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Shares of computing giant Hewlett-Packard rose by more than 4 percent today, a day after the company announced that it expects to lay off as many as 30,000 employees as it splits in two later this year.
The cuts, which will hit the enterprise-facing side of HP’s operations and therefore the company that will on Nov. 1 become Hewlett-Packard Enterprise, will take place mostly in the long-troubled Enterprise Services business unit, which is responsible for about $23 billion in annual revenue. It’s the IT outsourcing operation where HP employees work directly with large companies setting up and running their corporate computing equipment and infrastructure.
The latest round of job cuts amounts to about 10 percent of the new company’s workforce — which now stands at about 300,000, pre-split — bringing to about 85,000 the top-end estimate of the total jobs lost at HP since Meg Whitman took over as CEO in 2011.
In an interview, Whitman said the cuts, combined with a $2.7 billion charge, amount to what she expects to be the final restructuring action of her tenure. Her efforts to rebuild HP have been frustrated by the ongoing difficulties in Enterprise Services. Made up primarily of the company formerly known as EDS, which HP acquired in 2008, its revenue has declined consistently for several years.
Whitman said its results are finally looking up — or least the closest they’ve been to up in about five years. Revenue that had historically declined about 10 percent a year is now on track to flatten out in fiscal 2016 after accounting for the expected effects of currency exchange rates. She now expects the unit to consistently deliver operating margins of about 8 percent, assuming revenue stays flat. It has taken basically all four years of her tenure as CEO to get to this point. “I underestimated how long it would take to turn this business around,” she said.
One major complication is that HP’s service customers sign contracts that last for five, seven or even 10 years, and often the process leading to a contract can take months or years of complicated negotiations. “There are people we’re talking to now who won’t sign a contract for two years,” she said. “It’s exactly the opposite of our printing business, where we sell a printer every second, or in PCs, where we sell six computers every second.” All the more reason, she argues, that HP Enterprise and HP Inc. — the new company devoted to PCs and printing — should be separate.
So what makes her think that the services business is finally on the mend? Operating profits have ticked upward in recent quarters, and costs will decline with the job cuts. A significant portion of the services personnel work where labor costs are high, including the U.S. and Western Europe. Most of them — about 60 percent — will by 2018 be replaced by workers in one of five HP offices around the world: Costa Rica; Manila, the Philippines; Sofia, Bulgaria; and Bangalore and Chennai in India. “We expect to grow significantly in these locations,” she said.
The plan will allow HP Enterprise employees more flexibility to respond to quickly shifting needs of services customers. “The old way was that the HP employee would work on-site. … If the client was GM, you worked on GM and only on GM. And that made it difficult to move people between one client and another,” she said. “That may have worked before, but it’s not the right way to do things today.”
Concern over the services business is only part of the larger narrative of HP itself. Does the split that will take effect in about six weeks constitute a victory in the turnaround battle that Whitman undertook in 2011?
“The last four years have been a victory,” she said. “At that time this company was not strong enough to carry out the kind of separation we’re doing.” Four years ago, HP had a combined $11 billion in debt; today it has net cash of $3.8 billion. “The company was facing some really difficult times four years ago. Our work isn’t done, but we’re in far better shape now.”
This article originally appeared on Recode.net.
