Wednesday, June 12, 2013

HP Falls Behind?

Steve Johnson,, got a front page story in the San Jose Mercury-News  this morning, his headline breathlessly reporting that "HP falls behind on R and D spending: Share of company revenue devoted to research dwindles".

The story is actually lengthy, some sixty column inches, including a great graph of HP versus 19 other local companies.  another of HP's R and D decline from 11% in 1987 to 2.8% today, along with a table of the top R and D spenders in total dollars.  For those who haven't paid attention, this is a new and BIG story; for long-term blog followers, shareholders, and generally aware folk in the Valley, this is hardly new news.

See, for example, "HP R and D and Palmisano"  on 9/15/10 where I noted that: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

Johnson couched his story with Meg's promise to re-instore higher R and D levels, which has ever so slightly happened.  Actually, she has raised the percentage by a new trick -- cutting the revenue line a lot changes the denominator.

Still, the article is a good reprise of a fairly clear set of decisions at HP to de-emphasize innovation in favor of today's profits.  Every HP CEO since John Young -- yes, and three of them, Lew Platt, Carly, and Hurd - cut R and D big-time percentage-wise, EACH.  The cross-product of the three was a staggering 74.5%.  And the rub, as those cuts took place, in general, was that the 'further out' stuff gets cut rather than the 'close-in' stuff.  Most estimates, supported by the actual employment numbers at HP Labs, indicate that 80 to 90% of longer-range (i.e. more break-through ideas) were axed or allowed to lapse.

Even Phil McKinney defended the low numbers when he was the Innovation Champion, arguing that Apple only spent 2.2% on RandD, so why should HP need to spend more.  Well, one reason is that HP is not "big hit driven" in the way that Apple is.  Another just could be that Apple's model isn't all that effective for the long term either, as the Android crowd and others are putting much more pressure on the creative leader.  But Phil didn't have the team to finish the HP TouchPad, or to recast it when Apple's iPad clearly out-invented them.  He was dealing almost exclusively with outsourced R and D.

It was refreshing to see Johnson ferret out (with HP help) some 'recent' R and D contributions.  Sure, the scientific calculator, the first commercial LEDs, ultrasound medical detectors, and Hewlett's oscillator got billing, but so did the energy saving algorithms for IT centers, and some virus-thwarting software of recent years.  And notably, the low-cost laser and ink-jet printers weren't trotted out.  Nor were those ubiquitous logic analyzers,   But then again, of the ones Johnson mentioned, all but the last two software things were really Agilent, not HP, contributions.  And Agilent still spends 9.7% on their R and D investment, similar to Cisco at 11.3%.  Both are dwarfed by Intel's $10.1 billion, and 19% rate

Johnson accurately notes that such luminary organizations, with their 27 year old analysts, as Booz and Company, KPMG and Battelle, question R and D spending as a gauge to innovation prowess.  I much prefer Ron Enderle's succinct statement, "strategically, it's suicide"

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