Resisting Major Cuts, HP Takes Long View

Denizens of Silicon Valley were naive to think that the information-technology industry somehow would be immune from the economic devastation that began in the financial markets and rippled through almost every other industry worldwide.

Silicon Valley is not immune, never was, and never will be. It’s linked inextricably to the broader marketplace. If banks fail, or have to undergo severe restructuring, they will necessarily have to reduce their IT budgets. Similarly, if credit from banks dries up or is constricted, companies in other industries will spend less on IT. Consumers, too, confronted by plummeting real-estate values and economic uncertainty, will be less inclined to fork out big bucks for the latest electronic wizardry and software.

So, Silicon Valley, including its largest players, such as Hewlett-Packard, is suffering along with the rest of the country and the economy at large. It’s an unavoidable hardship.

How Silicon Valley, and the technology industry as a whole, responds to a long and deep recession — whether it will qualify as a depression is a matter of economic debate — will be critical. At this point, most technology companies are taking a long-term perspective, giving consideration not only to quarter-to-quarter investor demands, but also to how they will be positioned when the market regains a semblance of stability. Some, though, have gone for the axe, chopping staff aggressively to cut costs now.

If companies can afford to do so, the long-term option seems the best course. Why disrupt the culture and operational rhythm of your company if you don’t need to do so? Implement a hiring freeze, enact executive pay cuts — what’s a few less million to a CEO taking home ridiculously high remuneration from a bamboozled and profligate board of directors, anyway? — and institute other cost-saving measures that fall short of shedding valuable staff.

However, the assumption behind the long-term approach is that the recovery is not too far off, and that, when the recovery comes, it will be sufficiently robust and long-lived to justify today’s patient tactics. The problem is, nobody knows for sure how long or how deep this punishing downturn will be.

In a memorandum to Hewlett-Packard employees explaining the need for executive and employee pay cuts, CEO Mark Hurd hinted ominously at darker scenarios.

Wrote Hurd:

“If the company performs well, if your individual businesses perform well and if you perform well, then you could potentially make up the difference,” with a bonus, Hurd, 52, told employees in the memo, which was confirmed by spokeswoman Emma McCulloch. “There are no guarantees. If the environment gets worse, if the downturn lasts longer than we’re assuming, if our performance declines, we’ll have to reassess.”

Reassess. What that means, basically, is that desperate times would call for desperate measures.


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