FT : HP (World’s Largest Technology Employer) To Cut Workforce

Friday, June 4, 2010

A firee does not care if it was a machine or a foreigner that took his job.  Hewlett-Packard, however, thinks the days of geographical wage arbitrage are numbered.  Announcing a minor restructuring yesterday, the company identified automation of IT services as the area of growth for the next five to 10 years.  The reorganisation required should be straightforward for the world’s largest technology employer – cutting a net 3,000 jobs shortly after adding 100,000 of them via the 2008 acquisition of Electronic Data Systems.  Cost-cutting has already moved operating margins at EDS, since rechristened Enterprise Services, from below 12% to almost 16%.  Spending $1bn to save $500m to $700m annually by 2013 should push that margin onward into the high teens.

The challenge, however, will be holding on to such profitability in the face of competition.  HP is not alone in noticing that the future of business technology is likely to involve a combination of three things: secure data managed onsite, outsourced data warehousing and so-called cloud-based online services.  Buying service companies to stake out a piece of this market is now fashionable for hardware makers facing commoditisation of component assembly lines.  The largest consultant by revenues, IBM, already drives the automisation bandwagon and plans to spend $20bn on acquisitions over the next five years.  Also HP, as the world’s largest PC manufacturer, seems unlikely to follow IBM’s lead in getting rid of legacy hardware businesses.  So the group’s fortunes will continue to be dictated by demand for goods such as printers, laptops and servers, which contribute two-thirds of sales.  A valuation of 10 times prospective earnings is arguably too cheap for such a group facing recovering demand, but the rise of the machines does not extend to enthusiasm for making them.

Reference : http://www.ft.com/cms/s/3/03f213bc-6d87-11df-bde2-00144feabdc0.html

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