HP needs to transform itself if it is to avoid becoming obsolete

WHEN the board of HP, the world's largest computer-maker, unveiled plans to restructure, it expected the company's shares to suffer; but not to crash by 20%. HP's bosses thought investors would love their plan to spin off the firm's low-margin personal-computer (PC) business, but be wary of their plan to buy Autonomy, a British software-maker, for a handsome $10.3 billion. In fact, they hated both ideas. On August 19th, the day after the announcement, they wiped $12 billion off HP's market value.
 

One problem was that the announcement left unclear what HP wanted to do with its PC unit and why exactly it intends to pay so much for Autonomy. Another factor was that many of the firm's shareholders are short-termists, who were scared away by lowered revenue and profit forecasts. But the big problem is that Léo Apotheker, HP's newish boss, is taking a huge gamble. He is trying to follow the example of IBM, by reducing HP's dependence on hardware and pushing up into software and services.
 

To grasp what HP has in mind, one has to understand the two main currents in the IT industry. First, nearly any new technology quickly becomes a commodity that is easily copied and hence not very profitable. This is why IT firms are always trying to move “up the stack” into software and services, where margins are higher. Second, the biggest IT firms typically control what is known as a “platform”: a digital foundation on which others build their products, such as Microsoft's Windows. This allows them to capture a disproportionate share of the industry's profits.
 

HP seems to have ignored both currents, at least in the past decade. Carly Fiorina, its boss from 1999 to 2005, merged with Compaq, another computer-maker, in a deal worth $25 billion.

Mark Hurd, her successor, cut costs but was ousted in 2010 after a dust-up over sex and expenses before he could fix the firm's strategy.
 

That job now falls to Mr Apotheker. The firm's PC business is the world's biggest, but is not as profitable as HP's other units. What is more, most buyers of HP's machines are consumers, whose demands shift faster and more whimsically than those of corporate customers. So HP intends to turn its PC business into a separate unit and then spin it off.
 

Buying Autonomy also helps HP to move onto higher-margin terrain: the British firm's operating margins exceed 40%. But the main reason HP paid a 64% premium for its shares seems to be that it believes that Autonomy's technology could be turned into a platform to help companies make sense of their ever-growing pile of data. This includes not only “structured” data (payroll records, sales figures), but also the “unstructured” kind (documents, e-mails), which now makes up more than 80% of the information that flows through a typical company.
 

Such a platform would allow firms to do some nifty things. A retailer, for instance, might decide how much beer to stock based not just on previous sales records, but also on weather forecasts, party chatter on social media and schedules for sports matches.
 

All this sounds sensible. But establishing a new platform and ultimately becoming a firm that looks much like IBM is a tall order. Many other firms are also jostling to become the main interpreter of corporate data. To reach its goal of having software generate 8-9% of its revenues by 2015, up from less than 3% today, HP will probably have to make further acquisitions. And its services business is mainly about keeping IT systems running, not about helping firms reinvent themselves (as IBM does).
 

Given the difficulties, it is not surprising that many shareholders have bolted. But HP and its new boss should not be faulted for trying. They have little alternative, if they wish to avoid becoming a collection of commodity businesses. “Technology is a brutal business,” says Mr Apotheker. “If you don't innovate and reinvent yourself, you will become obsolete.”