When HP shocked Wall Street with news that its server and storage business was tanking as rivals were on the rise, one executive clearly in the hot seat was Ann Livermore, executive vice president for the company's technology solutions group. TSG includes HP's high-margin enterprise storage and systems, software and services business. The shortfall, capped by a 15 percent overall decline in its server and storage business led to the dismissal of three high-ranking executives: Peter Blackmore, Jim Milton and Bernard Meric. At this week's HP World show in Chicago, Livermore had some explaining to do. In an interview with senior executive editor T.C. Doyle and senior editor Jeffrey Schwartz, Livermore discussed HP's missteps and remedies moving forward.
VB: You let go three people who served the company with distinction. Why was it necessary to fire the executives in such a public manner?
Livermore: The message that [chairman and CEO] Carly [Fiorina] has for both inside and outside HP, is that our top leaders are accountable for our business results, and it's fundamental to HP and all well-run companies that you hold people accountable for results at every level of the organization.
VB: What's your perspective on what went wrong?
Livermore: There were really three things that were the core issues for us: that we were implementing a new order-processing and manufacturing system in the United States, we had some business process changes that we didn't manage as well as we should have, so that delayed some customer shipments and some activities in the Americas. In EMEA, we had some channel-management issues where we had some concerns both with our channel-compensation programs and the management of our rebate programs in Europe. We had aggressive discounting in EMEA, and then we broadly had performance lower than we had anticipated in terms of our storage growth. We feel good about our product portfolio. Back in April, we introduced a new suite of storage products. We have a strong product offering; we just have some sales-execution issues in terms of hitting the number of storage specialists and resources available that we needed to be able to sell some of our storage products.
VB: Touch on the software rollout. Is that something that will be fixed?
Livermore: All of the issues associated with that will be taken care of this quarter, and we don't expect it to have any significant impact on HP's performance this quarter.
VB: Is that tied to the problems you are having with eHIP?
Livermore: It was tied to the availability and shipment to some of our server products during the quarter.
VB: We've talked to some partners who said it has taken up to a week or two and have waited as long as 60 to 90 days to get product shipped.
Livermore: That was at the core of the issue during the third quarter, and that is something where during this quarter we are back to our normal value of shipment levels both in terms of the processing orders as well as the shipments.
VB: Do you want to change some of the underlying policies that supported that rollout? In other words, do you want to revisit how you're going to market through the distribution partners--do you put more back into their basket, which seemed to work effectively for many many years--or do you continue with the current thinking?
Livermore: We are going to continue with our current strategy and programs, and our channel partners were an important business ally. During the last quarter, many of our channel partners helped us ship additional volumes of products and worked with us to be able to take on and meet some of the customer commitments that HP has. We feel very positive about the performance of our channel partners in the Americas during the last quarter.
VB: You don't think there was a level of tumult, upheaval and dissatisfaction that has raised it to a new level as a result of some of the issues?
Livermore: I don't think so. We are in very close discussion and communication with our partners. In this business, partners are always concerned when you have constraints on supply, and so I think they did have some concerns over the course of the quarter, but we worked with them. They understood what the situation was.
VB: Where do you think the portfolio is strongest? Services, software or storage?
Livermore: Let's start with the services perspective. As you know, in the last quarter our services business grew 12 percent, which is a very healthy growth rate. The managed services business was up 42 percent, the customer-support business was up 7 percent, and our consulting and integration business is up 6 percent. That's very healthy revenue growth, which we think is a good reflection of the strength of our business. We were very pleased with the progress we've made with our channel partners around the services business in terms of working our channel partners, based on their business model and their business strategy, having them decide where they want to sell, manage and deliver services, and we feel like we've got a great program there in terms of being able to extend our reach, extend our capabilities and team with our partners no matter what their business strategy is. As we look at the services business, we clearly have had some great results around the growth in our managed services.
VB: What's the upside of this part of the business?
Livermore: It's the single, fastest-growing part of our company. From a services perspective, there's tremendous market demand and tremendous market interest. We think that the outsourcing business is still in its very early formative stages.
VB: How is that impacting your partners?
Livermore: From our partners' perspective, I think most of them see it as a positive opportunity. When we are winning the large managed services deals where we're the prime contractors, in many cases we use our services partners to deliver part of the value to our customers. So that's an opportunity for them.
VB: How many services partners have you brought in for the Procter and Gamble engagement or the recent BT contract?
Livermore: I don't know the exact amount, but we have partners that range in size helping us with various aspects of it. We use our partners extensively in the delivery of our help-desk services and desk-side support services, and as part of the P&G deal, we are managing their entire desktop environment. Similarly with the Ericsson deal, we are managing their entire desktop environment and our partners do a lot of the delivery of that work on a global basis for us.
VB: What percentage of your [direct]-services business is being delivered through partners?
Livermore: I don't know the exact percentage. In general, HP has between 25 to 30 percent of its delivery through partners. So we supplement our own resources by an additional 25 to 30 percent with partners.
VB: Let's jump to software. How would you rank the portfolio's competitive position compared to a year ago?
Livermore: HP's software portfolio as compared to a year ago is tremendously stronger based on the set of acquisitions that were done over the last year. If you look at this last quarter, the software business was up 17 percent and OpenView was up 26 percent. HP OpenCall was up 8 percent. Compared to our competitive landscape, that's really great growth for the software business. One of the things we've done with our software is make management really be the cornerstone of our Adaptive Enterprise strategy, and when you look at the things that customers are using to be able to bring better cost control to their environment, better security management to their environment, better service levels and also the ability to be more agile. It all has to do with the management background and framework.
VB: That said, what holes would you like to fill in terms of making acquisitions or new partnerships?
