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HP doing more cost cutting, wants to eliminate more jobs

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May 25, 2015

HP recently reported that its enterprise services division posted a 16 percent drop in turnover to $4.81 billion in its second quarter of fiscal 2015 year ended April 30.

However, profit before taxes went up 31 percent to $194 million, eased by stricter controls on several department overheads.

The specific problem area is infrastructure IT Outsourcing (ITO), where the impact of cloud services is being felt severely and where revenues dropped by about 20.4 percent in the quarter.

Hewlett-Packard is making some progress to meet its long-term goal of a seven to nine percent operating profit margin but CEO Meg Whitman is concerned about several factors that could pull the rug from underneath it.

“Overall, ITO industry challenges have accelerated recently and are driving risk in the sustainability of this profit level if we don’t do further cost reductions,” she warned industry analysts.

The current thinking today is that HP needs to remove up to $2 billion of gross annualized costs in the next three years, the company said.

Overall, some government austerity measures have altered the way public sector buyers procure technical services from a fixed fee model to a cost-plus model, so that puts some pressure on, said Whitman.

There are certainly fewer big ticket deals to be had in the government market, particularly in Britain which is HP’s second largest market.

Additionally, cloud computing is impacting demand for classic outsourcing in the private segment as well, Whitman added, referring to an accelerated move to a consumption model.

“This is going to require us to make a faster labor 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,” she said.

“We’ve got more aggressive labor pyramid shifts that have to take place in onshore and offshore locations to make sure we stay ahead in that market. The industry is changing dramatically,” added Whitman.

Many workers left the company earlier this month as part of the mega company-wide redundancy cutting program HP started back in 2012.

To date, about 48,150 workers from across the company have left, CFO Cathie Lesjak confirmed on the conference call with financial analysts.

A total of about 55,000 people will have gone by the start of HP’s new fiscal year in November.

Enterprise Services, formed when HP acquired EDS in 2008, issued no less than 7 areas to greatly cut costs in 2014 when it became apparent that financial targets were not likely to be met anytime soon.

Stricter policies were put in place last July governing overtime, travel, hiring restrictions, annual leave, internal projects, reduction of account business management and also cluster implementation.

Reliable sources told us that those policies were pushed into fiscal 2015. HP's enterprise services division in Britain, Ireland and MEMEA has a new boss, Jacqui Ferguson, who was CEO Whitman’s chief of staff for three years prior to her appointment last fall.

Ferguson, brought in to get the local enterprise services 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 that it plans to reduce wider company costs by at least another $1 billion as it splits into two publicly listed organizations-- HP Inc (PCs and printers) and Hewlett Packard Enterprise (the rest of the organization).

This should more than offset the expected costs of $400 million to $450 million related to starting up the two divisions.

Source: HP.

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