Will Dell be the Beneficiary of HP’s PC Blunders?

Hewlett-Packard is staying in the PC game after all.

On Thursday, HP issued a press release saying the company “completed its evaluation of strategic alternatives for its Personal Systems Group (PSG) and has decided the unit will remain part of the company.” Though not technically a flip-flop or Netflix-style fiasco, HP’s announcement makes we wonder about the management skills of the company’s board of directors.

The release quotes new president and CEO Meg Whitman’s explanation for the change of heart: “HP objectively evaluated the strategic, financial, and operational impact of spinning off PSG. It’s clear after our analysis that keeping PSG within HP is right for customers and partners, right for shareholders, and right for employees. HP is committed to PSG, and together we are stronger.”

Well, that’s certainly one way to look at the situation. Here’s another: It was stupid for the board to consider spinning off its PC division in the first place, and it was even stupider to go public with its ruminations (that is, to think out loud). Customer reaction wasn’t positive, to say the least.

A representative of Dell reached to me with news of a new IDG Research survey that found among 302 IT decision makers polled, 79 percent of respondents report that Dell would be among the vendors they consider if HP stopped manufacturing PCs, followed by Lenovo (49 percent), Apple (12 percent), Toshiba (7 percent), and Acer (6 percent).”

HP could lose more than just desktop PC sales; the study found that “41 percent are considering new or additional server vendors as a result of HP’s recent activity,” which included leadership changes and its announcement about acquiring Autonomy Corporation. Even worse: “of those, 64 percent would consider Dell.” (IBM was second at 52 percent, followed by Cisco at 18 percent and Oracle at 12 percent.)

That couldn’t (and shouldn’t) have pleased HP, especially given Dell’s continuing (unwavering) commitment to end-to-end solutions. Adding fuel to the fire: 34 percent of those interviewed are considering new or additional services vendors; of those naming preferred vendors, IBM ranked first, Dell was second.

HP’s moves were particularly puzzling because it showed the board of directors didn’t understand its customers. Most IT managers I know want to simplify acquisitions and buy the bulk of their equipment from a limited number of suppliers and be able to call just one of a few phone numbers for help. IDC’s survey backs up that sentiment, finding that “45 percent of organizations say it is important for their technology vendors to offer complete end-to-end solutions.”

Dell should also be pleased by a September 2011 survey from Technology Business Research (TBR) that said a majority of the 130 HP customers in the U.S. with 500 or more employees “have become concerned with the direction the company is taking.” TBR says Dell would “likely be their provider of choice if they decide to make a change.”

HPs news wasn’t just grist for the water cooler; IT managers were giving it careful consideration. The TBR survey found that following HP’s initial announcements, 46 percent of respondents were less likely “to purchase HP products and services; for companies 1,000 to 4,999, this sentiment rose to 53 percent.” Also troubling for HP, “47 percent of respondents using HP PCs or mobile devices and 23 percent of those using HP servers indicated they were investigating alternatives.”

TBR “asked HP customers if, based on the announcements, they felt HP was well-managed with a clear vision of the future or if they felt HP was struggling and unsure of what to do next,” according to a press release from Dell. At the time, 63 percent chose the “struggling” answer.

When HP initially floated the idea of spinning off PSG, executives were quoted in popular media saying that margins were slim, keeping up to date with technology was tough, and PC sales were declining. I won’t dispute any of those statements, and yes, the popularity of tablets and smartphones as information access devices will cut into desktop PC sales. However, sometimes you have to put other factors ahead of profit, and understand that some divisions will run at a loss in order to serve your overall goal, such as being a full service provider.

HP’s Thursday release points out that “the data-driven evaluation revealed the depth of the integration that has occurred across key operations such as supply chain, IT, and procurement. It also detailed the significant extent to which PSG contributes to HP’s solutions portfolio and overall brand value.” At least someone woke up to realize the value of the brand. “Finally, [the analysis] also showed that the cost to recreate these in a standalone company outweighed any benefits of separation.” Well, duh.

During an investor presentation on Thursday (full transcript here), Cathie Lesjak, Hewlett Packard’s CFO, laid out a variety of factors the company considered, and noted that that “the annual synergies between HP and PSG exceed $1 billion in operating profit per year, and enable HP to be more competitive as a whole.” Are you telling me they didn’t know this before announcing a possible spin-off? If so, how can they justify their positions on the board of a major corporation?

Can HP regain customer loyalty? Time will tell. The last thing IT needs right now is confusion. Fear, uncertain, and doubt is one marketing technique, but it’s rare to see a company instill FUD about its own future.

With so much to manage, IT managers simply don’t need HP muddying the waters.

HP must heed that familiar naval warning: Loose lips sink ships. When you don’t know what you’re going to do, you don’t float ideas in public. You keep quiet. If you need to test the waters, you talk to selected clients.

Perhaps its board of directors should take an MBA refresher course to relearn that it costs much more to acquire a new customer than it does to retain one.

-- James E. Powell
Editorial Director, ESJ

Posted by Jim Powell on 10/31/2011