Monday, September 27, 2010

Another score for illegal behavior

What the hell is going on, we might ask. Headline in the San Jose Merc this time said "Valley's Titans Conspired". Citing a Justice Department investigation and findings, six companies -- Google, Apple, Intel and three smaller fry -- Intuit, Adobe, and Pixar -- agreed to quit their practice, now five years old, of colluding to 'not poach' each others' employees. Maybe that's why HP didn't pursue the suit against Hurd any longer -- if the Justice Department now is looking into restraint of employee 'freedom'...

These companies have been more respectable, outwardly, than many in the rough-and-tumble Valley. These are not (except for Apple) companies that got caught in the gigantic stock option 'backdating' fraud. These are the darlings in general -- Google far outpacing Yahoo to lead in Search and now perhaps in Android phones; Intel far and away the leader in microprocessor deliveries and now ramping up for fantastic n-way 'cloud computing'; Apple held in extremely high regard for pinpoint marketing savvy with the i-Pod, i-Phone and i-Pad hits in succession. Intuit is the world leader (and there is really no second place) for Home and Small business Accounting software; Adobe is the master of multimedia delivery security; Pixar -- my gawd, the greatest animated film company of all time (well, maybe Disney..., but Pixar does such complex wonderful stuff).

So what happened? Well, it seems that these leaders are all pretty good friends. The story implicated Eric Schmidt (CEO Google), Steve Jobs (CEO Apple), Bill Campbell (Chairman Intuit) and Paul Otellini (CEO Intel) directly. Otellini and Campbell are on Schmidt's Board (as is Stanford Prexy John Hennessy), Campbell was on Jobs' staff for years and is a close friend; Schmidt was on Apple's Board until the Justice Dept invited him to step down a year ago. Jobs of course was the key owner of Pixar before selling it to Disney (and now he is Disney's largest shareholder). Adobe was coerced by Apple, in order to have its software included on the new i-Pad. Hard to imagine that these folk all had cocktails at a barbeque one night, and someone said, "hey, I've got an idea..." but who knows?

What is clear is that, once again, the leadership in the Valley looks tawdry, cheap, and illegal. Classically, Intel issued the statement that it perennially has ready: "we've agreed not to enter into agreements (like this anymore). Intel does not believe its actions violated the law, nor does the company agree with the allegations." Unstated, but as we've seen in a multitude of other actions involving Intel non-violations, they'll keep a little extra cash around to pay the fine.

what next for HP and crowd?

The beleaguered HP Board settled with Mark Hurd last week, getting $13.5 million back (of the $42 million they gave him) and in turn withdrew their injunction request to stop him from going to work for Larry Ellison at Oracle. Since Hurd's paycheck will total around $11 million with an upside 'prob,ability' of another $5 million, he probably felt that he could be a bit magnanimous.

After a suitable few days, the Board floated their current best thinking:
1. They want an insider (this after looking at a crop of outsiders, and presumably listening to a lot of 'oldtimers' about the last two choices)
2. They discussed a couple of outsiders that they had considered, sort of explaining that they were 'late' for the one who just became the new Nokia CEO...
3. They said Todd Bradley, Ann Livermore, and Dave Donatelli -- in that order -- were the leading inside candidates, while the newspaper showed a big article with Viomesh Joshi prominently talking about the peripherals business, far and away the most profitable part of HP. VJ was not "on the list" put forth by the board
4. Astonishingly candid, the article said "several members of the Board" backed Bradley, "who has many of Hurd's capabilities" The article went on to note that Livermore is the best candidate in terms of the company employees liking her, but "she's been passed over twice". It then said Donatelli hasn't been at HP long enough (just a year), so is "unlikely" to prevail. This was all big news a week ago; nothing has appeared since. Wierd, don't you think? Says they're wrestling with something that has them uncomfortable.

Wednesday, September 15, 2010

HP R&D and Palmissano

The dirty little secret is starting to get wider currency. Sam Palmissano, in today's Wall Street Journal, p B1, is headlined at "IBM's Chief Thumps HP". Spencer Ante's story uses the wrong numbers (the same numbers that journalists have used for these past two months -- I have been flabbergasted by how everyone uses everyone else's words/numbers as though they themselves had done the work!), but makes the point that HP has been lowering its R and D investment steadily for a long time now.

Palmissano said "HP used to be a very inventive company.... (but re) buying 3PAR, HP had no choice. Hurd cut out all the research and development..." Damning, but of course, just words from a competitor.

