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Is there a CEO out there who can really run HP?
Three CEOs in six years and the inability to steady a concrete well set up business – this is what HP, one of the founding companies of Silicon Valley has to show. How can they put the house in order?
Issue Date - 27/10/2011
What do you do if you happen to be on the Board of a multi-billion dollar Fortune 500 outfit? Whatever it is, it shouldn’t be even remotely close to what the Hewlett-Packard (HP) board has been doing. In the past one decade, HP has perhaps done just two things right – acquiring Compaq and hiring Mark Hurd. The bad part is – it has done a lot more to undo and then outdo whatever has been undone. After kicking out Léo Apotheker from the position of President & CEO (who was just 11 months into the job), the board of HP led by Chairman Ray Lane has appointed Meg Whitman, Former CEO of eBay. No doubt she did a great job with taking the online portal public, but what the board didn’t perhaps consider is that she faltered once the company started growing. Moreover, she was heading a company that was 14 times smaller than HP in terms of revenues. In fact, if we were to go by Whitman’s political performance (she ran for the California Governor’s post and lost despite personally spending $141.5 million on the campaign out of her own pocket), then you can probably expect more boardroom drama and strategic mishaps in the months to come.

A brief study of the the company’s past decade suggests that HP’s failure has been twofold – its choice of CEOs and their respective strategies. But before we move on to how the company can be fixed, let’s see how the these two-fold blunders stack up.

Ever since the departure of Lewis E. Platt as President and CEO in 1999, HP’s talent hunt abilities have not been very encouraging. For instance, its obsession with hiring superstar CEOs from outside has not worked very well for the company. And since Whitman may also face quite a harsh reception, (as expected by industry experts), the HP board may well consider flicking through a gathering pile of academic studies for some help. In August this year, Richard Cazier of Texas Christian University and John McInnis of the University of Texas at Austin presented an unpublished paper at the annual conference of the American Accounting Association. The Professors studied 192 CEOs who had been hired from outside between 1993 and 2005. The paper shows that such CEOs are mostly hired at a premium from companies that have done well in the past. So far so good. Now here comes the catch. The pay premium of these CEOs is negatively correlated with the future performance of the firm that has hired. In other words, the bigger the CEO, the worst he performs in the new job. According to a study commissioned by Hay Group in 2007, around 80% of Fortune’s Most Admired Companies chose internal candidates as CEOs! In fact, Booz Allen’s benchmark 2008 CEO research documents that 80-83% of CEO recruits are insiders! The research further goes on to prove that operationally and statistically, ‘insider CEOs’ outperform ‘outsider CEOs’! Next time, it would be advisable if the HP board could look for a worthy suitor for the top job from a reservoir of 350,000 employees.

But what is more disturbing is how HP has been tampering with a well structured strategy for almost 10 years now. The acquisition of Compaq made it the largest IT company in the world. Hurd took it forward pretty well. Under his tenure, HP crossed the $100 billion m-cap mark for the first time. However, Apotheker’s focus on software unleashed a chain of cataclysmic events, which has today made the company a laughing stock. With the announcement of Whitman as President & CEO, HP’s stock price declined to an all time low of $22.2 from a point where it had even traded at around $60 in April 2010. Speaking to B&E from Chicago, Michael Holt, Chartered Financial Analyst, Morningstar, sounds his concern “Meg Whitman is a surprising choice for the permanent CEO position: She lacks experience leading a firm of HP’s size, managing enterprise-focused strategies, or nurturing critical channel relationships that weakened during Leo Apotheker’s tenure.” The board continues to stand by its decision of converting HP into a software giant and Whitman is yet to decide as to what will become of the PC business. No doubt that the Personal Systems group generated profits of just $2 billion on revenues of $40.74 billion, but then it was this business in the very first place that made HP the largest IT company. If HP does really want to go the IBM way, then the most strategically sound decision at this point of time would be to retain its PC business and use the money to fill in the missing pieces of the software & enterprise businesses. IBM could make one of the most successful transitions in corporate history primarily because its enterprise, software and services businesses derived immense synergies from each other. HP doesn’t have a line up of developer platforms or general purpose enterprise softwares. It’s heavily dependent of others for enterprise software. Without all this in place, HP cannot even become a respectable enterprise software outfit let alone resemble IBM. It’s time they got on to fine tuning their product strategy as well as their head hunting acumen.
Amir Moin           

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