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Hewlett-Packard was quick to sort out the details of the Compaq acquisition, but must now play a waiting game; why WorldCom's problems may create problems for you.
Scott Leibs, CFO Magazine
August 1, 2002
Addressing a group of analysts in June, one month after she won her battle to merge Hewlett-Packard and Compaq, Carly Fiorina said, "I would [not] want to relive the last nine months." Yet the next nine may be tougher still.
Fiorina, HP chairman and CEO, led a phalanx of senior executives to the Boston meeting, all of them intent on demonstrating that despite contention over the merger and a slumping economy, the deal makes good sense for "the new HP" and its customers. By all accounts, HP has moved quickly and competently to merge the two companies, helped by lessons learned from Compaq's acquisition of Digital Equipment Corp. in 1998, which was handled less well.
Yet the speed with which HP has moved stands in dismaying contrast to the sluggishness of the IT market, and already the company has had to revise revenue projections down. The company has tried to put a happy face on the situation--CFO Bob Wayman, for example, trotted out a chart that showed that HP and Compaq's revenue had not dropped nearly as badly as the average among its major competitors--but to some degree, the company is all dressed up with no particularly exciting place to go.
Wayman has an answer for that as well. In July he suggested that the IT spending slump was actually good for HP. "We're benefiting from the slow environment," he said. "We have many transitions to go through, and a slow-moving market can minimize losses."
One loss the company would like to maximize is manpower. As part of its effort to reduce its workforce by 15,000 people by the end of next year, HP offered a generous early-retirement program to about 9,000 employees. Around 4,000 took the company up on it. The terms were such that HP will absorb a bigger-than-anticipated restructuring charge, but Wayman says it's worth it because the early-retirement program enables HP to cut its workforce more quickly, particularly in parts of the world where layoffs don't proceed with what might charitably be called American efficiency.
While HP now believes it can achieve its headcount reductions even sooner than it first thought, there is one staffing matter that poses an issue for customers: the company had not, as of press time, sorted out who the new contact people would be for any but its largest enterprise accounts. Merging two sales forces and the armies of customer-service and field reps who work with them is a daunting task, of course, and HP expects to work through it by summer's end. Joe Wagner, vice president and CIO at the North Broward Hospital District, Florida's largest health-care provider, says, "We've seen some churn as far as who is assigned to our account, but we expected it. We know HP faces a relearning period at the customer-contact level, but we think the merger makes sense."
The Power Of One
Despite that hiccup, analysts say that the HP sales force will enjoy two advantages. First, it can walk customers through a detailed road map describing product strategy. Second, it can offer more products and services. "Buyers clearly want to consolidate the number of companies they deal with," says Herb VanHook, executive vice president at Meta Group. The new HP is almost as big as IBM, and "has a broad enough product and services offering so that customers see a chance to negotiate volume deals and streamline their vendor portfolios."
"Consolidation is good," Wagner says. "It's easier to deal with one company, and we think the combined R&D efforts of HP and Compaq will lead to good things." Consolidation of another sort is also on Wagner's mind: his company uses 164 different software applications on the desktop, down from about 300 but still, he says, far too many. Over the next few years the health-care company plans to extend those applications to include new patient-information systems, medication administration, and other functions, which will pose some complex integration challenges. Anything that brings simplicity to bear will be counted as good. "Now, with HP owning the PCs, servers, and printers," he says, "if something doesn't work you know who to blame." He says that in the current buyer's market, better deals can be had on service and support, training, installation, and in other areas, freeing up money for new applications.
In fact, much of the rationale for the merger, at least by June, was as a strategic response to an industry that Fiorina described as "consolidating" due largely to "changing customer requirements." In other words, it's a jungle out there. Fiorina said the new reality demands a new business model that provides more flexibility and choice, greater interoperability, and lower total cost of ownership.
Lower costs are very much the theme at HP these days. Fiorina said that cost-cutting efforts are going so well that the company will reach one of its targets, a $2.5 billion "cost synergy," by 2003, a full year ahead of schedule. Much of that, she says, stems not from headcount reductions but from process improvements in procurement and savings in real estate. Since savings are also on the minds of customers, analysts say that now may be a good time to drive a hard bargain with HP--and all IT vendors, for that matter.
World Wide Wobble?
As stunning as the cooked-books angle may be, the WorldCom saga extends well beyond the financial realm. The company's role as a major telecom provider and operator of vast stretches of the Internet makes its troubles all too relevant to Corporate America. Shortly after the accounting scandal was revealed, WorldCom CEO John W. Sidgmore said that his company carries about one-third of the world's Internet traffic on its network, and suggested that WorldCom's survival was a matter of national security. Administration officials did not seem sympathetic to that view.
But corporate security may be another matter. IT research firms were unanimous in urging companies to reevaluate their reliance on WorldCom. While acknowledging that the situation is fluid, Gartner, for example, suggested that WorldCom's telecom and Web-hosting customers (market leader Digex Inc. is tightly aligned with WorldCom, relying on its network infrastructure) delay signing on for new services, sign only six-month extensions for expiring services, and investigate alternative providers of Internet and wide-area-network services. IDC analysts point out that the collapse of KPNQwest NV had European customers running for the exits, but suggest the WorldCom situation may not be as dire. They do believe that it will inspire a "flight to quality," but point out that the telecom sector is so beleaguered that there are few if any truly safe havens.
Assessing the stability of a given carrier may be difficult, but customers will have to try. Large companies routinely divide their business among multiple carriers and so may be less at risk, although corporate backbones may suffer because WorldCom controls almost 50 percent of the high-speed "frame relay" traffic that many backbones rely on. Actual outages, which occurred in the late 1990s and were serious enough to force some corporate clients to cite them as a source of negative financial results, are less likely than a slow erosion of service quality, some analysts say, although whether and to what degree the massive layoffs at WorldCom affect service remain to be seen. Costs will rise on two fronts, according to Meta Group analyst David Willis. First, services will be priced higher as telecom companies feel less pressure to win business through large discounts. Second, the internal costs of managing contracts with different vendors will pose an administrative burden. Nonetheless, he says, the costs of redundant, higher-priced services will be worth it.
Longer term, should WorldCom declare bankruptcy or be divided into its constituent pieces, the outlook for truly global services will suffer, since nearly all the stronger players are regional in focus. IDC predicts that AT&T will be the biggest winner, although Sprint and other firms should gain business as well. --S.L.