5 Takeaways From HP’s Massive Restructuring Plan
Staff reductions and a shake-up in HP’s print business model are among the moves needed to put the company 'in the right position,' incoming CEO Enrique Lores says.
While HP Inc. had already disclosed some huge changes taking effect Nov. 1, there's much more on the way with the announcement of a major new restructuring plan.
The reduction of up to 16 percent of HP’s staff is planned for between now and 2022, with the company looking to invest more into growth areas while also facing a downturn in print supplies revenue.
The move coincides with a shake-up in HP's structure as of Nov. 1 to create a single commercial organization, along with the appointment of longtime HP executive Enrique Lores as CEO.
Lores, HP's printing business president, will take over for Dion Weisler, who is stepping down due to a family health matter. Weisler has served as CEO of the Palo Alto, Calif.-based PC and print giant since 2015, when Hewlett-Packard split into HP Inc. and Hewlett Packard Enterprise.
The restructuring plan is enabled in part by digital transformation efforts within the company, top HP executives said Thursday during the company's Securities Analyst Meeting.
"We will address the changes in our markets by being more customer-centric and agile, and operating with greater efficiency," CFO Steve Fieler said during the meeting. "To be frank, we run today with many of the same processes, tools, systems and operating models that we did in HP before separation."
Lores and Fieler also spoke Thursday with media outlets including CRN about the new restructuring plan.
What follows are five takeaways from HP's restructuring announcement.
Staff Reductions
With the restructuring, HP plans to reduce its total headcount by approximately 7,000 to 9,000 between now and the end of its fiscal year 2022, which runs through the end of October 2022.
The reductions will include both layoffs and voluntary early retirements. HP's current total headcount is in the range of 55,000, Fieler said.
Part of the restructuring will be an early retirement program in the U.S., he said. "Therefore the level of reductions will vary by the number of employees that ultimately participate in that program," Fieler said.
Based on the costs related to the restructuring that were disclosed by HP, the bulk of the reductions appear to be forecast for the company's fiscal 2020.
Fiscal fourth quarter of 2019 will see $100 million in costs related to the restructuring, while fiscal 2020 will see $500 million in related costs and the remaining costs will come in fiscal 2021 and 2022, HP said. Notifications to staff "will begin shortly," Fieler said.
"As you can imagine, this is one of the toughest decisions any company makes. But it's absolutely necessary for HP's future," Lores said during the call. "We will be really putting the company, from a cost perspective, in the right position."
Target Areas For Reductions
Lores said that cutbacks will be "mostly in the back-end operations," rather than in partner-facing or customer-facing roles.
"We are preserving our capacity to innovate. And we are preserving our presence in the field, our sales force," Lores said. "Because these are areas that will be bringing growth, and that will help us to continue to perform in the market."
Key steps outlined by Fieler include eliminating HP's regional operating layer and associated overhead costs; optimizing the company's manufacturing and R&D footprint; prioritizing successful marketing programs and improving service levels through automation; consolidating platforms for corporate functions; and automating reporting and analytics.
Specifically, the moves include reducing the number of IT systems and applications that HP uses, such as shifting from 13 different ERP systems to a single ERP system, Fieler said.
"Digital enablement can have many definitions, but what we're really talking about here is modernizing and automating our infrastructure backbone across the organization," Fieler said during the investor meeting.
Crucially, HP is going to "preserve and in fact create capacity to invest more in innovation, as well as the feet on the street from a sales force perspective," he said during the call Thursday.
Growth Areas
A3 printers, premium PCs and 3-D printing are among the most important growth areas for HP going forward, and will see increased investment due in part to the cost reductions, HP executives said.
The company will also continue working to drive contractual services such as managed print services and Device as a Service, which provide recurring revenue, executives said.
In print, "the big opportunity is contractual, an area where we are under-indexed today but well-positioned," said Tuan Tran, who will become HP's printing business president as of Nov. 1, during the investor meeting.
Managed print service revenue is up double digits year over year, he said, and "we're growing the number of partners, [with] 1,000 partners worldwide signed up with us."
Overall, "we'll invest in innovation, contractual, digital and industrial capabilities, along with targeted growth-based opportunities," Fieler said.
In existing PC and printing markets, there is a combined total addressable market of $485 billion, Lores said—and "our total share of these markets as a percent of revenue is only about 10 percent."
"As the market leader, we only have 10 percent of our addressable markets. Even if this total addressable market contracts a point or two, we still have opportunity to capture more value," he said.
Meanwhile, the emerging opportunities of 3-D printing and graphics printing add another $55 billion in total addressable market (TAM) for HP, and those markets are expected to grow rapidly, Lores said.
"Over time, we expect our TAM will expand by over almost half a billion dollars in these [3-D and graphics printing] markets alone," he said. "These are huge opportunities. We are talking about a long-term addressable market of nearly $1 trillion."
Implications For The Channel
Ultimately, the restructuring and investment moves will allow HP "to get closer both to customers and partners," Lores said during the call.
"What partners will see is a more cohesive go-to-market model and more cohesive channel programs around the globe. They will see us improving our tools," Lores said. "So actually as we will become more efficient, our channel partners also should see that they can work more efficiently with us."
In print, in particular, "we have to leverage data and manage the channels more effectively through a centralized pricing process and a disciplined channel partner program," Tran said. "This allows us to deepen our relationship with our channel partners and customers."
Change In Print Business Model
While HP has long offered subsidized printers to customers—with the expectation of generating revenue from sales of supplies—that model will soon start to change, executives said Thursday.
"We are challenging the status quo and making bold moves to pivot our transactional business to provide greater choice," Lores said. "Which means customers will be able to choose between paying a higher price for hardware and having a more flexible supplies model, or buying a subsidized hardware unit that will only work with HP Original Supplies."
Tran said the shift will take place "in the years ahead."
Along with buying discounted printers that only work with HP-branded supplies, "customers can pay for the full value of the HP printer up front, gaining the flexibility for supplies," Tran said. "This is like buying an unlocked cell phone and then choosing your own wireless carrier. In these cases, customers can enjoy HP's superior printing hardware, but obviously take risk if they choose alternative supplies."
In this model, "we rebalance the system profitability by monetizing innovation through increased hardware prices," he said.
"We know this transition is going to take time. And it could include trade-offs in market share and hardware growth in order to maximize long-term progress," Tran said. "But in the end, we're going to end up with a more balanced systems model.”
To that end, “we'll begin to systematically increase hardware prices that move towards this model,” he said. “As a result, supplies—while still very, very, very important to us—will no longer be the singular metric to determine our progress."