As HP approaches its Nov. 1 split into HP Inc. (HPI) and Hewlett Packard Enterprise (HPE), it unveiled further headcount reductions as part of its corporatewide restructuring plan that was put forth in 2012, designed to increase the market fitness of HPE.
At its Securities Analyst Meeting on Sept. 15, 2015, among business updates for HPI and HPE, HP CEO Meg Whitman — the future lead of HPE — announced additional layoffs as part of its corporate restructuring program.
This announcement detailed an additional 25,000 to 30,000 layoffs for HPE, almost entirely in its Enterprise Services (ES) group. This will bring total corporatewide layoffs to nearly 90,000 since early 2012, nearly one-third of its 2012 workforce. Further, HPE stated this round of layoffs will be its final corporate restructuring and eliminate the need for future workforce reductions.
In total, HPE plans to reduce its annual cost structure by $2.7 billion, including $2 billion related to its ES cost takeout initiatives and $700 million related to real estate shutdowns and other cost-cutting efforts.
While these cost-reduction efforts will support long-term profitability, particularly within ES where HP is targeting a sustainable operating margin of 7 percent to 9 percent, restructuring charges of $2.7 billion will hinder short-term profitability as costs will begin accruing in FY4Q15 (CY3Q15).
As a result of the restructuring, HP ES is moving toward operating with a more sustainable, longer-term business model than it is now. In addition to supporting its bottom line, HPE is reinvesting these cost savings back into the business in the form of R&D spend, M&A spend and hiring in strategic areas to bolster its portfolios and success in areas of its growth pillars, namely cloud, analytics and security.
We expect HP, like its peers, to continue to seek out IT professionals that are certified in leading cloud platforms and solutions such as Google, Salesforce and Workday as the services around these cloud offerings become an increasingly sizable market opportunity for vendors such as HP on which to capitalize.
HPI, HP’s printing and PC business following its split, also announced plans for additional layoffs. HPI will reduce its workforce by 3,300 employees by the end of FY16 (CY3Q16), 1,200 of which are expected to be complete by the end of CY15.
HPI’s layoffs will be focused in noncore business areas as the company focuses on accelerating strategic growth areas such as 3D and enterprise printing, commercial mobility and managed services.
TBR believes layoffs will help HPI reduce its cost structure and support long-term profitability despite continued challenges in the global PC and printing markets related to weak global PC demand and competitive printing pricing. However, HPI’s short-term margins will be pressured by a charge of $300 million associated with the layoffs.
As a key player in HPE’s solutions-led approach, ES gets another makeover
Despite HPE’s push toward becoming a solutions and services-led organization, it continues to whittle away at its ES bench. TBR believes this is due to multiple factors that have had compounding effects to the business and profitability over the greater part of the past decade such as the acquisition of labor-heavy, outsourcing-focused EDS, price and labor competition in IT services from India-based vendors, automated technologies overtaking some lower-level service delivery jobs, and overall market consolidation in IT services.
While HPE is scaling back its ES workforce, key competitors are investing heavily in expanding their services organizations, particularly in key areas such as cloud as evidenced by recent cloud acquisitions by IBM and Accenture. TBR believes this could negatively impact HP’s ability to win deals, as enterprises shift their focus toward utilizing technology to promote business outcomes, and increasingly undertake large-scale transformational initiatives around cloud, mobility, analytics and security.
These customers typically require a technology vendor that can assist them in their transformation through consulting and implementation services spanning solution design, deployment and management. TBR believes HP’s competitors will capitalize on customer uncertainty associated with the layoffs to differentiate from HP as it continues to transform ES.
As part of the restructuring in ES, HPE will look to balance its workforce to have a better cost mix. We expect HP to focus these additional layoffs in higher-cost areas, namely in the U.S. and Europe, while strategically hiring for its growth pillars in lower-cost areas, both onshore and offshore. Competition among IT services vendors for low-cost onshore hires is continually increasing as vendors seek proximal personnel to deliver on services contracts at more cost-effective rates. Such demand for these and offshore employees — particularly in India, the Middle East and central and eastern Europe — as well as the aforementioned competition for cloud-certified professionals will lead to a labor shortage and more selective applicants in these specific areas, forcing vendors to offer more attractive benefits, and thus taking away some of the cost benefits of these lower-cost hires.