Can HP win doing it the Hurd way?
How a sales-trained CEO is trying to reboot Hewlett Packard
(FORTUNE Magazine) - For all the changes at Hewlett-Packard (Research) in the past year, you'd never know this was a company in the middle of a profound transformation if you had to judge by the decor in the CEO's office.
The corner redoubt on the upper floor of HP's corporate campus in Palo Alto looks exactly as it did during the reign of its previous occupant, Carly Fiorina, who was fired in February 2005.
The modern art on the wall is the same. Mark Hurd, the new guy, has kept the big desk exactly where it was. He hasn't even bothered to move the little conference table in the opposite corner, where he, as Fiorina did before him, greets visitors. Other than adding a massive, HP-branded flat-screen TV installed on a credenza, the new CEO has kept everything pretty much exactly as Fiorina left it.
Then Hurd opens his mouth. I ask about one of his first official acts as CEO, the decentralization of HP's 17,000-strong sales force from a companywide organization into the business units whose products they're peddling.
Hurd, a fast talker who refuses to sit throughout our interview, launches into a disquisition about the process of effective salesmanship--or as he calls it, "selling as defined in the organic portfolio exploitation sales-process kind of selling."
Bingo! Now it's clear that things aren't quite the same at HP anymore.
What excited Fiorina was inspirational visions of an increasingly interconnected world. Hurd gets jazzed by diving into sales numbers--he jokes about "interrogating the data until it confesses." Fiorina loved the limelight; Hurd didn't want to be on the cover of this magazine. Fiorina owned Davos, the annual teach-in for plutocrats in the Swiss Alps; Hurd skipped this year's session, citing "customer commitments." Fiorina was always on message; Hurd is sales optimization in a suit.
About a year before the board ousted her, Fiorina had begun spinning a vision of HP's future designed to move the company beyond the controversial merger with Compaq. The plan had four prongs, all in one buzzword-packed phrase: "digital, virtual, mobile, personal."
In speeches and in everyday conversation she'd repeat the theme, but the words felt more like slogan than strategy. Hurd boils down HP's opportunities to three market trends that neatly match the company's three main units: selling big businesses every little thing they want for their IT departments, offering printing services as well as printers, and selling portable products like notebook and handheld computers, the growth engines of HP's PC business.
No matter how you dress up his views, he's simply trying to leverage the things HP is already good at. It's as if a new CEO of Procter & Gamble (Research) were to demand, "What else can we do here with toothpaste and diapers?"
Indeed, from the avuncular way he lets his rimless glasses perch at the end of his nose to his straight-talk emphasis on fundamentals, Hurd evokes another tech industry turnaround maestro, Lou Gerstner, the former IBM (Research) boss who famously said, "The last thing IBM needs right now is a vision."
Like Gerstner, Hurd is reviving a sales culture that had waned over the years. During the Fiorina era, HP had engineering prowess and marketing razzle-dazzle, yes. But legions of crafty sales mercenaries? Not so much.
And so Hurd is in the process of taking a crowbar to the company Fiorina left him. He broke up the centralized selling group, which Fiorina had created, because he judged that it caused more problems than it solved. He reversed a Fiorina decision to combine printers and PCs, figuring that the problematic PC unit needs its own care and feeding.
Hurd is chopping elsewhere as well. Despite 26,600 layoffs in the aftermath of the Compaq merger, Hurd confronted a company that was still bloated. So he's axing 15,300 additional jobs, about 10% of the total; trimming R&D; cutting back on HP's "e-inclusion" program, which promotes computing in the developing world; and freezing pension benefits, a move that puts HP in line with most of the high-tech industry but markedly out of step with its generous, paternalistic past. (Through a spokeswoman, Fiorina declined to comment on her successor other than to wish him well.)
Hurd has also brought in new blood at HP's highest levels, hiring executives from Siemens (Research), PalmOne (Research), and Dell (Research), whose former chief information officer is rewiring HP's internal technology setup.
Just as important have been the top executives he's kept, specifically the operating chiefs of two of HP's three major divisions--Ann Livermore and Vyomesh Joshi, who run the enterprise computing and printing groups, respectively. (An import, ex--PalmOne CEO Todd Bradley, heads the PC unit.)
