Is It Time for Hewlett-Packard to Go Back to the Garage?

Once an icon of stability, HP is in chaos under CEO Léo Apotheker

Hewlett-Packard came to life in a garage in 1939, about 20 years before the arrival of silicon-based semiconductors and long before beginning a company in a garage was a cliché. While plenty of electronics startups already existed in what would become Silicon Valley, HP hit it big first. William Hewlett and David Packard’s garage stands as the Valley’s symbolic birthplace, and for decades their company was an icon of stability in an industry ruled by booms and busts.

Under Léo Apotheker, who arrived as the new CEO late last year, it’s been quite the opposite: While much of the tech sector thrives, HP has appeared chaotic and confused. Apotheker has lowered sales forecasts for three consecutive quarters. Dozens of top executives have departed. And in March he vowed to double down on webOS, the mobile operating system HP acquired when it bought Palm in early 2010, only to soon reverse his decision. On Aug. 18, Apotheker announced that HP will explore the sale of its $41 billion PC business and pull its Palm smartphones and tablets from stores. HP will essentially quit the consumer market to focus on business software. Its stock plummeted more than 20 percent on the news. Analysts are wondering aloud how much time the CEO has left, and the measured Toni Sacconaghi of Sanford C. Bernstein recently wrote that a leadership shakeup “would likely serve as a catalyst for the stock.” Apotheker declined to comment.

The pullback can be traced to a sharp decline in consumer PC sales, which HP blames on the iPad and an inability to crack Apple and Google’s stranglehold on mobile. “There have been big, big changes over the last year, and some of them have been more acute and faster than we expected,” says HP Chairman Ray Lane.

Apotheker says he’ll redirect the company’s energies toward making business software. Last year, HP posted software revenue of $3.6 billion, less than 3 percent of total revenue. Along with the broader restructuring, HP acquired Autonomy, a British maker of sophisticated search software, for $10.3 billion, which will add about $1 billion in software revenue next year. Apotheker, a 20-year veteran at Germany’s SAP, is “a software guy,” says William J. Raduchel, a longtime Silicon Valley executive. “The first thing human beings do is convert a problem they have into some problem they know how to solve. And you pray they are related.” Apotheker, in other words, will try to remake the company according to his strengths.

His predecessor, Mark Hurd, had plenty of faults—including a tenure-ending scandal—but from the start he pitched himself as a temporary steward of a storied company rather than the head of a demolition crew. Shortly after he arrived in 2005, he ordered that portraits of the previous CEO, Carly Fiorina, be pulled from office lobbies. The only faces greeting visitors and employees would be those of Bill and Dave. “I think Mark’s initial approach came across as very humble,” says Rahul Sood, a former executive in HP’s computer division. Hurd borrowed heavily from the founders’ playbook. He had a maniacal focus on making sure each part of HP turned in consistent profits—a dictum from Bill and Dave’s company guide, “The HP Way,” that many former executives had ignored. And like the founders, Hurd demanded a great deal of himself and employees, says Sood. He took the parts assembled by Fiorina and turned them into an efficient whole, using the massive PC business to secure better prices from suppliers for HP’s other hardware products.

Apotheker and Lane spent the week after their announcement trying to persuade investors that they need to dismantle that whole. Focusing on software will translate into a more profitable company over the long term, they argue. Lane, the former second-in-command at database giant Oracle, says the next era of corporate technology will see customers asking for help to customize software and manage huge amounts of data. “We have to position ourselves to do that well,” he says.

Exactly how to go about it remains an open question. HP is a minnow compared with formidable sharks such as IBM, Oracle, and Microsoft, which dominate the most lucrative segments of the software industry. HP has only just begun its current foray into data analytics, the latest hot spot in corporate software: In February it acquired the analytics startup Vertica for an undisclosed sum. IBM, by contrast, has already spent $14 billion buying 25 data analytics companies in recent years. Apotheker insists that cloud computing will be key to HP’s new agenda, yet HP trails its rivals in this area by years, having yet to even release the products at the heart of its vision.

With just $13 billion in cash, HP will struggle to make another Autonomy-size acquisition anytime soon. Prize players such as VMware and SAP look to be out of its price range. HP must learn how to buy smaller companies and use its size to make them thrive, says Lane. Even so, “catering to the enterprise is such an old way of thinking,” says Sood. To a large degree, consumers now drive corporate hardware and software tastes—witness the rush by major companies to offer iPhones and iPads to employees. At some point in the near future, the only HP items left on retail shelves will be printers and pricey ink.

Over the past 12 years, HP employees have endured three CEOs, a pair of ethics scandals, huge acquisitions, repeated board overhauls, and relentless rounds of mega-layoffs. Now the 300,000-person workforce is being asked to adopt yet another identity. Perhaps it’s time to hold a massive team-building exercise at the HP Garage—or a candlelight vigil.


    The bottom line: Apotheker wants to refashion HP as a business software maker, but the company is an also-ran in markets dominated by IBM and Oracle.

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