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HP's Ultimate Team Player


One July evening in Silicon Valley, Hewlett-Packard Co. (HPQ) executive Ann Livermore got the phone call she had waited months to receive. She rushed to the hospital, having learned that a kidney had been donated, and underwent an organ transplant, necessary due to complications from a childhood disease. For most executives, it would have been an opportune time to call it quits after a 24-year career. But three days after the surgery, she was phoning HP Chief Executive Mark V. Hurd and peppering lieutenants with questions. "I finally asked if someone would please go in there and take her laptop away," laughs Hurd.

Why didn't Livermore step down? Opportunity. While the $33 billion corporate-computing business she runs has long been one of the most glaring underachievers in tech, she's convinced the business is finally ready to show what it can do. Livermore and HP have spent 18 months overhauling the unit, and the benefits are only now becoming visible. "From the moment I left, I never thought of not coming back," says Livermore, who was out for 51/2 weeks. "We have a very special opportunity right now."

It's a dramatic reversal. A year ago her Technology Solutions Group, which sells servers, storage, and consulting services to corporations, was valued at next to nothing by Wall Street analysts. Mercilessly squeezed by IBM (IBM) and Dell Inc. (DELL), the unit struggled to show profits or promise. Indeed, while HP's printer business brought in nearly all of the company's earnings, Livermore's unit became a millstone around the neck of former CEO Carleton S. Fiorina, contributing to her ouster a year ago.

Yet Livermore's unit is now a key reason HP's stock is on a tear and the newly arrived Hurd is being hailed as a turnaround maestro. Thanks mostly to cost-cutting and operational improvements, the businesses turned in a 50% increase in operating earnings in fiscal 2005, to $1.9 billion, on revenues of $33.2 billion. Overall, HP earned $4.2 billion for the year, on revenues of $86.7 billion.

Now, rather than bemoaning how bad the corporate business is, analysts are trying to figure out how good it can be. What was once rated an F has become a C business. Can Livermore bring the grade up to a B or even an A? It's an open question, though there's little doubt the next phase will be harder than the last. "They're certainly doing better," says Richard E. Belluzzo, a longtime HP exec who now heads the storage company Quantum Corp. "They've done some good work, particularly on the cost side. But the strategic challenges are pretty much the same."

Harsh perhaps, but true. While HP wants its corporate unit to be a leaner, meaner alternative to IBM, it remains far behind Big Blue in several key areas, including high-end computing, software, and services such as consulting and outsourcing. In software, for example, HP's revenues are about $1 billion, compared with IBM's $16 billion. And other rivals expect HP to grow complacent, given its recent improvements. "I'm happy they're feeling happy about their success, because it means they'll get apathetic -- and we'll clean their clocks," says Daniel J. Warmenhoven, another former HP executive who now runs storage highflier Network Appliance Inc.

Yet HP is better positioned than in the past. For starters, Hurd has brought the company's costs in line by laying off about 15,000 employees, or 10% of its workforce. It also has a stronger product lineup, particularly in storage and software, where HP has made nine acquisitions in 18 months. Just as important, Hurd and Livermore are beginning to articulate a strategy for corporate customers that's truly distinct from IBM's, not just a similar approach with a different name.

The difference? While IBM leads with its consulting services and its ability to help the top brass devise corporate strategy, HP is focused on helping companies get a handle on the soaring costs of maintaining and powering their tech gear. The goal is to use software and other automation technologies to reduce the number of tech staffers by 90%, at the same time they slash the amount of energy tech equipment uses. Livermore's ideal is a "lights-out" data center, with almost no human involvement. While IBM goes after chief executives, HP is tailoring its message for chief information officers, the people who oversee corporate technology. "We're focused on addressing CIOs biggest pain point," says Livermore. "Customers are complaining that all their money goes into labor and operating costs. We can be the company to help them automate and manage this, to drive costs out."

In many ways, Livermore is a perfect metaphor for HP. The 46-year-old is competent, respected, but not really feared by rivals. A standout tennis player and valedictorian of her high school in Greensboro, N.C., she earned a coveted Morehouse Scholarship to the University of North Carolina at Chapel Hill. She went straight to business school at Stanford University. There, she won the annual competition for best business plan for running the doughnut concession. Her secret? She solicited companies that were coming to interview students to buy her sweets by the dozen.

When she joined HP, straight out of Stanford, she never expected to make a career of it. She had watched her father stay at the same insurance company for years and vowed not to get bogged down. But she fell in love with HP's unique culture. Especially appealing was HP's willingness to accommodate working mothers, through flexible working hours and other arrangements. Livermore could dote on her daughter, even as she roared through the ranks. By 1996 she was running the services arm. In 1999, she made a very public run at the CEO job -- even hiring an internal press relations person to raise her profile. She lost out to Fiorina and then became a staunch ally.

