The Cuts Aren't Over at HP

CEO Mark Hurd says the company's operational and information technology costs are still too high

Mark Hurd is not done cutting at Hewlett-Packard. Not by a long shot.
The HP chief executive officer has already seen the company through a huge restructuring that reduced headcount by more than 15,000 and overhauled its retirement plan. And at a meeting with analysts in New York on Dec. 12, Hurd made it clear that there is still more work to be done.

"We are a company transforming, not a company transformed," Hurd said more than once during his remarks. And it's clear there are many targets he has in mind. Real estate is one—HP has "too much" of it, according to Hurd. Operational and information technology costs are too high, he said. "We still have a lot of heavy lifting to do."

Take IT costs. Analyst Lou Miscioscia of Cowen & Co. in New York estimates that HP spends 4% of sales on IT infrastructure. "That's high compared to other companies who spend about 2% to 3%. If they cut it down to those levels, that could mean $900 million in savings," he says.
But as any first-year MBA student knows, cutting costs doesn't translate into increasing revenue. Hurd says that calls for flooding the zone with a batch of new sales personnel. Hurd wouldn't say exactly how many the company has hired or will recruit, saying only that so far "hundreds" have been brought in, and that their results are being tracked closely. "We track sales by person, not only to see how much they're selling but what else they have in their funnel," Hurd said.

So between cutting costs and boosting sales personnel, is that enough for HP ? Not to American Technology Research analyst Shaw Wu, who says he's keeping his neutral rating on the stock for now. "Everything they said is pretty much in line with expectations," Wu says. "We expected more cost-cutting and more attention to sales. But at some point HP needs to reinvest and build up some new revenue streams. Until then it's going to be mostly a cost-cutting story."

Clearly, there is progress being made. The operating margin range expected for 2008 is way ahead of the 6% range HP turned in for 2005. And that leaves the picture looking anything but dour at HP for the next eight quarters or so. "Hurd is a master of setting attractive expectations and then overdelivering on them," says Cowen's Miscioscia. "Even just hitting those expectations, the picture is pretty attractive."