentives -- and the freedom to continue running his own show -- could convince him to stay. Bringing in some new blood will also be crucial. And to show you're not some invader from the East, try to rehire respected HP veterans such as Webb McKinney, the former PC chief .

Finally, don't go it alone, as your predecessor, Carleton S. Fiorina, tried to do. When she arrived from Lucent Technologies Inc. (LU ), she brought only her executive coach. Invite some of your most trusted colleagues to join you -- especially tough types who can take some heat for the cost-cutting you'll have to do.


One of Fiorina's top priorities was to create a unified salesforce that would sell all of HP's products. The idea was to transform the company from a fragmented gizmo-maker into a soup-to-nuts supplier. The plan looked great on paper, and it worked like a charm for IBM. But while Big Blue was able to do that by providing plenty of software and consulting advice along with its various computers, HP is primarily a product company. Also, while a chief information officer may write the check for IBM to build a sweeping back-end system, there's no one single person buying everything HP has to offer -- from printer cartridges to supercomputers.

Yes, NCR's success has been based partly on your ability to find synergies between disparate businesses -- ATMs, retail-checkout gear, and computer systems. But ease off the synergy theme for now at HP. Scores of promising products and technologies have been stillborn in recent years because they got lost inside HP's huge salesforce. And the push away from sales specialists harpooned HP's efforts in such key businesses as storage, where niche expertise is crucial. You're better off with specialized sales staff who can get in the face of such focused rivals as Dell and EMC Corp (EMC ).


When Fiorina was first hired, HP's board wanted her to declare war on what it deemed an outdated corporate culture. While the so-called HP Way pushed authority down as far as possible into the organization, the board felt the company needed more top-down decisiveness to keep up with nimbler boom-era rivals. There was some truth in that -- but only some. The power of the HP Way was that techies knew management would give them the tools and freedom to turn innovations into big new businesses -- so long as they hit their numbers. HP needed an overseer to make this happen, not a corporate DNA transplant. Fiorina's reforms ended up creating new bureaucracy while fraying the all-important faith of the troops.

So the best advice we've got is rethink the rethinking of the HP Way. It's not perfect, but properly harnessed, it may be the most unique advantage you have. "We want to believe," says one Boise (Idaho) staffer. "We love this place." Of course, that doesn't mean going back in time. But just as you helped hone NCR's strategy by concentrating on the best opportunities, HPers need a boss with the smarts to spot the best ideas -- and who can obliterate obstacles that prevent the troops from turning those ideas into profitable growth.

Your task is monumental, but you've certainly got the skills to pull it off. Good luck -- and ignore those Valley naysayers.

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