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The challenges facing HP as it splits in two

HP is splitting its business in two - but it is a reaction to the changing way that businesses and consumers buy IT

Cliff Saran
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Published: 08 Oct 2014 16:00

HP is splitting its business in two. The move is not an obvious part of the company's controversial turnaround plan, but is more a pragmatic reaction to the changing way that businesses and consumers buy IT.

When Meg Whitman (pictured) took over as CEO at HP in 2011 she could not have anticipated that she would ultimately take the company in an almost identical path to that proposed by her predecessor, Léo Apotheker.

Apotheker was fired following his decision to dump HP’s PC business, and then spent £7bn on acquiring Autonomy to focus on software. That was three years ago. Now Whitman is splitting HP in two, a move that probably was not part of her original grand plan to reinvent the ailing IT giant.

This week, HP announced it would separate into two new publicly traded businesses. Hewlett-Packard Enterprise will offer a portfolio of technology infrastructure, software and services for corporate IT needs, while HP Inc. will target the personal systems and printing markets.

This is a high-risk strategy. In the last quarter the company reported 12% increase in sales within the personal systems division. In its services business, outsourcing revenue was $3.5bn, down 8% year-on-year, while applications and business services revenue was $2.1bn, down 4%.

"The age of the customer is changing a lot of things in the tech industry, especially for companies like HP that feature an enormous portfolio traditionally focused on hardware and maintenance services," said Peter Burris, research director at analyst Forrester Research. "What companies need to do is differentiate on software that improves business technology."

But HP’s software and services businesses have been struggling compared to the PC business, where HP is still the top global manufacturer.

Read more on HP's turnaround plan

Last year, Gartner’s vendor rating for HP noted: "HP's revenues are still heavily dependent on hardware sales, and revenues in new areas haven't grown enough to return HP to overall growth. In addition, vendors such as Cisco, VMware, Apple and Microsoft are impacting HP's core businesses in servers, PCs and notebooks, and HP has suffered from a lack of timely and effective innovation in key segments such as cloud, tablets and mobility."

Gartner’s most recent PC market share data showed HP is the top PC supplier in Europe with 20.5% market share and had a strong quarter, shipping 4.61 million units.

Among the challenges Gartner identified for HP were that its growth and profit goals were threatened when supporting clients' portfolio rationalisation and modernisation initiatives. In other words, server consolidation, virtualisation and cloud computing were driving down IT infrastructure costs, eroding the company’s application outsourcing revenues.

On the Seeking Alpha financial website, analyst Kurt Avard wrote that HP’s PC business was doing moderately well. But he noted: "Hewlett Packard Enterprise on the other hand will be in dire straits. Already struggling to cope with under-performing divisions, there is a better than 50% chance that the company will crumble within five years. Even if it somehow manages to limp through the first years of its existence, long-term viability will be minimal at best."

HP has been a strong supporter of OpenStack, the open-source cloud-computing platform. Its Helion OpenStack has been positioned as a common architecture across private, public, and hybrid clouds.

Last month HP spent $100m acquiring hybrid cloud provider Eucalyptus along with its CEO, Marten Mickos, who founded MySQL (now owned by Oracle). At the time Whitman said: “The addition of Marten to HP’s world-class cloud leadership team will strengthen and accelerate the strategy we’ve had in place for more than three years, which is to help businesses build, consume and manage open-source hybrid clouds.”

Given that Eucalyptus’ unique selling point is integration with Amazon Web Services (AWS), Forrester analyst Lauren Nelson questioned the value of the deal, since HP is committed to OpenStack. 

In the Quick Take: HP Acquires Eucalyptus Systems report she wrote: "As more viable OpenStack-based public clouds (from HP and IBM, for example) become viable competitors to AWS, Google, and Azure, the bet is that support for the OpenStack APIs will be more valuable in enterprise private clouds than the AWS APIs. HP will now have to clarify its position here, having just acquired a rich AWS-compatible cloud platform."

Major changes

The stalwarts of the IT industry have all made major changes in the last year. Michael Dell reprivatised the company he founded in a bid to mastermind a strategic change without scrutiny from shareholders looking for a quick return.

Meanwhile IBM has sold its x86 PC server business to Lenovo and acquired SoftLayer, giving it a more competitive cloud computing offering. This has allowed it to scale out developments like Watson, its natural language expert system, to a wider market than the original supercomputer system that has been supporting medical research.

Now it is HP's turn. The company has to discover what it is good at because no one will be paying a premium for commodity x86 PCs and servers, especially now that Lenovo has taken a stake in the enterprise marketplace.

Speaking on HP's Proliant server business, Gartner analyst Errol Rasit said: "In real terms, Proliant is the biggest revenue and profit contributor. HP is still the number one server vendor because of its depth and breadth of installed base of the Proliant x86 line."

Hewlett Packard Enterprise will be in dire straits. Already struggling to cope with under-performing divisions, there is a better than 50% chance that the company will crumble within five years

Kurt Avard, financial analyst

However, he said HP's hyperscale group, which focuses on custom engineering for hyperscale customers, is the part of HP servers that hold the keys to the future. The Hyperscale group was responsible for bringing the new Moonshot servers to market. 

"The hyperscale style of computing, known as webscale IT, represents a threat to HP by further commoditising enterprise server purchase behaviour. HP's challenge therefore is to leverage its knowledge from the hyperscale community in a way that is valuable to mainstream customers and profitable for HP," said Rasit.

At the high end, Rasit expected HP's Odyssey programme would help to bolster, and potentially differentiate HP's x86 servers. The first Odyssey product is the converged System 900. This is essentially an x86-based HP Superdome server built to run scale-up SAP Hana workloads.

 These are the areas RaRasit believes HP will need to focus on to differentiate its business, particularly given that Lenovo has now entered the market.

In 2000, then-CEO Carly Fiorina spoke about HP’s renaissance around e-services, information appliances and always-on internet infrastructure. This was at a time before HP embarked on what now looks like a disastrous $13.9bn acquisition of EDS in 2008, and the controversial 2011 $11.7bn acquisition of Autonomy. Terminology may have changed, but HP clearly needs to turn back the clock on the last 14 years and start inventing things again.

For CIOs, the changes to HP raises plenty of questions. For a start, HP Inc and HP Enterprise will change the way customers manage the supplier. This is particularly significant especially when the partnership is strategic.

In fact, it will be difficult for CIOs to plan ahead on a strategy built around HP's technology. Until the split occurs HP will be at risk of rivals exploiting the uncertainty in its business. Meanwhile, the two new companies must not forget their existing customers, said Leonard Klejnow, deputy chair of HP user group, HPUG.

"Such changes are always sprinkled with tripping points but splitting very large enterprises can have great benefits in that it can allow total specialisation and focus," he said. "What will make the difference is the attitude of both new companies to put the customer first whilst sorting out the detail."

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