HP Eyes $2 Billion In Cost Cutting In Troubled Enterprise Services Business

Hewlett-Packard on Thursday told Wall Street analysts that it is aiming to take $2 billion in costs out of its beleaguered $22.3 billion enterprise services business.

The enterprise services cost-cutting plan comes after HP reported that sales in the business were down 16 percent in its fiscal second quarter ended April 30, to $4.81 billion, compared with $5.7 billion in the year ago quarter.

HP's Enterprise Service Group's infrastructure technology outsourcing (ITO) business, which is facing severe pressure as corporations move to cloud computing solutions, was down 20 percent in the quarter.

[Related: HP Posts Q2 Sales Drop, Names Execs To New Roles As It Preps For Split]

Sponsored post

Customers are moving faster to a "consumption," pay-for-what-you-use IT model that is forcing dramatic changes in HP's enterprise services labor force and in its data centers, said HP CEO Meg Whitman.

"That is going to require us to make a faster mix shift to low-cost resources, and frankly, the transformation of the physical data center footprint to a much more streamlined footprint that is far more automated," said Whitman. "There are real market shifts going on here."

HP CFO Cathie Lesjak told Wall Street analysts to expect GAAP charges going forward of $2 billion for the services business. She said HP will take the costs out of the business over a three-year period and will provide more details as it finalizes its plans.

Besides the enterprise services charges, HP is moving to take $1 billion in costs out of the company, resulting in a $1 billion GAAP charge, as it splits into two new Fortune 50 companies as of Nov. 1: a $57.6 billion enterprise computing company known as Hewlett-Packard Enterprise and a $57.3 billion PC and printing business known as HP Inc.

Lesjak said HP expects the $1 billion cost savings to offset more than half of the $400 million to $450 million in costs related to starting up the two new independent companies.

The new charges came to light after HP posted better than expected earnings for the second quarter.

The Palo Alto, Calif.-based company reported non-GAAP diluted net earnings of $1.6 billion, or 87 cents per share, for its second quarter, compared with $1.69 billion, or 88 cents per share in the same quarter a year ago.

Sales for the quarter dropped to $25.45 billion, down 7 percent from $27.31 billion in the year-ago quarter.

Whitman, for her part, said it is a strategic imperative that HP remain in the enterprise services business as it splits in two.

"My view is, if we don't have a healthy services business, that will actually compromise our overall business as we go forward," said Whitman. "Increasingly services is becoming the tip of the spear of how we go to market, not only to direct customers, but frankly, our partners and VARs are seeing the exact same thing."

With customers requiring business outcome IT solutions rather than point product solutions, HP's Enterprise Services unit and Technology Services consulting businesses are "becoming more strategic to the future of Hewlett Packard Enterprise," said Whitman.

The seeds of the HP's enterprise services infrastructure outsourcing troubles started seven years ago when former HP CEO Mark Hurd, now CEO of HP rival Oracle, signed off on the $13.9 billion HP acquisition of systems integration giant EDS.

In retrospect, HP didn’t move as fast as it should have to transform EDS into a more efficient services organization, said Bob Venero, CEO of Holbrook, N.Y.-based solution provider Future Tech, No. 234 on the CRN Solution Provider 500.

"Kudos to Meg (Whitman) for making the hard choices and decision around doing these writeoffs, making the adjustments and the hard calls," said Venero. "She inherited someone else's vision and now is trying to turn it into something feasible and functional."

HP's Enterprise Services troubles strike at the heart of how difficult it is to adapt in an IT market that is changing constantly at breakneck speed, said Venero. That has always been a staple of successful technology solution providers, he said.

Future Tech, for its part, is finding success with what it calls an in-sourcing model, providing Fortune 1,000 customers with processes and procedures to gain hybrid computing efficiencies rather than a complete IT outsourcing model. That business, said Venero, grew 130 percent in the past year.

As for working with HP's Enterprise Services business, Venero said he sees Future Tech continuing to aggressively provide its own services to Fortune 1,000 customers.

"I'm not knocking HP's services organization, but they have a very large overhead," he said. "Our overhead and cost structure is much more price-effective for customers."