By Susan Kelly July 20, 2005 -- Conference call participants included Mr. Mark Hurd, CEO, and Mr. Robert Wayman, CFO for HP. Hurd opened the call to remind analysts from their May 17 th call about their consistency in looking at the structure and working hard to understand all operational aspects. Quite simply they have a plan to take out complexity, drive a performance company, and go end-to-end with customers. In short, HP is getting rid of their costly matrixed organizations. Hurd announced HP will be dissolving the Customer Solutions Group (CSG). Business segments will now host and be responsible for customer segments. For example, Consumer will be hosted by Imaging and Printing Group (IPG). Mike Winkler will retire after 10 years at HP from his position of Executive Vice President of the Customer Solutions Group. HP made several additions to the company’s Executive Council to help flatten the organization while minimizing disruption to the business. Hurd named Cathy Lyons executive vice president and CMO, Todd Bradley as the executive vice president of PSG, and Randy Mott as executive vice president and CIO. Hurd confirmed that HP is targeting a worldwide reduction in force of 14,500 employees; with more than 50% of those coming from support functions These reductions are mostly involuntary actions, however they are conducting a U.S. voluntary early retirement program. There will be minimal reductions in the sales force and R&D to keep demand generation strong and innovation value. The reductions vary by country based on legal requirements of those specific countries. In addition, HP will reduce the U.S. Retirement benefits program to make the company more competitive as of January, 2006. HP will freeze pensions and medical benefits for employees who do not meet certain criteria, but will increase its matching 401K contribution from 4 to 6 percent. Hurd expects to realize a restructuring cost of $1.1 billion in next 6 quarters with majority of the charges in Q4 2005. The outcome of these actions should see a return for the full year of 2007 $1.6 billion in savings, with another $300 million from retirement benefits program for a total of $1.9 billion. Half of these savings will be used to reinvest in the company and in innovation. HP expects to realize $1.050 billion savings in 2006. Many assumptions have been made as the plan has not been done country by country. In addition, they will wait for the final results of voluntary programs to determine the final reduction in forces numbers.. HP does not expect to see any material savings for this quarter. All reductions will be done over the next 6 quarters. Questions & Answers Analysts understand that the total centralized support is 15,000 people so which functions, geographies, which divisions will go away? Hurd says the numbers are bigger than analysts describe but the details will be laid out in the coming months. Advertising not going to be cut. HP needs to be more efficient and use dollars more effectively. They’re going after the costs of the underpinning structure such as support without affecting their demand generation activities. There’s opportunity to do better but advertising is not an area targeted as a first step for cuts. According to Hurd, “HP will continue to be opportunistic where we can scale and grow; we need to cut in some areas and fund others to be better against competitive forces. At the same time we have to become a lot more efficient in our cost structure”. HP will not have to take out another $1 billion in 2007 to fight the competitive forces according to Hurd’s models. The process used to come to these restructuring conclusions: HP has spent considerable time looking at a 2008 view and then figured out what they needed to get there financially. This takes a fair amount of work to get to that equation and then work backwards examining what each function, department, and geography has to do to get HP to 2008. In general they are getting rid of work that doesn’t need to be done. “We have people working on things that customers no longer need or does not add value.” Lots of work done prior to Hurd’s arrival, he just tried to “galvanize” work already going on in the company. Proof is in execution. According to Hurd, Randy is one of the best CIO’s in the game. His mandate is to reduce IT costs and get the best information possible. Hurd summarized the RIF actions of the absorbing of CSG into TSG to reduce the number of handoffs. Hurd has no affection for matrix organizations. He wants to raise and streamline accountability in the entire company. HP stands firm that the channel is a valuable asset and they will retain a hybrid to give customer choices. Some partners lead with the HP brand selling other products; so HP will be focusing on those partners who really do offer an HP solution. HP will continue to go after incremental market through partners. Outsourcing will not be done as a major action in the restructuring plan to get costs in line. According to Hurd, the mood in the company is what you would expect. This is balanced with a lot of hope and HP just completed an employee survey and the morale is higher than you would expect. These changes are not a surprise but the reality is just hitting them. “We reinforced with the Sales group that this was not an area for cutting.” No other announcements are planned. This is a six quarter plan. The $100 million in Q3 announcement is separate and everything announced today is about the 14,500 RIF. R&D is done by each business unit so they are looking at their ratios to see what value they get from R&D to make sure they understand the value of innovation. No comments on M&A, not looking at this right now. Continue to look at and reduce their contractor workforce. Raine Radar Industry pundits have been speculating since Hurd took the helm at HP about when and where the major reorganizations would come from. Most rumors centered around selling or spinning off of the PC or Indigo digital press businesses, but neither of those came to pass. The changes announced today should help increase the agility and profitability of the company. Once fully implemented, Hurd will have the opportunity to re-evaluate HP’s business units and decide if they are strategically valuable or non-core.