July 16, 2005 8:00 PM PDT
HP to slash approximately 15,000 jobs
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IT, sales and services will be among the areas particularly hit, although the sweeping cuts will be felt throughout the company, according to the source. The move to cut more than $1 billion a year in costs during the next two years marks one of the most significant initiatives Mark Hurd, HP's chief executive, has launched since his arrival less than four months ago from NCR.
"Almost every area will be affected across-the-board, but it won't be 10 percent cuts in every department. It'll be in areas where (HP) need to improve their benchmark against competitors," the source said. "Mark likes to benchmark against the competitors and IT, sales and service are areas where (HP) needs to improve efficiencies."
A representative with HP was not immediately available to comment on the layoffs or which departments would be impacted most.
HP is expected to announce the layoffs as early as Monday, but employees are not expected to be immediately notified of their status, the source said, noting such a practice is common in corporate America.
More high-level discussions on the layoffs will occur late next week and employees may get a greater sense of their specific status sometime thereafter.
HP's management team and business units will remain in their current form, with the restructuring mainly focusing on the workforce, said the source, who declined to further delve into the effect of the layoffs in each division.
The source noted none of the existing executives on the management team will be re-assigned to new posts, but members may be added to the team.
Analysts, however, have been expecting HP's Technology and Solutions Group to be the likely recipient of most of the pink slips, as well as services and HP's research and development spending.
Within HP's total workforce of 150,000 employees worldwide, about 70 percent of the company's workers reside in the Technology Solutions Group, which is headed by Ann Livermore, said Toni Sacconaghi Jr., an analyst with Sanford C. Bernstein & Co.
That group includes enterprise storage and systems, software and services.
HP Services has roughly 65,000 employees, but analysts are predicting HP will lop off only about 8 percent here because the company is working on edging out IBM Global Services, EDS and Accenture for corporate contracts.
"We estimate that HP has roughly 20,000 salespeople, with the majority in (enterprise server group) and Services, and that CEO Hurd is likely to look to streamline the organization, moving away from HP's current 'matrixed' selling organization to focus on more direct accountability," Sacconaghi said.
The company's Enterprise Server Group (ESG) has roughly 40,000 employees on the payroll, Sacconaghi said. If HP cuts back about 10 percent, or approximately 4,000 jobs, HP could hypothetically boost operating margins by 2.3 percent, Sacconaghi said.
Noncritical research and development (R&D) could also be impacted, analysts suggest.
HP's R&D spending is nearly $1 billion higher than all of its relevant competitors combined, according to an independent benchmarking analysis done by Sacconaghi's firm. The comparison was designed to mirror the one that Hurd has professed as his method for bringing costs back into line.
"We suspect that Hurd might be able to lower HP's annual $3.5 billion in R&D by $250 (million)-$500 million through the elimination of non-core projects, Sacconaghi said.
Meanwhile, analysts suggest long-term employees could see their pensions and options programs slashed if Hurd follows his past course.
While at NCR, Hurd replaced pension benefits with 401K plans for employees older than 40 and reduced option grants to 1 percent, said Cindy Shaw, an analyst with Moore & Cabot.
Future severance packages may also be less generous than the current range of two to 12 months of pay, depending on years of service, according to Shaw. Severance expenses averaged $78,000 per person in the first half of this year, Shaw said.
Massive job cuts have been more the rule than the exception in recent years at the Palo Alto, Calif.-based company. HP laid off thousands of employees under the plan by previous CEO Carly Fiorina to merge with Compaq Computer.
HP has laid off about 4,500 employees so far this year with, "no ostensible disruption to business," Sacconaghi said. But further layoffs could run the risk of undermining employee morale.
Not all cuts have been in the form of pink slips, though: 1,900 employees took advantage of a voluntary severance plan in the imaging and printing division.
In the last quarter, which ended April 30, HP took a charge of $71 million for the imaging and printing cuts. It also took a $74 million charge for cuts in services and $24 million for cuts in the servers and storage group.
In the current quarter, HP said it has budgeting $100 million for job cuts that already were planned.
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