Livermore: At this point, we feel our portfolio is robust between the HP OpenView offering and the functionality that we have ourselves there, and a very broad set of partners that we already have in the environment, we have a complete portfolio. As new companies pop up, we're always evaluating start-ups and very focused functionality to include in our partner program.
VB: Let's take a look at the OS market, Linux in particular. You were first to go from the desktop side of Linux, yet IBM is considered the Linux company. How is this happening, and what does it do for you competitively?
Livermore: Well, we tend to prefer to let the facts guide the definition of who's the leader and who's not the leader. So when we look at market share, we feel very good about our leadership position in Linux, and when we look at our product offerings, we also believe we still have the leading market position around Linux. One of the things our customers tell us, that is working very well, is our multi-OS strategy. We have since [had] the merger and even before the merger, HP was focused in providing Unix, Windows and Linux, on top of that continuing to support our heritage operating environments from pre-merger Digital, Compaq and HP. And we put our software investments around the operating environment, and dollars into management software, virtualization software that tie the operating systems together. So a lot of our interoperability, in fact, comes from the fact that we've got the management software, the virtualization software, and the availability software that goes across all three operating environments.
VB: The cost to you guys can be exorbitant to keep up with so many different flavors. How do you balance that?
Livermore: The maintenance on the legacy stuff for us is an important value to our customer base and the most important thing we can, in fact, do for our customer base is to continue to support those environments, so as they have migration desires in the future, they migrate with HP. One of my very strong beliefs is you must take care of your installed base well, because your installed base is a very important set of customers, and installed bases that are supported well tend to stay with that company as they migrate to new environments.
VB: Looking at storage, you have lost some significant share to EMC. What's happening there?
Livermore: We introduced a whole suite of new products back in April, we have a new set of product offerings to our customer base, so we feel we've got a very strong product portfolio. One of the things we're doing right now is to work with our channel partners from a storage perspective. We are working hard with our value-added resellers to increase their participation with HP in the storage market, and we also are in a situation where we need to have more sales specialists than we had in place. So we are going through a process where HP is adding some additional sales specialists to our sales force in the storage space.
VB: Will these be HP salespeople calling on user accounts or channel accounts?
Livermore: Both. They are both resources who will be working with our channel partners.
VB: Could you give us an update on the philosophy on selling to accounts direct vs. indirect? Will any change in strategy result in a change in the mix one way or another?
Livermore: As you know, for most HP product categories, we have multiple sales [channels] from every product that we have from low-end printers all the way up through the NonStop computers, where we work with value-added resellers, sometimes volume resellers and, in some cases, our indirect sales, so we will continue with that strategy and implementation, and you'll see us be very explicit with our partners so we communicate to them our strategy whatever it is on each of the lines of business. In the storage market, we believe we have upside with both our value-added resellers as well as our direct sales reps because the customer demand is there.
VB: That said, EMC has grabbed significant share. How concerned are you about that?
Livermore: We are very focused on growth inside the storage market. We believe it's a very important market space for us. We feel very good about our product portfolio. We're seeing very strong customer interest around our information life-cycle management offerings, the Persist acquisition that we made about a year ago has provided to customers a very attractive ability to be able to index, archive and do rapid retrieval of e-mail-based information. It's a question of how do you do the archiving--the indexing, archiving and the rapid retrieval of information--these capabilities from the Persist acquisition that we did are right dead on the mark.
VB: So do you believe the market-share numbers will turn in favor of HP again?
Livermore: Well our focus is certainly 100 percent on gaining back share and winning in the marketplace. We believe we are well-positioned. We believe we have had some sales-execution issues; we think they are all in our control to fix. It's a tough market, and we take our competition very seriously but we feel very good about the capability we have.
VB: You have been very open with your partners about your desire to extend the business taken direct. Given the trouble you most recently had in the last quarter, is there any new thinking in terms of the need to step up the amount that you're trying to sell direct?
Livermore: Our belief is to be a leading market-share owner in any category, that you have to have multiple channels of distribution. We've said that for years. We still believe that. So what you will see us doing is trying to gain share through every channel, through more direct, through more in the channel, and gain share through our sales reps.
VB: You've been with the organization for many years. You've seen highs, you've seen lows. Give us a sense as to where you're at with regard to the most recent news and the tumult of the last quarter?
Livermore: My view is that despite what happened in the third quarter, I think that HP has one of the strongest product portfolios that I've ever seen, that HP has a very loyal customer base, and that HP has very strong fundamentals when you look at both the balance sheet and the income statement and most of all our businesses. And we had some execution issues, all of which are under our control. So if you're an executive at any company in the world, and you had a bad quarter, that's the way you'd hope it could be because those are all things within your control to fix. You hate that it ever happened, but everything that was an issue for us was in our control to fix.
VB: So when we read the Merrill Lynch report, where [Merrill Lynch analyst] Steven Milunovich suggests you should break the company up and free and unleash all the hidden equity there, is that nonsense? Do you take some of that seriously? Do you re-evaluate the strategy?
Livermore: Several times during HP's past, we have gone through the evaluation of does the company have the strongest strategy and the best value as independent entities, or as one overall organization. That is something our board has evaluated numerous times, and every time we have come back to the same conclusion that the power of our portfolio is quite amazing. Look at what Dell is trying to do. They're trying to get into the printer business. And look at what [former chairman and CEO Lou] Gerstner said about IBM"his biggest mistake was exiting the consumer marketplace. So there are many competitors who covet the portfolio that we have today. We believe that very often, the analysts and the people who watch the market don't see important factors or trends until after they've happened. Our belief is the power of the portfolio we have is an important thing.