Daily Archives: June 2, 2010

Pondering HP’s $1-Billion Services Remake

I typically use this blog to convey my modest knowledge and understanding of industry developments and events, but toward the end of this post, I will ask my readers to provide me with some enlightenment. I hope you will be kind enough to assist in this ambitious endeavor.

First, let’s step back and consider HP’s major announcement yesterday. As Craig Matsumoto of Light Reading wrote, HP dominated, perhaps monopolized, the cloud-computing news yesterday with is plans to cut 9,000 employees and spend $1 billion over the next few years to extensively automate its customer-facing EDS data centers.

Yes, I know, HP says it will hire 6,000 employees back, but the upshot is that HP is radically revamping what’s left of EDS for a cloud-computing future in which customer relationships will involve intensive automation and a lot fewer humans than were necessary in the old “high touch” era of consulting’s halcyon days.

We’re in a different set of economic circumstances today, though, and no company embraces that lean, mean ethos like HP. It’s pushing standardized, commoditized hardware and relentless data-center automation with a near-medieval vengeance, employees and competitors be damned. If the shareholders are smiling, with their thumbs jutting upward, all is well in Mark Hurd’s austere universe.

All of which brings us to why this announcement was made. While Hurd is lauded by investors as the consummate operational scourge, buttressed by a zealous executive team that searches for efficiency gains and cost reductions like value shoppers looking for deals at Wal-Mart, he and his consiglieri were seen to be struggling to get full value from their $13.6-billion acquisition of EDS.  That’s not a favorable perception, and it’s not one Hurd or the HP board wants to see gain popular currency. Radical surgery was required, as it usually is (even perhaps when it isn’t) somewhere within HP.

Over at SearchDataCenter.comBarbara Darrow provides a cogent analysis of what’s behind HP’s data-center shakeup. She points out that HP, in its earnings call two weeks ago, reported that revenue from its services division grew a paltry two percent year over year, with much of that gain more than offset by currency fluctuations. Meanwhile, HP’s lower-margin PC sales spiked more than 20 percent during the same period.  The contrast between the performance of the two groups was stark and unwelcome.

So, more change comes to HP. The shuffling of bodies out of and back into the company will continue at a relatively frenetic pace until Hurd and his team crack the code or steer the company off the rails. If the history of the technology industry teaches us anything, it’s that past performance does not guarantee future results, so be careful about placing wagers on the ultimate outcome.

Speaking of results, this is where I need the benefit of your wisdom. During a call yesterday to announce its momentous overhaul to EDS, HP took a question from an analyst regarding the company decision to incur a GAAP charge rather than a non-GAAP charge (or charges) to account for the restructuring costs. Here’s the exchange, as excerpted from a Thomson Reuters transcript:

Toni Sacconaghi – Sanford C. Bernstein – Analyst

And then, Cathie, just on the charge. You know, this is a multi-year transformation, something clearly looking to improve your business. It looks like you will be excluding the restructuring charge from your non-GAAP earnings. Could you just review how you determine whether something is a charge or a one-time charge that you choose to exclude from non-GAAP earnings and what is a normal course of transformation in terms of charge and what you would include in as a charge and non-GAAP earnings?

Cathie Lesjak – Hewlett-Packard Company – EVP, CFO

Sure. We look at a number of different factors when we’re determining whether or not the charge should be a GAAP-only restructuring charge. We look at things like whether or not it’s one-time in nature as opposed to a recurring –. It’s generally a global in scope kind of initiative involving a number of different countries.

It also has to involve something structural, long-term strategic realignment of a business segment or across a business segment. While business charges in non-GAAP are typically more routine, routine rebalancing of activities and adjustments to changing business conditions. So this is really a structural change.

We are transforming the Enterprise Services business with the investment that we are making and we are making these one-time investments to modernize our delivery organization and expand our global footprint and fundamentally simplify our operating model and it is really those pieces that have us take this out as a GAAP only charge. We don’t really want it to basically taint the ongoing earnings with something that is nonrecurring in nature.

Ann Livermore – Hewlett-Packard Company – EVP, Enterprise Business

Tony, this is Ann. One example of that would be a when Cathie mentioned simplifying the operating model, one action we’re doing is to take some layers out of the structure. If you look at — we always count layers in between our clients and our CEO as one of the things that we think is important from an operating model perspective. So part of this action, for example, and why we think the charge is appropriate this way is because we’re taking some layers out of the structure.

Huh? Alas, I am a simple man, but that distinction seems arbitrary to me, open to misinterpretation, if not abuse. Please enlighten me, dear readers, as to why HP applied the relevant charges in this manner. This curious mind wants to know.

