Hewlett-Packard Co. said Tuesday that it would cut 14,500 jobs, or 10% of its workforce, as the storied computer and printer maker slashes costs to remain competitive in an industry that it helped create.
The restructuring, which will be implemented over the next 18 months, is expected to reduce annual expenses at the iconic Silicon Valley company by $1.9 billion. HP employs 58,000 people in the United States -- about 9,000 of them in the Bay Area. The company said it was too early to discuss where the deepest cuts might occur.
Tuesday’s changes are the most significant so far by Chief Executive Mark Hurd, who took over in March after predecessor Carly Fiorina was ousted for failing to remake HP in the face of pressure from low-cost manufacturers such as Dell Inc.
Word of the job cuts spread through the company last week, and employees at HP’s Palo Alto headquarters grimly referred to Hurd’s plans as “The Big One.” The staff reductions would be the second-largest in the company’s 66-year history. HP cut 15,900 jobs in the wake of its 2002 acquisition of Compaq Computer Corp.
Some noted sadly that the cuts -- which will occur mainly through layoffs -- marked a shift in corporate culture at HP, which for years operated as the sort of close-knit company where founders William Hewlett and David Packard routinely walked around chatting with workers.
But others said Hurd was returning HP to its engineering roots because most of the cuts targeted the company’s sales and support staffs, including finance and human resources. Notably, Hurd made only minor trims to HP’s research and development budget, which some analysts had criticized as too lavish in an era of ever-dwindling margins and relentless competition.
“HP is an engineering culture and has been since the time of Bill and Dave,” said Caris & Co. analyst Mark Stahlman, referring to Hewlett and Packard, who founded HP in 1939. “The engineers can feel like they have their company back.”
Even so, Wall Street greeted the changes skeptically. HP shares fell 40 cents to $24.52, continuing a slide that has trimmed 50% of its value in the last year.
In addition to the job cuts, HP will freeze pension benefits and increase its matching contribution to most employees’ 401(k) retirement plans, mirroring a trend among big companies away from expensive defined-benefit retirement programs.
The company will take a pretax restructuring charge of about $1.1 billion over the next six quarters.
“We’ve been working hard over the past few months to review every element of operations, including our operating model, our shared services model and the cost structure of each business and corporate function,” Hurd said. “The actions we are announcing today are focused on creating a simpler operating model with clearer accountability, getting the support functions and businesses as efficient as possible without affecting key areas.”
Hurd’s plans for the company appear to repudiate the tenure of Fiorina, who was criticized for talking up innovative HP products without actually delivering many. HP suffered in the market against Dell, which spends relatively little in researching new technologies or developing new products.
Some on Wall Street criticized HP for spending about $3.5 billion -- 4.4% of annual revenue -- a year on research and development, about $1 billion more than all of its relevant competitors combined. Dell, by contrast, spends $463 million on research and development, about 1% of its revenue.
Others, though, said Hurd was wise to spare research spending and support the company’s slogan, “HP: Invent.”
Todd Zenger, a professor of business strategy at Washington University in St. Louis who has followed HP for 20 years, said Hurd’s plan to assign salespeople to work more closely with the developers of the product they sell would create more opportunities for innovation.
“What Carly Fiorina did was to come in and centralize this organization in a very dramatic way at the very top,” Zenger said. “The result was that it wrung the life out of the invention at the company.”
But Hurd and HP will have to move swiftly to catch up with Dell.
Dell, the world’s largest personal-computer maker, increased worldwide PC sales by 23.7% in the second quarter, while sales for No. 2 HP grew 16.7%, according to figures released Monday by technology market researcher IDC.
And Dell beats HP on key financial measures as well.
With $23 billion in assets and annual revenue of $49 billion, Dell generates $2.13 in sales for every dollar of assets, said James Owers, a finance professor at the Robinson College of Business at Georgia State University. HP, with $76 billion in assets on revenue of $80 billion, generates just $1.05 in revenue per dollar of assets, “which is frighteningly close to half of Dell,” Owers said.
“We can see that the market reaction today suggests that investors are not seeing enough to address these issues,” he said. “Given that this story is so anticipated, there is a remarkable lack of positive reaction to what was announced.”
Steve Fortuna, a computer analyst in New York with Prudential Equity Group, said Tuesday’s plan was a good start.
“The company is in need of a larger strategic reorientation above and beyond cost cutting,” Fortuna wrote in a report to clients after HP’s plan was unveiled. “Nonetheless, we believe cost cuts are a step in the right direction. Hurd’s ability to generate significant cost cuts in a short time frame highlights his reputation as a solid no-nonsense operator.”
Hurd, who was credited with turning around computer services company NCR Corp. before coming to HP, said the changes should refocus HP workers.
“HP’s got a culture of when things aren’t right, of fixing them,” Hurd said. “I do not want to do anything that would jeopardize that culture.
“It’s also a very team-oriented company, meaning that when the goals are clear, people rally around and execute. We’ve got a tremendous kind of force in the company, when the company’s got an issue, of teaming up to go deal with it. All I want to do is enhance that.”
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HP job cuts
October 1992: Says it will trim 2,700 jobs through voluntary layoffs.
February 1998: Reports it will cut 1,000 jobs at its Vancouver, Wash., factory.
October 1998: Announces it will eliminate 2,500 jobs.
January 2001: Says it will cut 1,770 positions.
April 2001: Says 3,000 management jobs will be axed.
July 2001: Announces it will drop 6,000 jobs.
May 2002: Begins slashing 15,900 positions after it acquired Compaq Computer Corp.
September 2002: Announces it will cut 1,800 more jobs.
May 2005: Eliminates 1,900 jobs in its printing and imaging unit.
Tuesday: Announces it will eliminate 14,500 jobs, about 10% of its workforce.
Sources: Times research, Associated Press
Los Angeles Times