Ante then repeats the mantra that HP under Hurd cut R and D from $3.5B (4% of revenue) to $2.8B (2.5%) in 2009 while IBM has maintained their R and D percentage at 6% ($5.8B). True numbers, but he (like others) uses a foreshortened lens to look at the facts.

I first reported this systematic reduction in R and D investment in an May 2009 interview with Ashley Vance of the New York Times, who featured a barbed response from R and D VP Shane Robison, related in my May 26, 2009 blog entry "Whither HP Now". Our book, THE HP PHENOMENON, documents this in overview form on pp. 503-4, submitting that the Valley 'buzz' is that HP has become "innovation hostile".

It is perhaps noteworthy that HP tried to stop publication of the book, citing "numerous factual errors , inappropriate use of confidential materials, and unwarranted conclusions", none of proved to be supportable when we engaged on specifics. The errors we have found in HP website materials, pointed out carefully, have been ignored (such as how many oscillators they sold to Disney and the price point, etc., not that it matters except you'd think they'd care enough to have their own history correct).

Since Ante and others are insistent to show that Hurd screwed it up by going from 4.0% R and D to 2.5% R and D investment, I would at least like them to use the right numbers. For example, it is wrong to use the 2005 fiscal numbers as Hurd's baseline, since Carly was gone for eleven months of calendar 2005 and nine months of fiscal 2005. And Hurd was there for nine and seven months respectively that year. And we have three quarters of 2010 already reported, measurably lower than 2009 for R and D percentage.

First of all, the six decade continuous investment at 9.0% plus or minus 1% was ended by Lew Platt, who took it from 9.0% to 6.0% in seven years, 1992-1999 (5.8% 4th Q 1999). Carly continued the trend, at a somewhat slower decline, taking it from 5.8% to 4.9% (1999-2003). Under pressure from her Board in 2004, she held R and D dollars constant, and the percentage shrunk to 4.4%. Counting the first six months of fiscal 2005, she averaged 4.34% R and D investment for her last eighteen months (counting the 2nd quarter of 2005, ere Hurd was fully on-board).

Hurd quickly started reducing, cutting $46M out of the 2nd half R and D actual dollars, taking the percentage to 3.9% from 4.3% in six months. The carnage continued through his last days, the average for three fiscal quarters of 2010 is 2.3%. General selling and administrative costs are now 437% of R and D costs, vs. 308% when he arrived.

So, for the last three CEO's, here is the track record:
Platt reduced R and D percentage by 34% in seven years
Fiorina reduced it by 27% in five and a half years
Hurd reduced it by 47% in five and a half years

The claim at HP continues to be of the form that "it is hard to spend more money on R and D and expect better results; we're spending plenty...". But Apple seems to find new exciting products to invent, with higher investment rates and more risk-taking. Iterative R and D is really just D; memristors are indeed R, but somewhere inbetween is what used to be the sweet spot. Even when they out-invent the competition (great examples include 3D Printers and DNA Printers, plus HP Halo), they today have a tendency to license or outsource or forget to market their advantage. What gives?

"What gives" is clearly a focus on today, not tomorrow; pandering to quarterly results throughout the company which emasculates not just R and D, but the possible uptake or technology transfer from R and D to successful marketing launch. Palmissano got it right. He closed his statements by praising Ellison at Oracle, "Oracle invests". That might become the contest between Hurd and Ellison, which has not yet been picked up in the trade press as the possible hot button.

Thursday, September 9, 2010

insider or outsider

A number of my best friends -- "oldtimers" as they're affectionately called in our book THE HP PHENOMENON -- are clear. What's been wrong at HP is that the Board has picked two outsiders in a row, and they were both TERRIBLE when all the facts became known. Thus, without question, the Board has to pick an INSIDER this time, the way HP did it so well for the first sixty years. Otherwise, it is hard to know, respect, and honor "the HP Way".

There is a lot of wisdom in that view, in my opinion. The HP Way, despite what Wall Streeters and avaricious shareholders believe, is not outmoded or inappropriate for this day and age. Indeed, as we chronicle in the book, the very distributed nature of most multinational corporations today, whether using outsourcing or offshoring or merely localized operations to support international sales, MUST HAVE some sort of honor system akin to the historic HP Way. Consider -- one out of five professionals working for Intel, Microsoft, Cisco, IBM or HP have NEVER met their boss face-to-face. Wouldn't you, as a shareholder, like to imagine that those workers believe in their company and their leadership and work hard on their (and your) behalf?

