Innovation is a mantra in the information technology sector that typically refers to a new technology and disruptive business model. In 1992, the innovative “starwalkers” were arguably Apple, Dell, Microsoft, Oracle, and Sun. Among these, Sun Microsystems is gone, Dell is fading, and Apple is weakened by both competition and the loss of Steve Jobs. In 2013, the innovative list most relevant to the enterprise CIOs we recently interviewed starts with Amazon Web Services, Google, Salesforce, Rackspace, and Workday.
Twenty years ago, HP was in its ascendency; IBM was near collapse and dismemberment. Today their positions are reversed. IBM is doing well despite legacy burdens, while HP is seriously challenged. Why? The explanation lies in innovation in its broadest sense rather than any single or simple factor. Yielding little are management efforts to seed innovation through casual idea teams or one-time energy bursts. Desperate acquisitions, often overpriced and inadequately integrated into the product line, do no better.
CEOs at the Helm
The stark differences between HP and IBM can be described as a cross with the CEO at the center. To both sides are the twin engines of innovation, M&A and R&D. An aggressive M&A function gives R&D the needed perspective on the in-house projects that will provide the most competitive advantage. A strong R&D activity helps M&A identify and price the targets that best fill gaps in the company’s future product line. IBM spends six percent of revenues on its Labs, and HP under two percent, mostly on incremental product improvements.
On the upright are the three levels of management that define the company’s brain and back bone. At the top are directors, with the longevity, experience, and stature to provide candid and actionable advice (in addition to financial oversight). At the bottom is the executive team, with the perspective and competence needed to execute the strategy. In between is the CEO with strategic sense, decisiveness and steadfastness in holding his decisions.
Now let’s compare IBM and HP: Since 1992, IBM has filled that position with Lou Gerstner, Sam Palmisano and recently Ginni Rometty. It’s too soon to judge Rometty, but Gerstner set the path from mainframes to software and services. Palmissano strengthened that transition by selling the PC division, and buying consulting partnership PWC and a plethora of software firms.
By contrast, HP has never had a CEO who wasn’t fired except Dave Packard: Since 1992, there was Lew Platt (the last insider) followed by Carly Fiorina, Mark Hurd, Leo Apotheker (briefly) and now Meg Whitman. Whitman is too busy, salvaging a company roiled by her predecessors, for a fair assessment. Both Fiorina and Hurd savaged HP’s once-proud R&D organization for near-term profits while making acquisitions that mystify us today.
IBM spends six percent of revenues on its Labs, and HP under two percent, mostly on incremental product improvements.
Fiorina bought PC maker Compaq just one year before Palmisano began planning the sale of IBM’s once-iconic PC division. As it turned out, Compaq and PCs never drove the innovation at HP that Fiorina had predicted. Today, the PC division is an anchor that yields a barely adequate five percent profit—less than half the margin contributed by the rest of the company. Hurd acquired outsourcer EDS in the teeth of ferocious competition from Indian firms and, more recently, cloud-delivered services. So HP’s outsourcing services group has been stagnant.
Next came Leo Apotheker, recently ousted as CEO of German applications vendor SAP (though with little scrutiny from most directors, who never actually met the man). Apotheker had some good ideas, like spinning off or selling the PC business, but these were quashed by his successor—perhaps because there was no buyer, as Palmissano had predicted ten years earlier. But Apotheker also acquired the horrendously misjudged Autonomy. Even the pricing multiples it paid by HP offer a telling contrast. The undisciplined HP paid eleven times revenues for Autonomy, seven times for Arcsight and a comparable figure for 3PAR. IBM usually stayed at tightly disciplined acquisition prices of three or four times revenues.
Role of Directors
So who (and where) were the directors of both companies? The contrast is astounding. Most of IBM’s were the CEOs of prestigious companies like American Express, Boeing, Caterpillar and Dow. Roughly each year one or two directors retired after seven or eight years of service to be replaced by another CEO of equal caliber. None needed the job to cap an already-prestigious career, so they could push back against the CEO if necessary.
The HP board has gone through violent swings, with three or four directors replaced at a time, starting with the four added from Compaq after the 2001 acquisition and proceeding to the present resignation of the executive chairman and departure of two more directors, in part over the Autonomy acquisition. Over many years, the directors have had little opportunity to form a coherent and collegial board or fully understand the strategy or culture. Nor did they have the stature of the IBM board. In sum, the complementary weaknesses of board, M&A, and R&D organizations explains much about the ill-fated acquisitions that could still sink Hewlett Packard.
A Balanced Approach Drives Innovation
Obviously, there is no single model for an innovative corporation. But the contrast of IBM and HP over the past two decades suggests the value of strength, balance and consistency along two axes. First, the relationship between R&D and M&A in building an ever evolving product line, guided by a steadfast CEO with a firm grasp of markets and the technology.
And second, the balance between a strong, confident and independent board—and an equally capable executive committee in holding the steadfast CEO to a sensible path. Such balance is difficult to achieve and easy to destroy as the histories of these two tech giants amply demonstrate.
