Farewell, IPG: HP Restructures Its Printer Business
- By Charles Brewer
- May 01, 2012
On March 21, Hewlett-Packard announced plans to combine the Personal Systems Group (PSG), which markets HP’s laptops and PCs, with the Imaging and Printing Group (IPG) to create the new Printing and Personal Systems business unit. The newly formed group is expected to have annual revenues in the neighborhood of $65 billion, or just about half of the firm’s total revenue. Todd Bradley, the current executive vice president responsible for PSG, will head the new unit. IPG Executive Vice President Vyomesh Joshi has retired.
Combining HP’s two largest revenue-generating units is expected to allow the firm to cut costs by improving supply chain efficiencies and streamlining product development and branding initiatives. In addition, HP announced in March it is streamlining other operations by centralizing its global account sales organization into the HP Enterprise Group. The company also plans to combine all marketing functions across business units as well as unify its communications staff.
Although HP CEO Meg Whitman indicated it was too early to speculate on job losses, it is widely believed that HP’s reorganization will result in layoffs. Cross Research estimates that the total headcount of the combined IPG and PSG will be reduced by approximately 6,000, leaving the Printing and Personal Systems with a total staff of around 30,000. According to HP’s 2011 Annual Report, as of October 31, 2011, the firm employed a total of about 349,600 worldwide.
Much ado about PCs
It seems that HP cannot make up its mind as to what to do with its PC business. Last year, rumors circulated that HP would exit the PC market, which the firm strongly denied. Then, last summer, the company shocked investors and the industry as a whole when it revealed it was considering divesting itself of PSG, either by selling it outright or spinning it off. On August 18, HP said it would “explore strategic alternatives” for its $41 billion personal computer business as it implemented “a plan to fundamentally transform the company.” After reporting lackluster third-quarter performance, HP reiterated it was focusing on “higher value, higher margin growth categories,” which apparently did not include PCs and laptops.
Léo Apotheker, HP’s leader at the time, said, “We believe there are alternatives that could afford PSG more autonomy and flexibility to make strategic investment decisions to better position the business for its customers, partners and employees.” At various meetings last year, Apotheker, who left the German ERP software giant SAP to take the helm at HP, had articulated a strategy that focused on delivering more high-value products like software and services.
Although it stressed that any final decision about the PSG business was a year or more away, HP’s August announcement resulted in an investor revolt of sorts. Share prices plunged from above $31 to below $23, their lowest levels in six years, and in a matter of days, the firm lost $16 billion in market capitalization. A securities class action suit was filed against the OEM on September 13 that claimed certain HP senior managers and the firm had caused investors to suffer an economic loss. Throughout September, calls came for Apotheker’s head, and by the end of the month, word came that Whitman, former CEO of the wildly successful online auction site eBay, had replaced him as CEO.
Of course, Apotheker was not the first HP CEO to get the boot — at least in part — because of monkeying with the company’s PC business. Carly Fiorina was shown the door after she succeeded in ramming the $24.2 billion Compaq merger through but then failed to make money on the low-margin PC business she acquired. In hindsight, some feel that the Compaq acquisition was not such a bad move, especially since Bradley has managed to turn a profit with the PSG business — albeit not quite the profit achieved by the IPG unit.
Try, try again
The formation of the new Printing and Personal Systems unit is the latest in a string of moves taken by HP over the years to maximize the synergies that exist between IPG and PSG. As far back as 2000, the firm reorganized so the two units could work together on product development. In 2005, prior to being given her pink slip, Fiorina merged IPG and PSG into the Imaging and Personal Systems Group. When Mark Hurd replaced Fiorina in 2005, one of his first official acts was to split the two units. The Wall Street Journal, however, reported recently that Hurd came close to recombining the two units again in 2009.
When Fiorina created the Imaging and Personal Systems Group, IPG was by far the shiniest star in the HP firmament. With the exception of fiscal 2001, IPG revenue grew, and for three out of five years, its earnings from operations were over 15 percent as a percentage of net revenue. This stood in sharp contrast to PSG’s performance. In 2001 and 2002, the unit lost money, and while revenue grew after the Compaq acquisition, margins remained razor-thin. Earnings from operations were a mere 2.5 percent of net revenue in 2005, up from 0.1 percent and 0.8 percent in 2003 and 2004, respectively.
Credited with much of the printer unit’s success, IPG’s Joshi was tapped to lead the newly combined printer and PC unit in 2005. There was some talk that the group would be spun off with Joshi as its head, as Hurd took over in the post being vacated by Fiorina in 2005. Shortly thereafter, as noted, the new CEO severed the two units, and Bradley took over as executive vice president of PSG after leaving his post as CEO of Palm, which HP would later acquire in 2010.
After taking control of PSG, Bradley managed to grow HP into the world’s largest PC company after surpassing its longtime rival Dell. In addition to growing unit sales, he also grew PSG’s revenue and, more importantly, its profitability. Many suspected that Bradley would become HP’s CEO when Hurd abruptly resigned after allegations surfaced that he made concealed payments to a female contractor. Instead, the board chose Apotheker to replace Hurd.
