HP plans to cut 14,500 jobs

Wednesday, July 20, 2005

SAN JOSE, Calif. -- Striving for Dell Inc.'s efficiency and IBM Corp.'s breadth, Hewlett-Packard Co. said Tuesday it will cut 14,500 jobs and overhaul its retirement plan in a move that all but buries the legendary company-employee bond known as the "HP Way."

The computer and printer maker once known for treating employees like family said it will save $1.9 billion a year as it trims its global work force of 151,000 by 10 percent over the next 18 months.

HP did not specify where jobs will be lost.

But executives said support jobs will be most affected -- in information technology, human resources and finance -- as they weed out inefficiencies.

"Cost structures and revenue growth go hand-in-hand," said chief executive Mark Hurd, who has been on the job four months. "We know that only by having a competitive cost structure can we compete aggressively in the marketplace, thereby growing the company for our employees, customers and shareholders."

Hurd was hired away from NCR Corp. with a mandate to perform painful surgery that HP's board had sought by failed to obtain from Carly Fiorina. The board fired Fiorina as CEO in February.

Tuesday's was just the latest in a series of moves by the Palo Alto company become more competitive in an industry dominated by lower-cost rivals. Critics contend that such moves have obliterated the workplace philosophy espoused by William Hewlett and David Packard, who founded HP in 1939.

But Hurd, like his predecessor, argues that the changes are necessary.

Rivals including Dell in computers and IBM in consulting services have managed to squeeze higher profits. At the same time, HP's highly profitable printer and ink business is coming under increasing threat.

Though HP has remained largely profitable, its stock has underperformed most of its rivals.

Shares of HP lost 39 cents, to $24.53, in Tuesday trading on the New York Stock Exchange. The company's stock has risen some 19 percent since Jan. 1, but remains well below its peak during the technology boom.

"Our objective is to create a simpler, nimbler HP," Hurd said.

Beginning in January, HP will freeze the pension and retiree medical-program benefits of current employees who don't meet defined criteria based on age and years of company service. The company said it instead plans to boost its matching contribution to most employees' 401(k) plans to 6 percent from 4 percent.

HP said the changes won't affect benefits currently received by retirees or eligible employees who are longer-serving and close to retirement age. Existing employees will retain benefits they have already earned.

"People who have been around the company a long time and have a clear idea of what HP culture is all about aren't seeing such a big change," said Eric Johnson, a former HP employee who is now a Dartmouth College business professor.

"For the next group, it's definitely a little less paternalistic, a little harder, colder, rough and tumble world," he said.

In an interview with The Associated Press, Hurd said the philosophy known as the HP Way has morphed over the years.

"If you looked at the great days of HP, when things needed to get done, they got done," he said. "This was something we needed to get done."

Some analysts see the restructuring as just a first of several steps needed before HP can realize its potential.

"This is a triage," said Frank Gillett, an analyst at Forrester Research. He said Hurd was taking the first steps of getting costs in line and simplifying the corporate structure.

Left unresolved, however, is how HP can turn its size and position into new sales and persuade customers that its products best offerings from Dell or IBM.

For years, HP has derived most of its profits from the sale of printers and ink. In an attempt to strengthen its computer offerings, HP acquired Compaq Computer Corp. in 2002 in an acrimonious proxy battle.

The $19 billion purchase didn't reap the benefits Fiorina promised, and the company briefly considered splitting itself up into several parts. Just before Fiorina's firing, she merged the weak PC business with the profitable printer division -- a move Hurd reversed.

"HP has been a fairly messed up company over the last few years," said Mark Stahlman, an analyst at Caris & Co.

In corporate servers, software and consulting, IBM has both a solid reputation and legions of consultants who advise corporations on technology buying decisions and point to IBM's offerings.

At the other end is Dell and its efficient PC manufacturing and distribution system that HP has had difficult matching.

On Monday, the research firm IDC report Dell's PC sales grew by 23.7 percent while No. 2 HP posted an increase of just 16.3 percent.

Beginning in fiscal 2007, HP expects to save about $1.9 billion a year from the restructuring, including $1.6 billion in labor costs and $300 million in benefits savings. In fiscal 2006, HP expects savings of between $900 million and $1.05 billion from the restructuring.

The company said about half the savings will be used to "offset market forces" or be reinvested in the business. The remainder is anticipated to add to operating profit.

HP plans to record pretax restructuring charges of about $1.1 billion over the next six quarters, beginning in the fourth quarter of fiscal 2005. This excludes a previously announced $100 million restructuring charge to be taken in the third quarter.

Though the cost-cutting runs counter to some parts of HP's culture, it's reinvigorating others, said Cindy Shaw, a Moors & Cabot analyst.

"One of the things that's been lost and under appreciated is that Hewlett and Packard themselves very much held people accountable," she said. "Over the last decade or two, the accountability thing was falling out of the company culture."

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