Update: HP to cut 14,500 jobs, hopes to save $1.9B a year

It's also eliminating its Customer Solutions Group, which sold to enterprise customers

Hewlett-Packard Co. hopes to save $1.9 billion a year through a massive reorganization in which it will cut 14,500 jobs, or about 10% of its workforce. It will also link sales and marketing efforts more closely to business units, eliminating the Customer Solutions Group (CSG), which sold to enterprise customers, the company said today.

Few positions will be cut in sales or research and development. Instead, HP will eliminate management layers and restructure support functions, for a savings of $1.6 billion a year in staffing costs. It will also cut U.S. retirement benefits programs, saving a further $300 million annually.

Most of the staff cuts will be made in central support functions such as human resources, finance and IT. The others will be made in individual business units.

In the U.S., longer-serving staff will be offered voluntary early retirement. Plans will vary in other countries, depending on local laws or the outcome of consultations with employee representatives, HP said.

The company will spread restructuring charges of $1.1 billion over six quarters, beginning with the fourth quarter of its 2005 fiscal year.

HP won't benefit fully from the savings until 2007, but in its 2006 fiscal year it expects to save $900 million to $1.05 billion. About half of those savings will be turned into operating profit, the company said. In the year up to April 30, HP had revenue of $83.3 billion.

HP's financial performance has been uneven in recent quarters. The company appears to have stemmed the losses in its PC and server groups, but those divisions are not as profitable as management and shareholders would like. HP has its printer business to thank for most of its recent profits, but the company trimmed positions from that group earlier this year in order to further reduce costs.

When the CSG is closed, sales staff there will transfer into three business units: the Technology Solutions Group, the Imaging and Printing Group and the Personal Systems Group. CSG's head, Michael Winkler, will retire at the end of this month, and senior sales positions will be created in each of the three business groups.

CEO Mark Hurd separated the imaging and personal systems groups last month, undoing a change made by former CEO Carly Fiorina. That move was designed to give each group more control over its business, HP said.

CSG was HP's point of contact with market segments such as the public sector and small and medium-size businesses. Those relationships will also be divided among the three business segments, with the Technology Solutions Group taking on public-sector customers, the Personal Systems Group handling small and medium-size businesses and the Imaging and Printing Group dealing with consumers, Hurd said in a conference call with analysts.

"The objective is to create a simpler, nimbler HP with fewer matrices," Hurd said. "I don't have very high affection for matrices."

The restructuring will reduce the number of people involved in each decision and shorten the path from idea to customer, he said.

Within the company, morale is higher than outsiders would expect, despite the planned job cuts, Hurd said. He attributed it to a hope that the company will go on the attack.

The company recently appointed three new members to its Executive Council, bringing the number of high-ranking company officials that serve on the council to 10 following Winkler's departure. Cathy Lyons became chief marketing officer after 26 years at the company. Todd Bradley became executive vice president of PSG; he was formerly president and CEO of PalmOne Inc., now Palm Inc. Randy Mott was named CIO after 22 years in similar roles at Dell Inc. and Wal-Mart Stores Inc.

The company's business is increasingly reliant on low-margin lines like PCs and low-end servers. In order to compete with a lean company like Dell, HP would have to look into trimming positions in those divisions, said Charles King, principal analyst at Pund-IT Research in Hayward, Calif., in a recent interview.

When Hurd was hired on March 29, many financial analysts wondered if he would take on the big problem that HP has faced in the past few years: how to digest the acquisition of Compaq. Today's announcement is an indication that Hurd is planning to address strategy only after he has taken care of reducing costs and improving performance, said Cindy Shaw, a senior analyst at Moors & Cabot Inc., in a June research note predicting the layoffs.

Richard Ptak of Ptak & Associates Inc. in Amherst, N.J., said the layoffs "make good sense" but should not be stretched out over 18 months because of the damage they could have to employee morale and productivity. He also said it is ironic that "the head of a technology company with products and services focused on making IT relevant is saying HP has a lot of fat in its own IT organization. I'm bothered by the message that sends."

Ptak praised Hurd's decision to hold on to the HP software division. Many customers have expressed concerns it would be cut or sold. "I don't think that will happen, and it would be a big mistake," Ptak said, adding that HP has quality software but has fallen short in marketing it and explaining it effectively to customers.

HP plans to report its third-quarter earnings on Aug. 16.

Tom Krazit of the IDG News Service and Matt Hamblen of Computerworld contributed to this story.

Copyright © 2005 IDG Communications, Inc.

Shop Tech Products at Amazon