HP Services: $8 Billion EDS Write Down Isn’t Surprising

For HP (NYSE: HPQ), the tech titan determined to be all things to all customers, less may yet prove to be more. In Q3 2012, the company will write down by $8 billion (nearly its entire Q2 services sales) the value of its services business in a pre-tax, non-cash “impairment of goodwill” charge.

When you add that to the $1.5 billion – $1.7 billion charge HP expects to take for laying off 27,000 employees in May—the majority of which will come from its services business–sluggish service sales amid a less-than-rosy outlook, slowed PC sales, heavy competition for solution wins from IBM, Dell and others, is it really so surprising that HP seems slightly adrift?

Maybe not, but don’t ask Wall Street, which yesterday rewarded HP’s stock with a 2 percent uptick as the company boosted its adjusted per-share earnings outlook for Q3 to about $1 a share, albeit still a bit below analysts’ expectations in May.

Business and Consumers?

More to the point, from a wider view, is HP’s bid to become the kingpin of all IT from consumer to business failing? In other words, as an old-guard technology company, is HP holding on or moving forward? Here are some clues:

While it’s obvious to say that HP paid too much for EDS in 2008, that assessment now is four years old, more than a few lifetimes in tech parlance. Inasmuch as HP’s services unit is the company’s second largest revenue producer after PCs, the better questions are, has the company made the most out of what the services unit can deliver?

And, have decisions such as keeping PCs—but failing to have a notable presence in tablets, where the market is galloping–hold channel partners at arms’ length for enterprise service sales, not make hay with market-opening acquisitions such as Autonomy, are these calls the mark of a concise strategy and a well-defined competitor or one that is losing out on one flank to Lenovo and on another to IBM?

HP’s Focus

The straightforward answer is no, at least not to this point. Under current leadership, HP’s strategy is to win fewer, but larger, more profitable service contracts rather than how it’s performed of late, struggling to win smaller deals, renewing older contracts at a more frequent rate than winning new ones, and subsequently losing out to IBM in a number of cases.

Indeed, for the first six months of this fiscal year, service sales are flat at $17.5 billion. Q2 service sales slid 1 percent overall, with IT outsourcing and technology services, which together account for 70 percent of HP’s services revenue, both slipping by about 3 percent, saved only by application services which rose nearly 2 percent. On the PC side, Lenovo is eating HP’s lunch, making huge gains in Q2 to challenge the vendor for worldwide market leadership. And, Acer’s not far behind.

HP Executive Moves

Now, to shore up services HP has made a number of executive appointments, naming Mike Nefkens, currently senior vice president and general manager of HP Enterprise Services (ES) EMEA, to lead HP ES on an acting basis, replacing John Visentin. The company also tapped Jean-Jacques Charhon, senior vice president and chief financial officer of HP ES, as chief operating officer for HP ES.

These appointments are designed to drive profitable growth, service innovation and client satisfaction for the services business, HP said.

Still, consider this: A few months ago, HP chief executive Meg Whitman mentioned in passing a strategy to combine sales efforts from the enterprise and consumer sides of the business, and, perhaps, this is where HP is headed. If so, as mentioned in MSPmentor, that might mean more sales opportunities for the channel if HP continues to roll back staffing levels and seek greater efficiencies.

But it doesn’t solve the definitional problem of who HP is and what the company is peddling. When HP bought EDS in 2008, the vendor believed it finally had acquired enough feet-on-the-street to challenge IBM for lucrative service contracts, yet since then repeatedly has turned to the services business unit to cut headcount. So, which is it, services, solutions and software, or PCs and printers, or both?

That Old Question Is Back

By one accounting, HP will continue to struggle unless it breaks out its commodity business from its corporate sales efforts, in other words, loses one or more of its hats. As analyst Steven Milunovich noted, rather than ‘better together,’ as Whitman said when HP withdrew from selling off its PC business last year, the company might be better off split up, as former chief executive Leo Apotheker advocated.

“We question whether HP is ‘better together’ and that it might be “smart to be apart,’ specifically spinning off printers and PCs. HP lacks the pure enterprise focus of IBM and EMC yet will have trouble competing for consumers without strong tablet and phone businesses like Apple and Samsung,” wrote Milunovich.

It’s a good question, making it well worth watching to see if HP continues to act as an old-line technology company piecing together holes in its thinning armor, or if it begins to see the new marketplace a bit more clearly. There certainly are templates out there for both models.