End of an era
Joshi’s departure marks the end to an era at HP in a couple of ways. First, after 31 years, he was among the last senior executives at the firm who came up through the ranks following the five precepts of the so-called HP Way. Joshi’s career started in 1980 during the Bill and Dave Era, and he worked as an engineer on early inkjet machines. In a prepared statement, Whitman said, “VJ embodies the spirit of HP, and his impact on the company has been tremendous.” The firm said, “Under Joshi’s leadership, IPG has grown revenue from $19 billion to $26 billion and doubled its operating profit to approximately $4 billion.”
Joshi’s departure also seems to signal that IPG has lost some stature within HP. After years of high revenues and profits, HP’s printing business has been lackluster since the recession hit. Having reached a high-water mark of $29.39 billion in 2008, IPG revenue dove 18.2 percent in 2009. Although it sustained a “dead cat bounce,” revenue has remained flat at just over $25.76 billion for the past two years. Operating profits as a percentage of revenue hit 18 percent in 2009 only to slip to 17.1 percent and 15.4 percent in 2010 and 2011, respectively. During the first two quarters of the current year, IPG’s operating profits have remained well below 13 percent of total revenue, which has caused investors to question Joshi’s leadership along with what can be done to reverse the downward trend.
IPG’s travails over the past couple of years reflect the overall declines suffered by the hard copy industry as a whole since the economy tanked in 2008 and while it continues to remain stubbornly soft. Many OEMs in addition to HP have seen hardware and supplies sales nosedive as customers look to save money by printing less and refusing to purchase hardware unless it is an absolute necessity. To make matters worse, IPG has been plagued with recession-related supply chain issues since 2008. Over the past couple of quarters, HP executives have indicated that the channel is stuffed and sell-through rates are off. The problem is expected to continue until later this year. This latest glitch in the supply chain follows a similar problem in 2008, which took a year or more to correct.
Although Joshi is retiring when IPG is not at the top of its game, his accomplishments are not diminished. He leaves with revenue more than 35 percent higher than when he took the job. Joshi also led HP as it grew to be the world’s leading inkjet innovator. In addition to maintaining HP’s position as the world’s No. 1 desktop inkjet vendor, Joshi’s leadership allowed IPG to secure a significant share of the aqueous wide-format market through organic growth and the acquisition of firms like MacDermid ColorSpan and NUR Macroprinter. HP’s scalable print technology (SPT), launched under Joshi’s watch, allowed the firm to produce print heads for a wide range of machines (including devices for desktop, wide-format and industrial applications). HP owes a debt to its laser engine supplier Canon for the technology in LaserJet machines, but Joshi also contributed hugely to the dominant position the line holds in the enterprise and SMB spaces.
Bradley also has an impressive list of successes, including surpassing Dell and IBM in computer sales. I suspect that more than anything else, it was his ability to add hundreds of basis points to PSG’s operating margins over the past couple of years that put him at the head of the newly combined PC/printer unit. Despite the commoditization of PCs for more than a decade, Bradley has managed to more than double margins from approximately 2.5 percent in 2005 to just shy of 6 percent last year — and he did this during the worst economic downturn the world has experienced since the Great Depression.
HP’s newly combined PC and printer business ought to offer Bradley some unique opportunities, especially in terms of channel relations. Historically, IPG was more focused on consumer channels, while PSG maintained relationships with corporate and commercial clients. The channel-focused news website CRN.com said the combined HP units will provide channel partners with a “simpler relationship with the company.” According to CRN, in the past, “putting together deals involving products from PSG and IPG has been difficult for partners because the groups have separate Profit and Loss statements.” The new organization should go a long way to address such channel-related issues.
But Bradley will also face a new set of challenges. Selling PCs is not like selling printers. Each product line has its own distinct business model. Moreover, while there are some synergistic advantages to selling computers and office printers, a good chunk of the products in the IPG portfolio will not be afforded such synergies. It is hard to see, for example, how marketing Indigo machines or HP’s new high-speed inkjet Web press will gain any advantage by being associated with laptops.
After acknowledging that HP needs a more stable work environment, Whitman’s move to combine PSG and IPG is a little surprising. Although the total headcount reduction will be less than 2 percent, it may send the wrong signal to the OEM’s already beleaguered troops. HP employees have endured numerous layoffs over the years along with other painful cost-cutting schemes. As a result, the workforce has grown increasingly disenchanted with the OEM. This was particularly true during Hurd’s reign, when tens of thousands of jobs were eliminated and budgets were slashed to the bone. Since the reorganization does eliminate jobs, Whitman’s first big step may be seen as a return to the Hurd era, which would not sit well with a workforce hypersensitive about its future with the company.
I also suspect that morale within IPG will suffer as Joshi leaves and Bradley, a PC guy identified as one of “Mark Hurd’s boys,” takes over as the boss. As noted earlier, IPG’s stature within HP has undoubtedly suffered as it has struggled over the past few years. In purely practical terms, the once substantial IPG R&D budget, which was trimmed back significantly during the Hurd years, may be cut once again as Bradley looks for saving. I would suspect that he’s also more inclined to bestow largesse on his old computer team rather than the printer guys.
Of course, much of this is speculation on my part. One thing that is for certain: HP will remain the market leader in our industry for the foreseeable future. And this is regardless of the fact that the group that propelled HP’s printer business to its vaunted position — IPG — no longer exists, and its leader, Joshi, has left the building.
This article originally appeared in the May 2012 issue of Recharger.