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

Last week NelsonHall attended HP’s analyst summit in Boston, U.S. In her opening speech, CEO Meg Whitman emphasized HP’s commitment to engineering, innovation and also to Enterprise Services.

Turnaround activity includes:

  • Investments in internal systems, such as a new CRM system (salesforce.com) for the sales force, revising its quote to cash system, implementing a new resource management system
  • Centralization of marketing and communications, and a new advertising campaign.

The commitment to services, and also specifically to BPO, was reiterated by Mike Nefkens who leads HP Enterprise Services (ES). Nefkens stated that he was “committed 150%” to ES which he referred to as “a strategic asset” and as being a “stable and profitable” business. He also reiterated that BPO is a core part of the portfolio.

Stated priorities for HP ES in FY 2013 include:

  • Stabilizing HP ES services and delivery
  • Showing progress on its financial goals
  • Reinvigorating the sales force and creating a growth culture
  • “Increasing value to our clients’ agenda”.

HP ES is looking to shift its business mix from lower margin activities such as traditional workplace services, and take advantage of its skills and capabilities in the newer areas of mobility,   information management & analytics, application modernization, security and cloud services. These will become more and more embedded in its core portfolio of data center management ADM, enterprise application services BPO, and industry solutions.

HP ES is also looking to grow its capabilities for “advise and transform” services, by which it means helping clients shape, implement and manage their journeys in what Whitman calls “the new style of IT” which includes big data, mobility, BYOD, cloud and security.

HP ES is becoming more selective about the contracts that it takes on. Deal governance is being tightened with more consideration given to ensuring appropriate deal framework and appropriate management of contracts.

There is much that is going on internally to re-align and re-energize HP ES. This includes:

  • A focus on setting realistic goals matched with rewards and recognition. Increasing employee engagement is another objective, with the executive management meeting with leadership teams, and providing clear messaging for the workforce
  • Increasing internal accountability and visibility of responsibilities, performance, budgets and over expenditure
  • Enhancing internal capabilities, for example, there is working progress in dynamic allocation of resources and integration of key enterprise systems.

Other activity includes Applications and Business Services (ABS) developing its approach to application development, including agile methodologies and use of social tools.  A KM platform has helped with productivity improvement and the group has been flattening its pyramid: a significant share of new hires in ES has pay rates that are 20-30% lower those that have left.

On the delivery side HP ES is looking to hire more project managers. It is also hiring for vertical and technical specializations for business development.

 

(A description of the various initiatives the multi-year turnaround program for HP ES outlined in October 2012 is provided in article 76420, also more comprehensively in the Key Vendor Assessment on HP Enterprise Services).

 

In its fiscal Q1 2013, (the quarter ended December 31, 2012) HP Group revenue beat expectation and cash flow and net debt improved also. HP ES reported:

  • A year-over-year revenue decline of 7% (revenue guidance for full year FY 2013 is a decline of 11% to 13%)
  • An operating margin of 1.3%, within the target range of 0-3% for the year.

For HP Group overall, revenue beat expectation and cash flow and net debt improved also. Since the announcements of Q1 FY 2013 results on February 21, HP share price has risen by nearly 25%.

The turnaround at HP ES (and indeed at HP overall) is still in its early stages - FY 2013 is labeled the “Fix and Rebuild” year. There is a palpable sense of reinvigoration of HP ES, which has a new very experienced COO, JJ Charhon, and a new global head of sales. Larry Stack previously helped revitalize sales in Accenture’s Health & Public Service operating group; and he already has insider knowledge of HP ES, having previously worked for the Group. Among the measures that Stack is proposing to reinvigorate sales at HP ES is the revival of its Sales Academy, and as part of the drive to empower accounts execs, expect also to see a refresh of account execs over the next year or so, with an increased emphasis on recruits with industry knowledge. Among the service lines, HP ES particularly needs to strengthen its BPO sales ability to engage with clients about supporting them with their business issues.

There has been progress in sorting out unprofitable or underperforming accounts, the so called “red accounts”. On the project side of the business in Applications Services the number of red accounts is a fraction of what they were a year ago. BPO has no red accounts and is profitable. With IT infrastructure management red accounts, HP has sought to engage with clients’ senior execs to reach a new consensus on the work to be delivered and thus restructure the client relationships. In some cases, HP has elected to exit the contract. There remain a number of low-performing contracts, and addressing this will clearly continue to be a priority in the short term.

In investing in service enablement and automation and seeking to flatten its labor pyramid, HP is playing catch up with competitors who started these measures some time ago.

An obvious point, but one which is easily overlooked, is that HP ES is the enterprise services arm of HP Group, in particular its Enterprise Division, and is thus fundamentally different from standalone IT services providers. The CIO is the key target audience, and the focus is on bringing together relevant components of HP’s hardware and software and services capabilities into engagements. Cloud was a recurring theme during the two-day event, and where HP ES used to emphasize its ‘Converged Infrastructure’ abilities, it now highlights the ‘HP Converged Cloud’, offering clients both build and operate cloud services, and “consume” cloud services (managed IaaS and SaaS, public cloud). For HP ES, expect to see the messaging focus on its abilities to enable client’s journey to the cloud, even if the service is BPO.

There was no mention by HP ES during the event of its thinking about expanding in growth markets: this is something we would expect to hear more about in FY 2014.

The investment in portfolio is clearly in the areas of mobility, information management & analytics, apps modernization, security (one of HP ES’ fastest growing areas) and cloud services.

HP ES also arguably needs to invest more in its vertical capabilities, including within existing strongholds such as U.S. state government healthcare, where it has led the Medicaid market for decades. The contracts for health information exchanges (HIXs) are starting to be awarded. These would take HP ES into the new era of U.S. state healthcare following the reforms that are underway. However, competitors and new players are winning the contracts. For example Vermont, where HP recently won a Medicaid Fiscal agent contract renewal, awarded the contract to build its HIX infrastructure to CGI. And at Nevada, where HP ES is also the Medicaid fiscal agent, Xerox has won the contract to design and implement the state’s HIX.

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