HP pays a big price for failure to focus

This August’s announcement of HP’s $8bn write-off against the $14bn paid to acquire EDS in 2008 is shattering news. It was kept low profile, buried in an announcement of change of senior personnel at HP Enterprise Services. The FT Lex Column on the same day (‘Facebook/HP – laptops and likes’) flagged HP’s rapidly dropping annual free cash flow: circa $10bn in 2009, cut by two-thirds to an estimated $3-4bn in 2012. A leading player in our industry has clearly got its services business model badly wrong.

Courtesy of virtualisation, a large portion of historically people intensive IT operations are being automated and commoditised. This is about migration to the Weetabix business model, with highly automated factories delivering standardised products/services: a nutritious breakfast of two biscuits (with added milk and perhaps a little sugar?) on your table for 20p. Think Google Apps at £30 per user per year.

People intensive IT operations will now sustainably flourish only where the human value-add is both real and financially rewarded. This is the Wolselely business model, with people-intensive services at its core: experienced staff delivering breakfast for (well over) £20 per user – certainly 100x the cost of the Weetabix breakfast. Think FfastFill whose staff’s deep intimacy with derivatives trading, blending the experiential with focused operational and technical knowledge, lies at the heart of a fast growing specialist business.

These two business models are very different in their management focus and requirements. I observed in my original column that the business and management skills to succeed with the commodity Weetabix business form one reality: and the business and management skills to succeed with the speciality Wolseley business form a very different reality. A management team who have polished their reputation running a Weetabix business would fail given a Wolseley to manage. And vice versa.

A few weeks after my column appeared, I was delighted to get a post card from Jeremy King, one of the two co-founders of the Wolseley business. He was in full agreement – he and his team, market conquerors with the very profitable Wolseley business model, would not be able to grapple successfully with the Weetabix business.

Much of what we now classify as infrastructural services (computing, networks) are being automated and moved to the Weetabix business model. I would argue that a major element of platform services are following suit. This competitive services arena is becoming home to vendors who focus intensely on operational excellence in the management of major capital investments in server farms & communication networks – think Amazon Elastic Compute Cloud. These are service manufacturing businesses whose sustainable competitive edge lies in deep intimacy with the operational.

On these infrastructure services and platforms an exponentially growing myriad of companies delivering well focused Apps and Softwares delivered as Services now flourish. This is the natural habitat for a totally different type of vendor whose intimacy is with the application, what Vincent Sculley, of Apple and PepsiCo fame, calls Domain Expertise delivered as a Service – medium to smaller sized vendors able to focus on specific verticals, whose sustainable competitive edge is rooted in human expertise in the complex workings of particular markets.

This is why HP has had to write off $8bn. It has failed to decide whether it is in a Weetabix business or a Wolseley business. It has to choose – it cannot be in both. It should have acquired EDS with the intent to create a competitive Weetabix business, merged it with other relevant parts of HP to create a discrete venture and floated that off to focus on being a competitive commodity infrastructural/platform services play. How different the financial story might now be!

In our industry the common shared language is of a vertical value chain, with the deeply ingrained belief that the strategic challenge is to ‘move up the value chain’. But let me assure you – the value chain is flat! The challenge is strategic excellence at whatever point a business positions on that value chain. The (speciality) Wolselely does not sit ‘up the value chain’ from the (commodity) Weetabix. Both are equally profitable business plays – providing each focuses on strategic business excellence at that specific point on the value chain where it is positioned. Commodity fully matches specialty. But do not try to be both simultaneously – that results in very large write offs, as HP is learning to its cost!