But, this begs the question. The first question to consider is "who is an insider?" Are there any left? Who knows what the HP Way even means. Instructive to read page 245, where old-timer VP Bruce Wholey was vituperative about the "new kids in computing and in Headquarters" circa 1980's. Page 384 documents the fact that these disgruntled employees led Packard to "ask for John Young's resignation" for lack of empathy with "the HP Way". Lew Platt certainly fulfilled the founder's hopes, and the company employees adored him by and large. Worth noting though that what Hurd was good at (and I do give him credit for running a lean, mean organization which did bolster Wall Street bidding 'while it lasted'), was just not Lew's strength.

So, the first thing to note is that the Board replaced two insiders (Young and Platt) in just about the same timeframe as the later Board got rid of two outsiders. This job ain't easy. In other words, they were looking for help outside when they found Carly; the insiders had not measured up twice in a row.

Perhaps the more important observation, though, is how many "insiders" are left, and from when do you count? By our 'count', only about five percent (ONE OUT OF TWENTY) employees at HP worked there before Packard passed away in 1996. And only about ten percent (ONE OUT OF TEN) employees at HP were there prior to the Compaq merger eight years ago. If those numbers seem out of whack, go do the math. It should scare you!!! Lest you think this is a new problem, consider page 383 where Bill Hewlett observed that 58% of HP employees in mid-1976 had been with the company less than 18 months, so how could they possibly know yet "the HP Way"?

So, it is folly to think that the ONLY CHOICE is to "go inside" -- and it is even more silly to think that if the Board does so, that it will mean that the CEO selected has any HP WAY DNA built in over a long acculturation period. Granted, there is still a pool of several thousand folk who have been at HP a long time, and "know deeply" the HP Way -- but they are more or less unlikely to be on the short list of CEO candidates.

So, I submit that the Board's task is to study the meaning and impact of the HP Way of doing business, try to correlate that with the distributed / chaotic / inchoate / highly competitive world in which the company has to perform, and select someone INSIDE or OUTSIDE, who can balance three things --- 1. the HP Way of leadership and ethics, which means empathy for, trust in and responsibility given to employees; 2. bold, decisive strategic choices; and 3. crisp operational excellence.

Thinking about these three points -- Packard and Hewlett shared power for a long time, and both were legendary for Point #1. Packard was great at #3, not too bad on #2; Hewlett was generally intuitively great on #2, and almost absent on #3. The pair did good work. Young was excellent on #3, as was Hurd. Hurd failed #1 on every count imaginable, and #2 mostly. Young did better, certainly excellent on much of #1 (not so hot on empathy, but able to delegate). Platt was superb on #1, better than either Dave or Bill on empathy and trust. Lew did not, however, do #2 or #3 particularly well. Carly... gets an A from me on #2, although the trade press and many pundits didn't agree even on that. I think time has vindicated her two biggest moves, even though the PwC attempt failed, it was the right direction and IBM has shown that to be true in spades. She actually should get fair marks on #3, because the truth was that the PC integration with Compaq was much further along under Duane Zitzner than the current team gives credit for -- Dell was already on the run. Carly's failing was that style issues clouded #1 so badly that it would have taken herculean measures in #2 and #3 to 'win'. Kinda like Hurd -- herculean #3 stuff at the expense of #1 especially, and #2 eventually, catch up with you.

So, what does that say? No new CEO will walk on water for very long; Hurd and Ellison will help see to that, not to mention legions of other observers. And no person can be great at all three (presumption, yes, but perfection is rare, right?). So, it might be that an organization of two or three shared roles is worth considering (possibility one) or that if just one person, they should be a good listener, able to let their team help on all three points, but in particular, they must not be ONE-DIMENSIONAL. A choice to be empathetic and operationally tough is tricky at best, but if you're ethical and fair, it is easier. It'd be wonderful to imagine that someone could be found who is a leader, not a manager, good at two of the three and not terrible at the third; who could accept a COO who could be really good at two of the three with a different balance than the CEO. That's my dream...

Wednesday, September 8, 2010

Marc Andreessen -- the linchpin for the HP Board

Lots of speculation running through the Valley about HP's Board. The San Jose Mercury-News had two front-page stories on Monday, Labor Day, one about Hurd joining Oracle, and the other profiling Marc Andreessen, the 'high-tech heavy' on HP's Board. I had the distinct pleasure some years ago (maybe fifteen years, gawd is that possible?) to introduce Marc to Doug Engelbart. One was 24 years old at the time, a wunderkind for his Mosiac invention and Netscape company that ushered in the modern Internet with its exciting browser. The other was 74 years young, the almost forgotten creator of the PC / networking paradigm when he was at SRI in the mid-sixties. Each exclaimed at the time to the other, almost simultaneously, "I am so glad to meet you!!!"

