HP's Ouster of Carly Fiorina

The initial flurry of Carly's exit stories yesterday is dwarfed by the prodigious output of armchair quarterbacking this morning. The Wall Street Journal, Business Week, the Economist and even regular news outlets have stories this morning. What caught me by surprise, though, was a piece in today's MIT Technology Review entitled, “Worst. CEO. Ever.

It's pretty harsh.

There was little love lost between the CEO and the 151,000 HP workers who have, almost consistently since 1999, made hating their boss a very personal, full-time mission.
“When the news was officially announced this morning, people were dancing—literally dancing—around their cubicles,” an employee in the business division writes in an email.

Why is there so much hated of Carly inside the company? After all, the Board of Directors has done nothing to change the strategy that many feel has led to HP's problems. As The Economist is saying today,

The ousting of Ms Fiorina therefore does not automatically mean that a break-up is now likely. The same board that has decided against it three times already, and this week pledged allegiance to HP’s strategy—whatever that is—will now be looking for a new chief executive.

Carly was a key driver of combining businesses inside HP. Recently she drove the merger of the PC and Printer business units, which would hide the poor performance of that division in the profits of the only truly profitable part of the company.

Part of the reason HP is up in the market now is that many feel the key person arguing against a break-up of the company is now gone, and therefore it is likely to split up.

Other may believe that innovation will return as a HP strategy. As MIT Technology Review put it:

Fiorina's obsession with Wall Street pushed much innovation to the side, and eventually led to a rather unsettling change in the HP work environment: the company's very first layoffs. When it was all said and done, 15,000 of the then 85,000 workers found themselves without a job by the end of 2003.

However, if the 80's and 90's taught us anything, one cannot be a lean-mean fighting company and have a culture of entitlement and continuous employment. Carly's head was in the right place in one respect:

“After a period of integration, cost-cutting, returning our businesses to profitability and returning to top line growth, we enter fiscal year 2005 knowing that we have the right strategy, play in the right markets and offer the right portfolio of products and services,” Fiorina writes. “We are now focused on consistency of execution and consistently delivering financial performance, great customer experiences and shareowner value.”

She's right. One has to build shareholder value to make the investors happy. However, it's only one of the many levers of managerial control. One also has to innovate in order to maintain growth long-term. I believe she tipped the balance too far. HP was not about to go bankrupt. It still needed to invest in forward-looking projects as well as cleaning up the bottom line. Apparently the employees agree:

And her reluctance to embrace research and development of emerging technologies, consistently creating new and better markets as only Hewlett-Packard could, alienated her from the company.

According to BusinessWeek's “Inside Story” of the firing of Fiorina, she was good at passion and marketing but lousy at strategy,

Sure, she had dazzled directors and many investors with her passionate work in pushing through the controversial merger with Compaq Computer in 2002. And the immediate integration of the two companies bested expectations, silencing even her fiercest critics. But by late 2003, investors began shifting their focus from the Compaq deal to HP's ebbing position against key competitors IBM and Dell. They bored in on the ragged financial performance that led to the swooning stock price.
“[Fiorina's] good with marketing. She's a good speaker for the company,” says a former HP executive. “But this is a company that doesn't need a statesman. It needs a hands-on operations person.”

The story keeps coming back to execution, specifically the speed at which she needed to change the business. She was slow to fight the incursion of Dell and IBM (who I readily admit working for, although I try to keep their business out of my writing here). She was slow to execute on a possible acquisition of Veritas Software, Inc.

Financial performance is definitely important, compared to the industry:

The management ouster at HP gives the company a chance to rebuild trust with investors. During Fiorina's 21 quarters atop HP, it missed profit expectations eight times. Sure, that's better than the 21 quarters before Fiorina arrived. But it's also more than double the combined misses of IBM and Dell over the same period.

However, Business Week doesn't believe it was just execution that is causing HP's funk, however:

While it's convenient for HP's leaders to blame poor execution for their problems, what ails the company runs much deeper than replacing a few top executives. In enterprise computing, HP has failed to improve its lot. While it is still narrowly holds the market-share lead in storage and in key server markets, including Unix and PC servers, it's losing ground to EMC in storage and Dell and IBM in servers. In some cases, its technology just hasn't kept up. In others, it has made bad bets.

The biggest failure, in my opinion, was Itanium, as I've mentioned here before.

As a result the board talked to her more and more in hopes of getting her to delegate operational activities to her executives and she was reluctant to do so. Remember that she fired three executives for a bad quarter just half a year previously. She also drew some criticism for twice rejecting an opportunity to establish a chief operating officer to handle the tasks of execution. As a result, by not delegating, she took the brunt of the bad year herself.

I think it's telling that HP's CFO, Robert P. Wayman, is now the interim CEO. That indicates to me that the board is interested in shoring up its financial position and hopes that Wayman will execute on what strategy remains at HP. However, it's the perfect person to have in charge if breaking the company up is in the future.

The front runner for replacing Fiorina is Michael A. Capellas, currently running MCI, but notable as the executive that sold Compaq to HP in the first place, and served as a VP for a short while in the giant company. However, we'll have to see if the half a year it takes to find an executive yields fruit or if the company is sliced and diced into smaller, faster, companies that have to struggle to find revenue.

If you're a subscriber and you have a lot of time, the Wall Street Journal has comprehensive coverage of the situation. Me, I need to get back to work.

Update: With a pointer from Prof. Jack Raiton, I discovered a Financial Times article that points out changes in the Board of Directors at HP hastened Fiorina's demise.

Dick Hackborn, the HP director and former executive responsible for creating the company's hugely successful printing business, probably played a key role in the behind-the-scenes manoeuvrings that led up to Carly Fiorina's removal, according to close observers of the company.

So Hackborn was her main source of support, but her other supporters started leaving a year ago:

Other boardroom moves have also served to weaken Ms Fiorina's position. Sam Ginn, who had led the search committee when she was hired and had been one of her staunchest supporters, left the board a year ago, along with Phil Condit, the former Boeing chairman who had also been a supporter. Mr Ginn and Mr Condit had also steered the board's nominating and governance committee, a key inner group with influence over the composition and workings of the board.

Two more changes cemented the deal. First, she lost another supporter:

Recent signs pointed to a more rapid shift in the balance of power in the boardroom that finally stripped Ms Fiorina of support. Sandy Litvack, who as a former general counsel of Walt Disney had shown strident public support for embattled CEOs in the past, quit unexpectedly as an HP director at the start of this month - just weeks before he was due to retire.

…and she gained an enemy:

Then this Monday, the day before Ms Fiorina was dismissed, Tom Perkins, a former Compaq director and one of Silicon Valley's most eminent venture capitalists, rejoined the HP board a year after retiring allegedly for age reasons.

You have to keep the board happy if you want to continue being a CEO. When the board changes you have to move fast. “Moving fast” was not at the top of the list of Carly's strong points.

Josh Poulson

Posted Thursday, Feb 10 2005 08:37 AM

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There is one comment on this entry.

HP is a crazy place to work in, since the merger I have survived 24 rounds of layoffs - the rumour is the merger didnt complete until 2006. Most the people I knew are gone, people are very stressed and its very difficult as a result of this to work. I think I will look back at HP as an example of a company I dont want to work for.


Posted Sunday, Aug 20 2006 02:28 PM

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