INAUSPICIOUS START

For all her success, Livermore still has something to prove. Wall Streeters are wary of her ability to deliver consistent financial results. Even some HP insiders ascribe her rise to a selfless willingness to follow orders. They're quick to point out that she's a solid general manager and universally well-liked but question whether she can rally the troops to challenge a fierce foe like IBM. "She's extremely competent," says one insider, "but I don't see her as a key leader for the long-term." Completing the turnaround in the corporate business could help Livermore win over the naysayers. She may even get another shot at the chief executive job, although Hurd, at 49, likely will hold the post for a good number of years.

Livermore had an inauspicious start in her current job. She took over the corporate computing business in early 2004. Just three months later, in August, it reported a disastrous quarter, causing HP to miss its earnings estimates by 33% and pushing the company's stock down 15%.

Out of that crisis, Livermore has helped forge a comeback. Within days, she instructed HP veteran Scott Stallard to set up a war room to begin addressing the unit's many operational problems. Over the months that followed, she worked closely with a seven-person team to identify and improve 15 key weaknesses -- everything from how HP worked with distributors to how it pulled together bids for customers. One accomplishment: HP established an Integrated Bid Desk that reduced the time it took to generate prices for complex corporate deals from two weeks to one day.

The improvements couldn't save Fiorina, though. She was pushed out in early February of last year.

As the company searched for a new chief, Livermore headed out to talk with customers. In March she visited four large Wall Street firms and was struck by the problems these big tech buyers were suffering from. "Every one of the CIOs was complaining that while their spending on tech equipment was declining, their spending on operations -- mostly labor -- was increasing an average of 10% per year. They were pleading for ways to automate more," says Livermore. "They all believed HP was a company that could help them."

From New York, Livermore traveled to Phoenix, where 80 of HP's top researchers had gathered for an annual technology confab. At the gathering, which is structured like a trade show with demonstration booths, Livermore saw a series of technologies that could help the CIOs she had just met on Wall Street. She pow-wowed with Shane Robison, HP's chief technologist, and his staff. Together, they hatched a plan centered on creating the "next-generation data center."

Hurd came on board later that month, on Mar. 29. In their first meetings, Livermore urged him to slash HP's cost structure, to boost profits and clean out bureaucracy. She also encouraged Hurd to improve HP's sales effort by investing in software tools to help salesmen analyze deals more quickly, and by promoting sales vets to run more of HP's businesses.

In all of these cases, she got her wish. In July, Hurd laid off thousands and gave Livermore and her fellow division chiefs more control over their respective sales and marketing efforts. Soon after, she accelerated plans to hire more storage and server salespeople and implemented a new compensation plan to boost sales of software, including the next-generation data center technologies. The once-insular HP is also hiring and promoting outsiders to fill key posts. Among others, Steve Smith, a hard-driving former Electronic Data Systems Corp. (EDS) salesman, now runs the $15 billion services business.

BLOWING HP'S HORN

The payoff came in November, when HP showed investors surprisingly strong results. The corporate computing business was the real shocker, with the storage and server unit posting operating earnings of $405 million, about four times the total a year earlier.

By December, the normally hype-free Hurd was ready to crow a bit. At a packed meeting of financial analysts in Manhattan, he said Livermore's division would lead the way toward a "lights-out" data center. "If you look at our raw technology, I don't think there's another company in the world that has a lead on HP," he said.

A growing number of analysts think Livermore's business is back on solid footing. Merrill Lynch & Co. analyst Richard Farmer predicts the unit will see operating profits rise another 50% this year, to $3 billion, while revenues increase to $35.1 billion.

But can HP become a leader on par with IBM, setting the trends in technology? That's a separate question. "They're in the process of turning it around, but I wouldn't hand them the keys to the kingdom just yet," says Goldman Sachs & Co. analyst Laura Conigliaro.

Livermore recognizes that both she and HP have their doubters. But she believes time is on their side. "The fact is, there's no one better in the world at helping customers design, build, and manage data centers," she says. "We have not proudly or loudly enough put that stake in the ground. But we will." The company's future -- and her own -- may depend on it.

Corrections and Clarifications

"HP's ultimate team player" (Information Technology, Jan. 30) should have said that Ann Livermore received a Morehead (not Morehouse) Scholarship from the University of North Carolina at Chapel Hill.

By Peter Burrows


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