Several of us managed to get Doug nominated the next year for the Lemelsen/MIT prize, at $500,000 the highest prize in America for scientific achievement. I hand-carried the nomination forms to MIT the last day of submission; Doug won handily for his 1968 "Mother of All Demos" that we profiled at Stanford on the 40th anniversary in December 2008 -- but the context was that until Andreessen's creation, the world had a hard time seeing more than a 'mouse' in Doug's contributions, so until the Internet 'exploded' in usage, Doug labored in obscurity except within our 'techie circles'. Once this happened, of course, he got acknowledged widely, including ACM's Turing Award and the Presidential National Medal of Technology.

Marc, for his part, lived through tumultuous times at Netscape, with noisome persona such as Jim Clark, the founder of Silicon Graphics, Netscape, and Healtheon doing battle called "the Browser Wars" with the Darth Vader from the North, Microsoft. The net result was a 1999 firesale (well, $4.2B) to A/OL, itself the darling and eventual casualty of the boom and bust.

Nearing forty, Andreessen has matured enormously. He has founded and led two other companies, restructuring one with considerable success that he later sold to HP. His positions on the Boards of Facebook, e-Bay and HP are worth a moment's consideration. We are in the midst of a profound restructuring of society, driven by Internet applications of every kind and description. The triangulation view that these three Board seats afford him has got to be pivotal for assessment, not unlike the view that Eric Schmidt got while seated on the Apple Board for several years. Marc also has a strong position at the Venture Capital table through his 'day job', seeing all manner of the 'newest ideas' that run rampant through Silicon Valley; he and his wife have a major commitment to social philanthropy as well, unusual (and incredibly commendable) at his age.

Andreessen, moreover, is one of the small minority of HP directors who came aboard without prior ties to Hurd; he is the only director who has worked in engineering or innovation in a direct way (unless I missed something in the other bio's). So we're pulling for you, Marc. Help 'em get it right this time...

Tuesday, September 7, 2010

Hurd lands on his feet, maybe

Amid speculation all week, the next shoe dropped finally yesterday, as Oracle's arrogant Larry Ellison announced that Mark Hurd would become the new co-President of Oracle, replacing beleagured married Chuck Phillips (whose jilted girl friend put a saucy Times Square billboard up in January). HP wasted no time in filing for an injunction to prevent it, filing in Santa Clara County court at 11:30am this morning, citing a clear violation of their mutual contract and a damaging competitive unfair practices situation. These are tough things to win in California, since judges have viewed them as 'limiting a person's ability to hold a job'. But this one is about as high-profile as you can get; if it is unwinnable, it could well launch a whole new level of pirating key execs.

HP's claims, that Hurd four times in the past three years has signed confidentiality documents, including the finale on August 6, 2010, seem clear enough. HP further noted that he was WELL COMPENSATED in the resignation, partially in order to ensure the confidentiality clause. Well, it would seem that $42 million should have tided him (and any payments to women) over for more than thirty days. But maybe his $7.15 million Atherton home is a bit chilly these days, and he has to husband his cash.... And doubtless, the mere two years that he is supposed to be enjoined might seem longish if you're used to having $20 or $30 million in spending money each year. Poor man.... has to find employment somehow, especially at his advancing age

My take is that this may be the straw that breaks the camel's back. This is an incredibly confrontive act on the part of Ellison and Hurd, a pair who could find even closer friendship in the days ahead since they obviously share core ethical disregard for ordinary laws and rules. It figures -- one of Larry's previous tennis partners and erstwhile competitors in databases went to jail for kiting Informix financials a few years back, a mere 'billion dollar misstatement' for a company whose annual revenues were about that same size. Were it not for cases like Enron and the amazing theft via stock option backdating, "a mere billion" could have raised hackles. We still, of course, don't know the extent of the infractions that led to HP and Hurd separating...

Think about it this way -- seven hand-selected Hurd lieutenants and three others vote UNANIMOUSLY to ask for his resignation -- at a time the world viewed Hurd as "the" HP shareholder savior. They KNEW this would not play well on Wall Street, but they voted their conscience. Doesn't it stretch all credulity to think that the Board was concerned enough about non-sexual non harassment and supposedly $1,000 or maybe a little more in faked expense reports to fire this guy? I give you example A -- yesterday's announcement was as deceitful as the way he managed at NCR and at HP for the past decade. He is dishonorable, unethical, a total fraud and cheat, and he just got exposed more clearly. Plus, as I noted before, he's still a thug.