GridPoint Among Startups Recalibrating in Search for Smart-Grid Gold

Using GridPoint as an example, Martin LaMonica of CNET examines the hardships some smart-grid startup companies are experiencing as utilities take a discriminating approach to expenditures on technology upgrades.

Even though the general consensus holds that the smart grid eventually will fulfill its commercial promise — most of it, anyway — many market analysts and startup investors now concede that they were overly optimistic regarding their industry forecasts and commercial expectations.

Like a pop star trying to appeal to a fickle audience, GridPoint has reinvented itself on a number of occasions, with its transformations perhaps prompted as much by anxious investors as by customer demand. Depending on one’s perspective, GridPoint is a market visionary seeking to provide comprehensive grid-management software or an increasingly desperate company firing shotgun blasts in all directions.

As often is the case, however, it’s not that simple. In nascent markets, such as the smart-grid space, startup vendors often recalibrate their strategic plans as expectations meet reality. It isn’t unusual for companies to go through several metamorphoses before finding the right path to prosperity — or getting irredeemably lost in the wilderness (where there are no paying customers). It remains to be seen how it will end for GridPoint, but the company is leaving no stone unturned its quest for viability.

GridPoint has struggled as a purveyor of residential energy-management software, partly because consumers remain unconvinced they need such a product and partly because utilities are ambivalent about acting as a sales channel for such products. GridPoint also has tried, with varying degrees of success, to sell grid-management software, including vehicle-to-grid (V2G) solutions, directly to utilities. Now, the company believes it has worked the market oracle by offering energy-management software to commercial, industrial, and government customers, obviating utilities in the process.

There is an identifiable, well-contested market for demand-response software in the commercial and industrial sectors, but GridPoint’s play is a bit different. Through its acquisitions of Standard Renewable Energy and ADM Micro, GridPoint has put together a relatively comprehensive offering for businesses and government organizations pursuing “optimized energy consumption” — comprising reduced costs, longer equipment life cycles, and attainment of corporate-sustainability goals — as well as a greater integration of renewable energy (and, thus, lower emissions) into their consumption profile.

It’s true that organizations can derive efficiency gains and cost savings these sorts of solutions, but customers tend to be keener on adoption if they have a self-appointed or externally enforced “green mandate.” For that reason, large departments and agencies at governments of various levels, even in these straitened times, might be the low-hanging fruit for GridPoint’s latest near-term revenue focus.

As for what LaMonica’s interlocutors, including GridPoint, tell us about the state of the rest of the smart-grid space, I agree and disagree with some of their salient observations. Yes, I agree that it’s exceedingly difficult at this juncture to sell home-energy management solutions to consumers. Most consumers aren’t fully cognizant of the smart grid, and many whose homes have been equipped with smart meters aren’t much interested in the new devices. They typically don’t notice the smart meters until time-of-use (ToU) billing is activated, at which point they are as likely to react with indignation as with bemused curiosity.

It’s not clear to me that utilities know how to sell residential energy-managmeent systems, nor is it obvious that they want to sell them. At the same time, utilities are equally concerned, perhaps for good reason, about allowing third-party vendors, such as Google and Microsoft, to circumvent them and go directly to consumers with home-energy management offerings.

Another challenge, of course, is proving to consumers that the time and money they’ll spend on such systems will be rewarded with a compelling ROI, whether measured monetarily or in environmental gratification. Utilities haven’t worked it out, and neither — as far as I can see — have vendors of such products. For their part, regulators and public-utility commissions (PUCs) seem undecided about how to proceed.

So, yes, the smart-meter-connected consumer remains a tough nut to crack. Interests haven’t yet aligned to bring the consumer the type of value proposition that will persuade him or her to become an active market agent.

But, contrary to what the article seems to suggest, utilities are spending on smart-grid upgrades to their electricity generation, transmission, distribution, and substation infrastructure. Vendors are making money selling products and services to utilities in those areas. GridPoint might have missed that particular target, but others are hitting it. The spending occurs in phases — not all at once, and not in a huge wave — but it is proceeding in measurable increments that continue to grow.

The smart grid is an expansive, sprawling, heterogeneous mosaic of  functions, products, technologies, interdependencies, and ecosystems. Depending on one’s particular vantage point, it will look different. What’s more, not all smart grids, in all parts of the world, are being created equally. Some utilities are ahead of others, and some have different priorities based on economic, environmental, financial, geographical, and policy considerations.

For vendors, as GridPoint will attest, the challenge is in determining who in the smart-grid constellation is wiling to spend now on urgent near-term priorities as well as on long-term strategic initiatives. For some vendors, that will mean reaching outside utilities, while others have found ready markets for their products and services inside utilities.