News Column

Meg Whitman Steadies HP but Big Challenges Remain

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Meg Whitman took the helm as CEO of Hewlett-Packard (HPQ) after her two predecessors were ousted amid scandal, lawsuits and controversial strategic moves. Six months later, she's credited with making swift decisions that steered the company through that storm.

She settled a paralyzing debate over HP's $40 billion personal computer business and, in a nod to Silicon Valley culture, moved top executives out of their offices and into cubicles instead.

But HP's vast tech business is still threatened on numerous fronts as it struggles to keep pace with competitive

trends and innovations, from Apple's (AAPL) iPad to the rise of cloud computing. And with the future of a Silicon Valley icon at stake, many HP insiders, competitors and industry observers say Whitman faces tremendous challenges in trying to get the company back on track.

"She's in a tough spot," said Charles King, a veteran tech analyst with the Pund-IT firm. "It isn't going to be an easy job."

"She needs a rallying cry that people can get behind," added former HP vice president Phil McKinney, who left the company last year.

The 55-year-old Whitman came to HP with a

reputation for management expertise. She held top jobs at Hasbro, Stride Rite and Walt Disney before overseeing eBay's (EBAY) tremendous growth as CEO of the online auction company from 1998 to 2008. That's where she earned the personal fortune that helped finance an unsuccessful bid for governor in 2010.

At HP, her immediate challenge was obvious: "We have been working hard," she told Wall Street analysts on a conference call, "to calm the waters and reassure our stakeholders that HP is the same reliable company that they've known and admired for years."

But experts say the size and breadth of HP's business is both an asset and a challenge for any CEO. With $126 billion in annual sales and nearly 350,000 workers, HP is a market leader in more industry segments -- from PCs and printers to big computer systems and tech services -- than any of its competitors.

"A lot of investors say they are more comfortable with Meg there than they were with Leo," said Baird & Co. analyst Jayson Noland, referring to previous CEO Leo Apotheker. "But it seems like she's still getting her arms around the problems. She hasn't articulated a clear strategy yet."

A quiet transformation

Whitman, who joined HP's board in January 2011, stepped into the chief executive's job on Sept. 22 when Apotheker was fired for weak financial performance and strategic missteps.

Apotheker, who held the job for less than a year, rocked the tech industry last August by announcing that HP, the world's biggest seller of PCs, would launch a months-long review of whether to get out of that business. The board, including Whitman, had approved that review. But after critics savaged HP for placing one of its major divisions in limbo, new CEO Whitman sped up the analysis and quickly decided to keep the PC operation.

Whitman has avoided further drama since then. She's quietly replaced executives in important behind-the-scenes jobs, overseeing corporate strategy, communications and legal matters. But she retained the more visible, longtime heads of HP's major divisions, such as PC chief Todd Bradley and printing boss Vyomesh Joshi.

And as the new boss, Whitman moved herself and other executives into cubicles at HP's Palo Alto headquarters, saying she wanted to foster teamwork and send a message to employees. She's held "coffee talks" and explained key decisions in companywide emails. Insiders say that's boosted sagging morale.

Compared with her predecessors, "Meg is doing a better job of getting out there and being accessible," said McKinney, the former HP executive, who decided to leave after Apotheker's August announcement. But the company is still seeing an exodus of talented workers, he warned.

Some breathing room

Whitman often describes HP's troubles in jargon that hints at her early training as a Harvard MBA and Bain management consultant. In her words, HP's challenges fall in three "buckets." The first represents operational issues, like the supply chain failings that allowed PC and server sales to suffer this winter after flooding in Thailand interrupted production of essential disk drives.

The second bucket, according to Whitman, contains specific threats to HP's major divisions: PC sales are slowing as more people buy smartphones and tablets. The high-profit ink business is slipping as customers store photos on Facebook instead of printing them at home. HP is selling fewer high-end servers after archrival Oracle (ORCL) stopped making software for those systems. And the services group, which does tech work for other companies, lacks resources and loses lucrative jobs to IBM.

Whitman's "third bucket" consists of broader trends, such as the rise of online services and cloud computing. These are changing how customers use HP products, she says, but they offer new business opportunities such as helping clients protect and manage data.

After listing all those challenges for analysts last month, Whitman assured them HP is up to the task. "We see a once-in-a-generation chance to define the future of technology and position HP as a leader for decades to come," she said.

But Whitman also warned that HP won't see a return to growth before the end of 2013. "She's making some smart moves," said a former HP board member. "Setting low expectations will give them breathing room to restore the brand."

Cutting costs

As she embarks on that effort, Whitman must wrestle with her predecessors' legacy.

Former CEO Mark Hurd, who ran the company from 2005 to 2010, built HP to its current size while earning Wall Street adoration for focusing relentlessly on the bottom line. He was ousted in a scandal after the company said it found expense account irregularities involving meals with a former B-movie actress turned HP marketing contractor, which then sparked a flurry of shareholder lawsuits. Whitman has blamed some of HP's problems on excessive cost-cutting during Hurd's tenure, especially in research and development.

"We didn't make the investments we should have during the past few years, to stay ahead of customer expectations and market trends," she told analysts. "As a result, we see eroding revenue and profits today."

Apotheker, for his part, tried to move from HP's roots in computer hardware by focusing on software. Analysts say the goal was rational, since software is more profitable, but his execution was clumsy. Whitman has distanced herself from Apotheker, but says HP will enhance its hardware business by selling software too.

While she's vowed to increase R&D spending, Whitman has told Wall Street she won't sacrifice profitability. She has said HP will cut costs in other areas, prompting speculation that layoffs are coming -- although she hasn't used that word.

Whitman has said she'll achieve savings by updating the systems HP uses to manage operations, reducing the number of versions of HP products, and consolidating sales efforts that now reside in each division.

Calm under fire

That wasn't enough for restless investors. After inching upward last fall, HP's stock plunged in the days after last month's weak quarterly report, subsiding to nearly last year's lows.

"HP shareholders deserve a concrete and detailed plan," complained Deutsche Bank analyst Chris Whitmore in a research note. He said Whitman has not yet offered "visibility on whether HP can reach sustainable growth."

But Whitman, who took heat for missteps during her novice political campaign, says the experience taught her to stay calm under fire. "We are building HP to last," she said recently, "not managing for short-term objectives."