Innovation @ HP – Declined in the past decade, major concern for HP Leadership

Bill Hewlett and Dave Packard founded Hewlett Packard Company also known as HP in 1939 and company gained a remarkable reputation to be one of the most innovative companies in the world where in it developed innovative printers, scanners, calculators, servers and personal computers.  For years success mantra for the company had been the innovation which is essential for the continuous growth and survive in the highly competitive market place. Innovation is at the heart of HP as company constantly innovated with bold ideas particularly in the printers business and also later in the servers and PC businesses. HP leadership has encouraged innovation at all levels in the organization which made company hugely successful and one of the most admired companies in the world. For years till the year 2000, HP was an innovative market leader focused on high-growth, high-profit businesses. But HP lost its way since then where in the company struggled to keep up its revenues and almost forgot innovation which helped the company to survive for years. Innovation is essential for technology companies be it hardware, software and services companies to survive for long term.

Since the year 2001 the company started facing serious troubles post the acquisition of Compaq (PC manufacturer) by Carly Fiorina which was highly criticized at that time as both the companies were struggling with poor financial performance and IBM had sold of its PC business to Lenovo highlighting that the PC business is no longer high profit business and IBM shifted its focus to software, services and consulting. Personal computers business was becoming low margin, low growth business which was a wrong move for a company like HP that focused on innovative products that provided unique benefits to the customers which were hard to be replicated by the competitors and are high margin. Carly Fiorina was criticized for transforming a highly innovative company into a market follower and generic company with focus on low growth and low profit business. Carly Fiorina targeted PC business which lacked product differentiation as Dell, Lenovo and other PC manufacturers who have manufacturing operations in China produced at cheaper cost and the whole strategy was based on volume based and not on innovation for which HP had big reputations. HP was turned from a transformational innovator into a generic manufacturer.

Mark Hurd replaced Carly Fiorina as HP CEO in 2005 and his tenure at the helm of HP was a remarkable transformation in itself where he doubled the share price and increased net income significantly. Mark Hurd acquired EDS which is a IT Services company in 2008 and this deal was questioned by many insiders and outsiders as EDS was facing severe financial troubles in its business and HP spent close to US$ 14 bn to acquire the troubled EDS. EDS could not recover under HP and its business is still struggling and rumors are going around that HP is looking to dispose of EDS. Mark Hurd also acquired 3com, networking equipment manufacturer and again HP struggled to maintain growth and profits as there had been significant shift in the technology environment where in there is shift towards mobile devices and common carriers and above all HP could not innovate and enter new markets for pushing the products. He also acquired another struggling smartphone company Palm for US$1.2 bn. Mark Hurd was brought into HP to cut costs and improve financial position of the company which he did remarkably well but in doing so he also cut Research & Development cost also significantly that hampered the innovation in HP. The short term profitability gains destroyed the long term gains fueled by innovation that are essential for long term survival of HP.

Leo Apotheker replaced Mark Hurd as CEO of HP as Mark Hurd was forced to leave accused of falsifying expense reports (worth US$ 20,000), and also covered up a relationship with a female marketing consultant who alleged that he sexually harassed her. Leo Apotheker whose tenure at SAP AG was itself controversial that cost SAP close to US$1.3 bn and in his 11 months tenure at HP he made some very controversial decisions like spinning off the Personal Computer business and also the acquisition of Autonomy for US$ 10.3 bn. Both the Mark Hurd and Leo Apotheker was paid severance packages of US$ 40 million and US$ 25 million respectively which was a big burden on already struggling HP financials. Meg Whitman replaced Leo Apotheker as CEO of HP and instantly she overturned the decision of spinning off PC business and initiated a series of layoffs, which numbered 27,000. In November 2012, HP announced that it will take an $8.8 billion write down on the Autonomy deal amid allegations of accounting improprieties at the software company and investigations were initiated by both US SEC and UK Serious Fraud office.

Apart from these failed acquisitions, mismanagement of HP Leadership another factor that significantly effected HP had been the brain drain where in HP veterans had left the company. Some of the departures were V.J. Joshi, the executive vice president Pinter business, Patrick Scaglia Group CTO, Bill DeLacy, who was the senior vice president for printing, Randy Mott CIO, etc. These departures of the company veterans some of them to key competitors and other firms is a big concern for the company in terms of focus on innovation. Meg Whitman after her initial tough decisions has realized the fact that only way of reviving the growth at HP is only through innovation and in a recent earnings call she promised disruptive innovations. She also said that there are many innovative products are being developed in the Research & Development Labs   and these products will hit the market over the period of time. But the critics are also skeptical about the capabilities of Meg Whitman to turnaround HP but she is confident that she will do her best to revive HP and she recently announced that there will be organizational restructuring within HP. She is also asking employees to work together to turnaround the struggling company and the only way HP will revive is through innovation of new products across different categories.

In an interview with CRN HP Chief Strategy Officer, Mohamad Ali highlighted three innovative technologies as software-defined networking, ElitePad notebooks and OfficeJet Pro X. OfficeJet Pro X is very different where in the ink technology that is super high-end and be able to run ink at 65 pages per minute which will be bright and at 50 percent reduction in cost. The recent launch of HP Moonshot which is the world's first software defined server powered by Atom processors and also extreme low-energy server technology. HP recovery is still in process and with these product launches it seems to be on right track.