Each of these businesses independently would win a place on the FORTUNE 500. (HP as a whole clocks in at No. 11.) Hurd believes that once he finishes fixing HP, his lieutenants will have tremendous horsepower at their disposal.
One year into the Hurd era, the organic portfolio exploitation process seems well underway. In HP's most recent quarter, operating profits were up 29% from the year before. If the company hits Wall Street's targets this year--it has exceeded expectations every time it has reported under Hurd--it will post profits of $5.6 billion on sales of $91 billion.
Six percent margins are nothing to brag about, unless you consider where HP has been.
The company's long-suffering share price, at $33, is up about 65% since Hurd was named CEO at the end of March last year, about seven weeks after the HP board sacked Fiorina. That's still way off its high of $67 in 2000, but at least the market now seems convinced that HP has shed its former tendency to overpromise and underdeliver.
The company would satisfy Wall Street's expectations one quarter only to disappoint the next. It badly missed delivering the profit margins it promised investors in the 2002 acquisition of Compaq. Hurd playfully refuses to let Wall Street raise expectations for HP, by suggesting, as he did on a recent conference call, that investors may be overlooking expenses that might pop up.
Dampening Wall Street's enthusiasm, you see, enables Hurd to continue to beat expectations. Almost as a mantra, he has the whole company repeating after him, "We've still got a lot of hard work to do."
At some companies the salesman is a peripheral player, the glib glad-hander who collects orders on the fruits of somebody else's genius. Hurd figured out how wrong that attitude was when he made his very first sale, back in 1980.
On his third day on the job as a trainee at NCR (Research), Hurd, a 23-year-old fresh out of Baylor University, sold $250 worth of printer accessories to a tractor maker in San Antonio. Young Hurd immediately hit a glitch: He didn't fill out the form correctly to process the order. "Wrong hierarchy," he was informed by the NCR guy in billing.
When Hurd told his manager what had happened, the older executive picked up the phone and called billing. "Hey, did my man just come down there with an order?" asked the manager as Hurd listened. "The next time he does, I want you to get your ass out from behind your desk, and I want you to shake his hand. And I want you to thank him for keeping your ass employed. If there's anything wrong with the order, I want you to fix it so that he can get about the job of continuing to keep you employed."
Apocryphal or not--Hurd swears it's true--the tale was lesson No. 1 of his sales education at NCR. No longer the powerhouse it was 100 years ago (it's No. 357 on the FORTUNE 500), the company born as National Cash Register has a particularly strong sales culture, engendered by its founder, John Henry Patterson.
Patterson popularized some of the central concepts of modern sales management--sales training, dedicated territories, and quota-based commissions. (Patterson's head of sales, by the way, was Thomas Watson Sr., who left NCR when Patterson fired him and built International Business Machines.)
As Hurd explains it, the old man's shrewdest innovation was arguably the notion of "demand creation." Say you're selling to a saloonkeeper. "You don't need a cash register," says Hurd, well versed to this day in Pattersonian theory. "What you really need is a receipt. The way you get a receipt is, you buy a cash register. It was, if you will, the first 'solution selling' ever."
When Hurd walked in the door, HP's demand-creation engine was sputtering. Fiorina's 11-month-old companywide sales group looked good on paper: One account representative would be the sole point of contact, or the "one throat to choke," as salespeople like to say, for each customer. But in practice, it was a nightmare.
Sales teams were selling far too many products--everything from high-end servers to commodity PCs--and had to report internally to a confusing web of corporate overlords. "We were very matrixed," says Carol Potts, a sales vice president in Chicago, using a word that has become a pejorative in the Hurd administration.
General managers of the three major parts of the business (back then it was Ann Livermore overseeing the $33 billion enterprise chunk and Vyomesh Joshi atop both the $25 billion printer division and the $27 billion PC group) weren't really in charge of any sales force, so they couldn't be held accountable for revenues.
