Just when the folk at HP Enterprise Services thought the multi-year cost cutting timetable was almost at an end, along comes another plan to lop $2bn off the expenses bill.
The division reported a 16 per cent drop in turnover to $4.81bn in HP’s second quarter of fiscal ’15 ended 30 April, although profit before tax went up 31 per cent to $194m, eased by strict controls on overheads.
The specific problem area is infrastructure IT Outsourcing (ITO), where the impact of cloud services is being felt acutely and where revenues dropped by a fifth in the quarter.
HP is “making progress” to meet its long-term goal for ES of a seven to nine per cent operating margin but CEO Meg Whitman is worried about several factors that could pull the rug from underneath it.
“ITO industry challenges have accelerated and are driving risk in the sustainability of this profit level if we don’t do further cost reductions,” she warned.
Current thinking is that HP needs to remove up to “$2bn of gross annualised costs” in the next three years, the company said.
Government austerity measures have altered the way public sector buyers procure tech services from a fixed fee model to a cost-plus model, “so that puts some pressure on,” said the CEO.
There are certainly fewer big ticket deals to be had in the government market, particularly in the UK which is HP’s second largest territory.
On top of this, cloud computing is impacting demand for classic outsourcing in the private sector, the CEO added, referring to an “accelerated move to a consumption model”.
“[This] is going to require us to make a faster labour mix shift to low-cost resources, and frankly, the transformation of the physical data centre footprint to a much more streamlined footprint that is more automated.”
“We’ve got more aggressive labour pyramid shifts that have to take place in onshore and offshore locations to make sure we stay ahead in that market. The market is changing dramatically,” said Whitman.
A bunch of ES workers left the company earlier this month as part of the mega company-wide redundancy programme HP started back in 2012 - to date 48k workers from across the business have left, CFO Cathie Lesjak confirmed on the conference call with financial analysts.
A total of 55k heads will have gone by the start of HP’s new fiscal year in November.
Enterprise Services, formed when HP acquired EDS in 2008, issued seven areas to slash costs last year when it became apparent financial targets were not likely to be met.
Strict policies were put in place last summer governing overtime, travel, hiring restrictions, annual leave, internal projects, reduction of account business management, and cluster implementation. Sources told us these policies were pushed into fiscal ’15.
Ferguson, brought in to get the local ES operation growing again, was handed a fillip during her first few months on board after deals that HP was working on including Deutsche Bank and TNT were finally signed.
On last week’s conference call, HP confirmed it plans to reduce wider company costs by $1bn as it splits into two publicly listed organisations - HP Inc (PCs/ printers) and Hewlett Packard Enterprise (the rest of the organisation). This should more than offset the expected costs of $400m to $450m related to starting up the two businesses. ®