Global Outsourcing Industry Outlook 2013

The current global volatile economic conditions and the European Sovereign Debt crisis is expected to continue in 2013. But Germany & France are actively trying to solve the euro zone crisis and there are some positive signs in this regards. But most of the companies across the globe are going to see weak and volatile demand conditions and companies have to expand even more into emerging countries other than the Brazil, Russia, India and China (BRIC). Growth for the companies lie in emerging markets other than BRIC countries and for companies to expand and retain their profitability is only possible by managing and reducing their costs and spends efficiently. Companies are looking at outsourcing vendors to actively partner with them and provide services that directly affect the business outcomes and the move towards outcome based pricing will continue in 2013 and even the outsourcing vendors are looking for outcome based revenues as it increases their margins. Outsourcing Vendors are also changing their organization structures, products and services portfolios and recruiting highly skilled and talented domain experts that help them in providing outcome based services to their clients. More over the emergence of technologies like cloud computing, Big Data, analytics, mobility and social media will also have a significant effect on the way the outsourcing vendors operate and provide their services in 2013. United States followed by Europe will dominate the outsourcing industry but the Asia Pacific particularly companies in Asian countries are increasing their outsourcing spends and this will be a significant change for the industry in 2013 which was initiated three years ago.

Outsourcing Vendors are also setting up centers and offering services from locations that are close to their clients. Most of the Indian Outsourcing Vendors have opened development centers in European countries like Poland, Latin American countries like Brazil, Argentina and expanding to other low cost destinations in Asia like China and Philippines. Indian outsourcing vendors have slowed down their hiring as the deals and the pricing mechanisms are changing and are aggressively focusing on nonlinear and outcome based revenues. Most of the outsourcing vendors globally have prepared themselves for the volatile and weak demand in 2013 and are developing strategies to overcome the difficulties as they did in the year 2012. The traditional stronger outsourcing verticals like Banking Financial Services and Insurance from which all the Indian Outsourcing vendors get more than 50% of their  revenues is undergoing some drastic changes that include regulatory changes has forced the outsourcing vendors to look at other verticals like Government, Healthcare, Telecom and the manufacturing vertical is seeing a resurgence. Cloud Computing, Big Data, Analytics, Social Media and Mobility are having a significant effect on the way the services are offered by outsourcing vendors and there is a lot of Mergers and acquisitions activity is going on involving the above mentioned emerging technologies. Outsourcing vendors are acquiring smaller companies that are offering the above mentioned services and integrate them into their core product and service offerings. But it will be a very challenging 2013 for the global outsourcing industry both in terms of increasing their revenues and profitability. 

Global Outsourcing Industry changed significantly in 2012, continue to change in 2013

According to KPMG Global IT-BPO Outsourcing Deals Analysis, 2012 is a year when the global outsourcing industry recovered from a comparatively bad 2011 but it still has to regain the level of performance that the industry saw in the year 2010. The report also highlights Worldwide in 2012, 1,244 ITO contracts worth USD 118.3 billion and 226 BPO contracts worth USD 19.5 billion were signed and 120 IT-BPO Bundled deals were signed in 2012 with contract value worth USD 12.7 billion. The number of deals also has improved compared to 2011 but it did not reach the 2010 or 2009 levels which show that the industry is being affected by the European Sovereign Debt Crisis and the economic volatility in the United States. 2012 saw a healthy growth in terms of number of deals (9% YoY) and Total deal value (24% YoY).

Geographically companies in Americas dominate the outsourcing industry with TCV of US$ 95.8bn followed by Europe, Middle East & Africa with US$ 36.0bn and Asia Pacific with US$ 18.7bn. Europe has seen a fall in terms of deal value by 21% courtesy the ongoing European Sovereign Debt crisis which is having a significant effect of the Europe as a whole and most of the countries have been drastically affected by the crisis. Asia is also gaining as companies in most of the Asian countries are also outsourcing to cut costs and increase their profitability.

Most of the deals worth US$ 64.9bn are in the range between US$ 100mn – US$500mn but the companies are still doing big deals that are more than US$ 500mn but less than US$ 1bn with a TCV of US$ 50bn. But overall the contract values of the deals are coming down when the deals are coming up for renewals. Companies are renewing deals at a lower value than previously outsourced. Companies are looking for significant discounts in pricing for the renewal deals and are also changing the outsourcing vendors if necessary which is leading to vendor churn in the industry. Less than US$100mn deals are with a TCV of US$ 35.5bn.

The Deal tenure has also come down as in the initial stages of outsourcing most of the deals were signed for 7-10 years and this trend has changed in the last two years when most of the deals are being signed for tenure of 1-5 years and the TCV is US$ 96.9bn. Deals with tenure of more than 5 years are also being signed and the TCV is US$ 52 bn. The deal size which most of the companies are looking at is around 4-5 years and less than 1 year deals are very small.

Pricing too has seen a significant change where in most of the deals (97%) are based on Fixed pricing and Hybrid pricing. Hybrid pricing deals are more complex hybrid pricing structures that combine input based pricing, output based pricing, and occasionally business outcome-based pricing mechanisms. In fact Hybrid pricing deals have significantly increased in the last three years as companies want their outsourcing vendors to not only reduce cost but also provide them more value based and outcome based services that will directly affect their business outcomes.