Hurd, in one of his first aha! moments at HP, divvied the sales force among the three business units. Livermore says that simply deciding where to focus sales spending used to involve weeks of meetings, but that "now I can do that sitting around the table with my staff in a very short discussion."
With a new sales geek CEO who's happier than a retriever chasing a ball whenever the subject comes up, the people doing the selling are feeling invigorated.
"If I pick up the phone and tell Mark's office I have an urgent customer request," says Dave Booth, a senior vice president for sales, "if he isn't already with a customer, he'll stop what he's doing and call me to find out what he can do. The fact that I pick up the phone and call his office directly and not go through channels is new. Mark is our chief sales officer."
Customers, too, say that they've noticed a change in tone at HP. Christian Anschuetz, chief information officer in the Americas for advertising-agency holding company Publicis (Research), says HP is listening more and patiently pursuing long-term business. HP's attitude, he says, is "Let's only engage where it makes sense. Let's not waste each other's time."
HP is also coming across as humbler. "We've gone to HP and asked them to cut back on maintenance for servers to save us money," says a CIO at a FORTUNE 500 company who's not authorized to be quoted in the press. "The old HP would've said, 'You must be on crack.' " The new HP, the CIO says, is figuring out what it needs to do to accommodate its customer.
Hurd has been barnstorming around the world, meeting with customer groups to make sales--and show some love, which isn't always requited.
Consider the polite grilling he endures on a recent visit to St. Louis, where John Parker, chief information officer of investment brokerage A.G. Edwards (Research), has asked Hurd to address the firm's 500 or so information technology people. (They had invited Fiorina, but she never came. "I think we were too small," Parker confides later. "Not a big enough stage.")
A.G. Edwards buys printers and servers from HP but uses Dell for PCs and EMC (Research) for storage computers, so this is a selling opportunity for Hurd. Seated next to him in a fireside-chat format, Parker wonders if the "drama" of the past few years has ceased.
Will Hurd abandon the low-margin PC business? Parker even asks whether Hurd's mass layoffs and benefits cuts represent an end to the cherished HP Way, the famous cultural mission statement published as a book by the company's founders that stressed putting people on par with profits.
After good-naturedly faux-thanking Parker for his welcome, Hurd rocks forward into a sitting crouch, twirling his glasses as he speaks, trying not to sound defensive. "Certainly we want to get out of the drama business and into the business of business," he says. There are numerous reasons for sticking with PCs, he explains, starting with the purchasing leverage it gives HP in buying components for other computer products it makes.
As for the HP Way, he says he has read it and is suggesting an update. "When things weren't right in the past, they were fixed," he says. "If things aren't right now, we've got to fix them. If that's countercultural to the past few years, so be it. We're just trying to run the fundamentals of a sound business."
Fixing the way HP sells is only the first step of Hurd's planned makeover. In looking at the company's own convoluted information technology setup, he realized that he could accomplish two tasks at once. By rationalizing IT, a confused organization that runs overlapping equipment from HP's many acquisitions, Hurd could not only cut costs but also set an example for customers.
To get there, Hurd poached from one of his own former customers, Dell. When he was CEO of NCR's Teradata unit, which makes data "warehouses," two of Hurd's best customers were Wal-Mart (Research) and Dell, each known for the masterly use of technology to run their business. Wal-Mart's former chief information officer, Randy Mott, had joined Dell in 2000. Hurd hired him away--Mott joined HP last July-- and got a twofer: He scored a world-class sales operations expert and screwed an HP archrival.
Mott quickly decided that HP's technology was too spread out. First he moved to consolidate the actual centers where the company runs its computer nerve system from 85 to three. He is also eliminating IT projects that individual business managers had ordered, cutting active projects from 1,200 to 500.
I ask Mott if his revamp won't be counterproductive for the sales force as word gets out that HP is trying to do more with less. After all, the salespeople's job is to get customers to buy more technology, not cut back projects. He responds that HP will actually be buying smarter even as it cuts overall spending.
"We think there would be a huge uptick in growth if more customers were doing what we're doing over the next three years," he says. And, of course, it's up to all those freshly energized salespeople to convince customers that buying smarter means buying more HP products.
