Innovation is a mantra in the information technology sector that typically refers to a new technology and disruptive business model. In 1992, the innovative “starwalkers” were arguably Apple, Dell, Microsoft, Oracle, and Sun. Among these, Sun Microsystems is gone, Dell is fading, and Apple is weakened by both competition and the loss of Steve Jobs. In 2013, the innovative list most relevant to the business customer starts with Amazon Web Services, Google, Salesforce, Rackspace, and Workday.
Twenty years ago, HP was in its ascendency; IBM was near collapse and dismemberment. Today their positions are reversed. IBM is doing well despite legacy burdens, while HP is seriously challenged. Why? The explanation lies in innovation in its broadest sense rather than any single or simple factor. Yielding little are management efforts to seed innovation through casual idea teams or one-time energy bursts. Desperate acquisitions, often overpriced and inadequately integrated into the product line, do no better.
The stark differences between HP and IBM can be described as a cross with the CEO at the center. To both sides are the twin engines of innovation, M&A and R&D. An aggressive M&A function gives R&D the needed perspective on the in-house projects that will provide the most competitive advantage. A strong R&D activity helps M&A identify and price the targets that best fill gaps in the company’s future product line. IBM spends percent of revenues on R&D, and HP only about two percent, mostly on incremental product improvements.
On the upright are the three levels of management that define the company’s brain and back bone. At the top are directors, with the longevity, experience, and stature to provide candid and actionable advice (in addition to financial oversight). At the bottom is the executive team, with the perspective and competence needed to execute the strategy. In between is the CEO with strategic sense, decisiveness and steadfastness in holding his decisions.
Now let’s compare IBM and HP: Since 1992, IBM has filled that position with Lou Gerstner, Sam Palmisano and recently Ginny Rometty. It’s too soon to judge Rometty, but Gerstner set the path from mainframes to software and services. Palmissano strengthened that transition by selling the PC division, and buying consulting partnership PWC and a plethora of software firms. By contrast, HP has never had a CEO who wasn’t fired except Dave Packard: Since 1992, there was Lew Platt (the last insider) followed by Carly Fiorina, Mark Hurd, Leo Apotheker (briefly) and now Meg Whitman. Whitman is too busy, salvaging a company roiled by her predecessors, for a fair assessment. Both Fiorina and Hurd savaged HP’s once-proud R&D organization for near-term profits while making acquisitions that mystify us today.
Fiorina bought PC maker Compaq just one year before Palmisano began planning the sale of IBM’s once-iconic PC division. As it turned out, Compaq and PCs never drove the innovation at HP that Fiorina had predicted. Today, the PC division is an anchor that yields a barely adequate five percent profit–less than half the margin contributed by the rest of the company. Hurd acquired outsourcer EDS in the teeth of ferocious competition from Indian firms and, more recently, cloud-delivered services. So HP’s outsourcing services group has been stagnant. Next came Leo Apotheker, recently ousted as CEO of German applications vendor SAP (though with little scrutiny from most directors, who never actually met the man). Apotheker had some good ideas, like spinning off or selling the PC business, but these were quashed by his successor–perhaps because there was no buyer, as Palmissano had predicted ten years earlier. But Apotheker also acquired the horrendously misjudged Autonomy. Even the pricing multiples it paid by HP offer a telling contrast. The undisciplined HP paid eleven times revenues for Autonomy, seven times for Arcsight and a comparable figure for 3PAR. IBM usually stayed at a tightly disciplined three or four times revenues.
So who (and where) were the directors of both companies? The contrast is astounding. Most of IBM’s were the CEOs of prestigious companies like American Express, Boeing, Caterpillar and Dow. Roughly each year one or two directors retired after seven or eight years of service to be replaced by another CEO of equal caliber. None needed the job to cap an already-prestigious career, so they could push back against the CEO if necessary.
The HP board went through violent swings, with four or five directors replaced at a time, starting with the four added from Compaq after the 2001 acquisition. They had little opportunity to form a coherent and collegial board or fully understand the strategy or culture. Nor did they have the stature of the IBM board. In sum, the complementary weaknesses of board, M&A, and R&D organizations explains much about the ill-fated acquisitions that could still sink Hewlett Packard.
About the Author:
A Senior Partner of Ostriker von Simson, a consultancy which assists the largest worldwide enterprises in the selection and deployment of advanced technologies, Ernest von Simson is also co-director of the CIO Strategy Exchange, a private sector think tank serving top CIOs. He has been on the Board of Directors of two dozen technology firms.
Previously, von Simson was the co-founder and senior partner of the Research Board. He has been featured recently in the Wall Street Journal, Yahoo! News, Forbes.com, The Atlantic Online, and his articles have been published by Harvard Business Review, The Atlantic, Fortune, and Computerworld.
For more information, please visit www.LimitsofStrategy.com.