HP Plans Layoffs, Sales Unit Shake-Up
Wednesday, July 20, 2005
Hewlett-Packard Co., the computer equipment giant that has been in the midst of executive upheaval and strategic soul-searching for the past year, said yesterday it plans to cut about 14,500 jobs, or a tenth of its workforce.
The layoffs are part of the Silicon Valley company's effort to control costs as it tries to compete against aggressive rivals such as Dell Inc. HP did not provide details about the impact the restructuring will have on its Washington area workforce, but the changes mean a shake-up is coming for the hundreds of HP employees focused on selling to the federal government. Rather than work in a specialized sales unit, they will be folded into a broad technology division -- a return to the structure that was in place several years ago.
"The sales force are now working for the engineers," said Mark D. Stahlman, an analyst with Caris & Co., an investment banking firm. "It gives the key managers control over sales costs and makes them accountable for ultimate results."
HP said the changes, which include discontinuing its company retirement plan in favor of a 401(k) program, will save about $1.9 billion annually starting in 2007. Analysts have expected the cuts for several months, since Mark V. Hurd signed on as chief executive in April, replacing storied executive Carly Fiorina, who was ousted in February.
Hurd said in a conference call that the changes are intended to "make us simpler, nimbler and quicker."
Analysts say the moves signal the continuation of Hurd's plan to revamp the business and reverse several of the strategies Fiorina implemented during her six years as HP's chief executive, a tenure marked by a tumultuous $25 billion merger with Compaq Computer Corp. in 2002.
The company is moving sales back into the three main divisions: technology systems, imaging and printing, and personal computing. That is a reversal of Fiorina's strategy, which created a specialized division to handle all sales to businesses and public sector clients. Hurd said that by bringing the sales teams back into each department, the engineers building HP's products will be more closely tied with their customers.
"Carly was a super saleswoman but was never really able to talk to the engineers," said Stahlman, the analyst with Caris. "What Hurd has done is given the power back to the engineers."
Cindy Shaw, an analyst with Moors & Cabot, an investment banking firm, agreed the change could be a boon for the company's sales.
"We believe . . . that tightening links with customers by moving these functions into business units is a necessary step," Shaw wrote in a research report yesterday.
About half the layoffs will be in what the company called "support functions," including information technology, human resources and finance departments. The rest of the cuts will be spread throughout the three main business units, though the firm said sales positions and research and development professionals would be largely spared.
The layoffs are expected to be spread out over the next 18 months, and the firm said it will incur a $1.1 billion charge during the period.
Wall Street had a mixed reaction to the plan, sending shares of HP down 40 cents to close at $24.52.
"HP's widely anticipated restructuring is an important first step in fixing some of the cost and profitability problems," Laura C. Conigliaro, an analyst with Goldman Sachs, said in a research report.
HP is also winding down its company pension plan. The firm will continue to pay out the pensions of retired employees, and workers who are already enrolled in the plan will have their funds frozen at their current level. Instead of the company plan, current and new employees will contribute to a 401(k) retirement plan. The company is increasing its 401(k) matching program to 6 percent from 4 percent. That portion of the restructuring is expected to save HP $300 million annually.
The company earned $3.5 billion on $79.9 billion in revenue during its fiscal year ended Oct. 31 and will report its third-quarter results Aug. 16.
Hurd also continued to shake up the company's executive ranks yesterday. The company said Michael J. Winkler, head of the sales division that is being disbanded, will retire, and Cathy Lyons, a longtime HP executive, will become the firm's chief marketing officer. Randall D. Mott, who previously served as chief information officer at Wal-Mart Stores Inc. and rival Dell, will hold the same position at HP.
HP declined to disclose the number of employees it has in the Washington area. CoStar Realty Information Inc., a Bethesda firm that tracks real estate data, said the company occupies 277,004 square feet of office space around the Beltway. The company has a total of 1,746 employees at offices in locations such as Greenbelt, Rockville and Reston, according to CoStar. As of October, HP had 151,000 employees total.
Ryan J. Donovan, an HP spokesman, said the company views the federal government market as an important area for growth.
In 2004, the company's prime contracts with the federal government totaled $351 million, up from $297.5 million the previous year, according to preliminary data provided by Eagle Eye Publishers Inc., a Fairfax research firm. The company ranked No. 35 on Washington Technology's list of the top 100 federal contractors.
Conigliaro of Goldman Sachs said in an e-mail that she does not expect the restructuring to affect HP's federal sales because the company is still trying to expand that sector.
Hurd said that more details of the restructuring will be disclosed in coming months but added that he is not planning other major layoff announcements.
Staff researcher Richard Drezen contributed to this report.