Designing the optimal sales organization and streamlining tech projects can take HP only so far. Eventually Hurd will have to deliver a long-term strategy for growth, a topic he has pointedly avoided.
It's been more than a year now since this magazine made a compelling case for "Why Carly's Big Bet Is Failing" (see fortune.com). Whatever the merits of diluting ownership of a profitable printer business in exchange for control of an ailing computer company--FORTUNE's central thesis was that it had no merit--Hurd has continued to pursue Carly's big bet.
As for whether he would have done the Compaq deal if he had been in Fiorina's shoes, Hurd isn't saying. "I have no opinion on it, because it's over. Who cares at this point? My job is to make HP the best company we can possibly make it in the future. I'm not a supporter of spending lots of time looking in the rearview mirror. I mean, we don't want to be on the History Channel. We want to be on the news channel."
It's unknowable whether HP would have rebounded with Fiorina still in charge. When she left, the company's morale was low and its credibility in tatters. Today the reverse is true. On the question of whether the merger with Compaq is working, the answer is yes, sure, absolutely--if you bought the stock post-Carly. If you're a longtime shareholder, you may beg to differ.
Meanwhile, Hurd expresses an opinion of sorts on the Compaq deal every time he makes the case for keeping PCs. It's possible that he's applying his business acumen to dress up the unit for sale, and there's no reason he'd say so before he had to. He has experience, having helped oversee NCR's divestiture of its unprofitable PC business in the mid-1990s. (The joke then at NCR was that the company could pay Compaq $60 to fill every PC order, and NCR would lose less money.)
But although when he first got to HP he tended to address the divestiture issue platitudinously--"I am not working on any plan to spin off a piece of HP or to split up HP," he told FORTUNE last summer--he has since become more emphatic.
At the A.G. Edwards gathering, Hurd argued that IBM will have higher costs in its other computer lines "as a result of not having PCs." Then, as if realizing that such nuanced answers only feed the rumor mill, Hurd said, "If the question is 'Are we getting out of the PC business?' the answer would be no."
When Hurd does stop fielding questions about what he's cutting and overhauling, where might he point for some old-fashioned revenue growth? The best opportunity lies in printing, where HP is moving into retail photo-finishing kiosks as well as the commercial printing business.
Notebook computers have been growing as they did in the old days, and HP is the world's third-largest maker of handheld computers (behind Research in Motion (Research) and Palm (Research)) --and the biggest that's tied to Microsoft's (Research) software. In the big-business computing arena, Hurd sees an opportunity to beef up consulting and take advantage of HP's position as the only tech provider with nearly the breadth of IBM.
The legendary HP research and development labs, even if they're not Hurd's focal point now, continue to represent the company's future. The project that has received the most attention is the so-called crossbar latch, a molecular transistor that uses nanotechnology to perform computing functions without silicon, the material today's transistors can't do without.
A science project that's far closer to commercialization is the Halo Virtual Collaboration System, a high-definition videoconferencing system that HP developed with the DreamWorks movie studio.
There are limitations to what the scientists can accomplish. Just as HP's customers will have to learn to do more with less, so too will the researchers.
At the company's annual meeting in March, Hurd said, "There's no question R&D remains the lifeblood of our company." But research expenditures have been dropping by $100 million a year and are forecast to remain roughly constant in dollar terms this year. HP spent $3.5 billion last year on research. That works out to around 4% of revenues, putting HP--as is often the case --right between IBM (6% of revenues) and Dell (just under 1%).
That even HP's famous R&D operation is subject to economizing speaks to where the new CEO is leading the company. Yes, it will spend on research--and far more than Dell does. But sophisticated selling is now HP's central mission.
When I ask Hurd to articulate his vision for HP, he says, "To be the most relevant IT company in the world." Most relevant? He's all but saying, a la Gerstner, that for the time being at least, execution trumps vision.
Apply the science of sales management and prudent cost cutting now, and there'll be plenty of time for strategy and vision in the future. At that point Hurd may even get around to hanging some new art in the corner office.
RESEARCH ASSOCIATES Doris Burke, Susan Kaufman2006 FORTUNE 500
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