Commodity companies, commodity budgets

The WSJ Wednesday posted an interesting article (and also snippets of video) from its interview with IBM CEO Sam Palmisano. The videotape

The article reported:

Palmisano said he doesn't worry about companies such as H-P that have slashed their investments in core technologies and need to make expensive acquisitions to keep up.

"H-P used to be a very inventive company," Mr. Palmisano said in an interview at a Wall Street Journal event on Tuesday. IBM would never have paid what H-P did to buy data-storage provider 3PAR Inc., he said. "[H-P] had no choice," said Mr. Palmisano. "Hurd cut out all the research and development."

Unfortunately, the WSJ doesn’t actually share the video of Palmisano making these points. However, in the opening part of the video clip, Palmisano says:

If you look at the core business of a Dell or HP, it’s an electronics distribution channel for Microsoft, Intel, and storage guys and everybody else. There's nothing wrong with that, we just don’t focus on it as much.

To his credit, reporter Spencer Ante quantifies the impact of HP’s brutal budget cuts as part of its shift from innovator to low-cost commodity player:

Mr. [Mark] Hurd cut H-P's research and development budget to $2.8 billion, or 2.5% of H-P's revenue, in its last fiscal year from $3.5 billion, or 4% of revenue, in 2005, when he took over as CEO. Under Mr. Palmisano, IBM has continued to invest about 6% of its revenue in R&D, including $5.8 billion last year.

Alas, the interview also retreads old ground as Palmisano calls PCs a dying industry. His comments are classic sour grapes: IBM dumped PCs because it proved itself unable to compete in that business, while HP has become the market leader. (Neither HP nor IBM has made a transition from PCs to smartphones or tablets, but unlike IBM HP has a plausible entree with its Palm acquisition.)
If the article is interesting and informative, the video snippets are neither. It’s painful to watch the actual news (i.e. comments by a leading tech exec) with insipid commentary by WSJ staffers.

If the WSJ is going to produce video clips, they need to learn PBS production values and hire some broadcasting professionals. Its AllThings D spinoff has done a great job packaging interviews from its annual conference, so perhaps it can provide the WSJ with necessary expertise.

"Reorg" of HP Labs

All day I’ve been trying to make sense of HP’s announcement Thursday that they’re reorganizing HP Labs. This is the official announcement:

HP today announced that it has sharpened the focus of its advanced research group, HP Labs, to address the most complex challenges facing technology customers in the next decade. ...

The redesign of HP Labs is intended to balance exploratory research with an entrepreneurial approach so breakthrough technology can be transferred more rapidly into commercial applications for customers.

HP Labs will pursue 20 to 30 large research projects – instead of the 150 smaller projects in the past – based on insight gained from newly expanded relationships with universities, partners, customers and venture capitalists.

At one level, it looks like a cut although there are pledges to keep up head count and funding. The 600 researchers are expected to focus on 23 areas instead of the 150 earlier projects; supposedly the priorities are being set by researchers.

CEO Mark Hurd was quoted as saying of the labs “It's one place where there is still R left in R&D.” Despite this, the press release and news accounts strongly suggest an increased emphasis on near-term results, and thus a shift from advanced research to applied research.

To me, one of the more interesting tidbits was a decision to embrace open innovation:

HP Labs has established an Open Innovation Office responsible for deepening HP Labs’ strategic collaborations with those in academia, government and the commercial sector. The office is designed to ensure joint research endeavors result in high-impact research that meets the scientific and business objectives of HP and its partners.

As part of this initiative, an Entrepreneur in Residence Program is being established to give venture capital investors and their portfolio companies early access to HP Labs research. In return, HP will receive insight into emerging market trends and potential business development opportunities.

HP’s interest in open innovation is personally gratifying, given my personal stake in the subject. And the idea of collaborating with academia, government and other firms seems like the right way to go about it.

Still, given all the HP mismanagement of the past 15 years, all we can do is wait and see. HP was once the shining exemplar for innovation excellence in the valley, and now (for better or worse) that mantle has passed to Google. So I’d like to think the new innovation strategy will increase effectiveness, but past results give reasons to be wary.

Open Innovation at HP

Hewlett-Packard Company (not to be confused with Hewlett-Packard Development Company, L.P.) is one of the foundations of the modern Silicon Valley. Even if you accept the argument of Tim Sturgeon (who I finally met last week) that Silicon Valley began in 1909 with Federal Telegraph, no firm has had a more sustained impact on Silicon Valley than has HP.

Thus, it’s been kinda depressing to watch the company mostly flounder since Bill & Dave left. Once the valley’s exemplar of an empowering corporate culture and engineering-driven innovation, it has been fighting a three front war against irrelevance: the risk that a culture of empowerment becomes one of entitlement, the bureaucratic stultification of any Fortune 100 company, and the disease of management-by-spreadsheets (particularly during the tumultuous reign of Queen Carly I).

How do you shake things up and turn things around? Do you hire from within, which brought us Dick Hackborn (who nurtured the printing cash cow responsibility for the vast majority of HP’s profits over the past 15 years) but also two undistinguished CEOs, John Young and Lew Platt. Hiring from outside brought both Carly Fiorina (a disaster) and Mark Hurd (for whom the jury remains out).

Today the Merc (dead tree edition) ran a story (registration required) on Phillip McKinney, a blogger and VP and CTO of HP’s personal systems group. For most, his claim to fame would be convincing Hurd to spend a few hundred million buying Voodoo PC.

But the most interesting thing about McKinney is his effort to incubate new ideas through a formal process of open innovation, by creating the Innovation Program Office. McKinney seems to have a highly original take on internal incubation, one that just might make a difference in restoring the company’s once-great record of innovation.

From the Q&A (not yet online):

We actually ask that every initial idea has to be able to answer five questions. …

1. “Will this idea fundamentally change the customer’s expectation?” …
2. “Does this idea fundamentally change the competitive landscape?” …
3. “Does this idea fundamentally change the economics of the industry?” …
4. “Does HP have a contribution to make?” …
5. “Will this idea generate enough margin?”

While these are good questions, they have been studied before. I don’t know if McKinney has read Radical Innovation, the multi-year study out of RPI that focused on these questions. If not, he should.

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