HP recently provided an update on its turnaround program at a securities analyst meeting in the U.S.  One major takeaway from the briefing is that HP ES, in particular, is taking additional steps to rebuild and strengthen its business.

Looking firstly at the HP group-wide picture, turnaround measures till now have included restructuring, retooling, and reducing costs.  Successes so far include:

• Outlook given during the Q3 earnings call is above the midpoint of the full-year outlook that the company announced at the 2012 Securities Analyst Meeting
• Cashflow was $7bn during the first three quarters of fiscal year 2013, ahead of guidance for the full year
• In Q3 cash conversion cycles have been reduced to just 18 days, lower than initial target of 24-26 days
• Operating net debt, excluding the debt associated with the financing business, was lower by $8bn
• HP is on target with its restructuring plan to get costs in line with its revenue trajectory; to reduced run rate of labor costs by >$3bn in 2014
• Reduced costs and during the first three quarters of fiscal 2013, an operating margin at the high end of the outlook given last year.

At HP Enterprise Services (HP ES), the program so far has resulted in:

• The elimination of red or underperforming accounts: this is almost complete
• Headcount reduction:  average headcount in the first three quarters of 2013 is down by 9% versus a revenue erosion of < 7% in constant currency
• Growth in the “new style of IT” business: HP ES is focusing on growing its “new style of IT” services business which largely includes cloud, mobile and big data. It estimates that the total addressable market is $131bn and growing, compared with the traditional IT services segment which is $410bn and declining. HP ES claims “new style” currently represents about 7% of overall signings. It sees plenty of opportunity for growth in the “new style of IT” which it expects to grow to represent ~25% of the market in 2016, at about $179bn
• Focusing on transitioning clients to the new-style of IT has helped with increasing renewal rate to > 90% in FY13.

The turnaround program is now in full swing, and the initial steps to rebuild the company have already started to deliver results.

HP ES has also started to extend the scope of its strategic measures in its multi-year turnaround program to include:

• Flattening the labor pyramid, in terms of both skill sets and locations: currently HP ES is weighted towards high-cost location with over-skilled personnel in relation to their duties. In future it will take more advantage of its  global delivery centers including those in Bangalore, Manila, Sofia, and Costa Rica
• Focus on getting better at taking contracts away from competitors: in FY 2013, ~ 4% of HP ES’ sales force has been deployed on proactive new logo wins. In FY 2014, this is going to increase to 29%, with a clear focus on new business and selling the new style of IT
• Build-up HP ES’ advisory offerings, to put itself in a stronger position to shape the transformation activity that comes from advisory work
• Build client road maps in every area to help clients go from the traditional to the “new style of IT” e.g. for workforce or workplace mobility with the addition of advanced analytics and integrating multiple devices with enterprise applications.

Each of these measures is a logical evolution, given HP ES capabilities and broader market dynamics.

Building its advisory services is key for HP ES to shape the transformation programs that it undertakes for its clients. This will enable HP ES to expand its customer interactions well beyond CIOs, to include heads of business units that are becoming increasingly influential in IT decision-making and who want agility and speed to market. HP ES’ cloud capabilities are already a good fit to this changing market. The advisory and transformation services should dovetail into them and so substantiating HP ES' mantra of advise, transform and manage.

The roadmaps for transformation to the new style of IT make up a strong addition to the portfolio. We expect to see more such offerings in the future, more focused on verticals. These will also increase HP ES’ ability to interact with the new IT decision-influencers.

HP ES is increasingly facing direct competition from Indian-centric vendors, e.g. it recently lost a major IT infrastructure outsourcing contract at Anglo American to HCL. HP ES needs to pull all the cost levers that it can and so it is increasing delivery from off-shore and lowering cost of transformation for its clients with pre-built road-maps. Increasing its portfolio of vertical offerings can help reduce costs further.

Costs continue to dominate ITO decisions and in the IaaS market in particular, where companies such as Amazon have established a strong presence. While HP has always competed on the added value enterprise ticket, this might not stand the test of time and an acquisition or two may be necessary.

Overall, HP ES is completely on track. It is quietly reinventing itself within its turnaround program and should not be underestimated.

Related article: HP Updates Analysts on Its Turnaround Strategy: Revitalization of HP Enterprise Services.