Wednesday, June 2, 2010

HP Revamps Service Unit

The Wall Street Journal
Tech Giant to Cut 9,000 Jobs, Automate Computer Centers as It Looks to Reduce Costs

Hewlett-Packard Co. said it plans to shed about 9,000 workers from its technology-services division while investing $1 billion to modernize the unit, as it moves to jumpstart growth in an industry that's lagged the economic recovery.

H-P's restructuring comes two weeks after the Palo Alto, Calif., company said quarterly revenue in its services division—which runs computer systems for large companies and governments—rose 2% from a year earlier but declined by 3% when adjusted for currency differences.

In contrast, other H-P divisions such as personal computers saw sales increase more than 20% year over year.

Rival International Business Machines Corp. also reported relatively weak tech-services growth in its most recent quarter, with sales up 4% from a year earlier but declining 2% when adjusted for currency.

The slow growth in services is due to industry-wide shifts in how companies purchase tech services, said Peter Bendor-Samuel, chief executive of Everest Group, which consults with companies on tech-services decisions. Companies are looking to sign smaller, shorter outsourcing deals, rather than the multi-year contracts that previously were standard.

To profit on smaller deals, services providers have been trying to automate their offerings, replacing high-cost workers with software that performs certain functions automatically.

Tech services are crucial to H-P, which has bet big on the business. In 2008, H-P acquired outsourcing giant Electronic Data Systems for $13.6 billion, adding 142,000 workers. Since then, H-P has worked to trim EDS's costs, largely through a plan to lay off 25,000 workers. Tech services forms nearly a third of H-P's total revenue.

The 9,000 layoffs announced Tuesday are on top of the earlier 25,000 cuts, an H-P spokeswoman said, and represent about 3% of the company's overall work force, which stood at 304,000 in October.

The company is still in hiring mode and said it plans to bring on about 6,000 additional employees, largely in sales roles. H-P didn't say how many employees it has in the services unit or how many of the jobs being eliminated are in the U.S.

With Tuesday's announcement, H-P intends to boost profits and lower costs to customers by developing "fully automated" data centers, the giant computing rooms used to run corporate technology functions, said Ann Livermore, who heads H-P's services division.

H-P's strategy of growing profit through acquisitions and layoffs is a hallmark of Chief Executive Mark Hurd. Since Mr. Hurd took over H-P in 2005, the company has repeatedly increased profit partly by paring down its expenses.

In mid-2005, Mr. Hurd announced a plan to cut more than 14,000 workers, or about 10% of H-P's work force at the time. Last year, during the recession, H-P announced plans to cut another 6,000 jobs and also instituted company-wide pay cuts.

In a Tuesday conference call, Ms. Livermore said H-P has now "closed the chapter on the EDS integration." She said H-P is now focused on growing its services division.

The unit runs tech systems for large companies. In some cases, clients outsource all of their computing functions, including email, data storage and corporate networks—to H-P. In other cases, H-P takes over a limited set of functions, like processing health-care claims for state governments or reservation systems for airlines.

Bill Kreher, an analyst with Edward Jones, said H-P has "revenue momentum" that's outstripping competitors, even with the slow services growth. By investing in more highly automated services systems, he said, the company should be able to increase its services profits.

The services unit had earnings last quarter of $1.38 billion on revenue of $8.7 billion. The division's operating margin was 15.9% last quarter, up from 13.8% a year earlier.

H-P plans to take a $1 billion charge over several years for the latest cuts. It expects the restructuring will generate $500 million to $700 million in annual savings.