HP wants to get leaner and meaner to better compete with the likes of IBM, Oracle and Microsoft for a bigger cut of the massive IT services and cloud-computing market, so it’s going to pink-slip some 9,000 employees in its enterprise services unit over the next three years while embracing some of the data center automation tools it’s been pitching to customers.
In particular, HP (NYSE: HPQ) said it plans to invest in “fully automated, standardized, state-of-the-art commercial data centers” built on its Converged Infrastructure hardware platform, using on-demand software applications and incorporating mobile computing and security platforms favored by enterprise clients both in the U.S. and abroad.
The job cuts, which represent a small portion of the company’s more than 300,000 employees, will cost HP more than $1 billion in one-time charges and write-offs over the three-year span.
The strategic shift comes less than two years after HP acquired IT services giant EDS for $13.9 billion, a massive deal that, when coupled with HP’s array of hardware and software assets, aimed to make HP the envy of every other services provider.
However, the integration of these two enormous units hasn’t delivered the profits and efficiency HP shareholders had first envisioned. Also, the widespread adoption of cloud-computing and the Software-as-a-Service model has changed the way customers build and buy hardware and software for their new virtual data centers.
In its latest quarter, HP easily blew past analysts’ profit estimates, but its services unit only chipped in a 2 percent improvement (on more than $30.8 billion in sales) on a year-over-year basis—an increase that was further diminished by the fact that overall IT spending bottomed out in the second quarter of last year.
At the time, Hurd told analysts that HP had “been spending a lot of time continuing its integration of EDS,” a comment that now appears to be a harbinger of this week’s massive reshuffling of the services unit.
Data center focus for HP Services
While HP will lop off 9,000 jobs from its services group in the next three years, company officials say the restructuring will actually only a result in a net loss of 3,000 workers as it plans to hire another 6,000 people over this same period to work on the more advanced data centers and expand its global sales and delivery units.
“Over the past 20 months, we focused on integrating EDS and improving profitability,” Tom Iannotti, senior vice president and general manager of HP’s enterprise services unit, said in a statement. “Now that the integration is largely complete, we have identified significant opportunities to grow and scale the business.”
“These next-generation services will enable our clients to benefit from the combined technology and services leadership that only HP offers,” he added.
But it will come at a price.
The Palo Alto, Calif.-based firm said it will eat about $500 million of the $1 billion in charges in the current quarter and the rest over the next three years. The charges, mainly for severance expenses, will be excluded from the company’s adjusted earnings results.
HP officials said it expects to realize savings of between $500 million and $750 million a year by the time it completes the layoffs and restructuring plan at the end of its 2013 fiscal year.
The announcement comes six weeks after chief services rival IBM (NYSE: IBM) posted stellar sales and earnings across the board, buffeted by a 4 percent improvement in global services revenue that included 13 contracts worth more than $100 million.