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IBM CEO calls HP's bluffed up growth deals

HPLogoAcquire It's a rare event when IBM's leader makes a point of commenting on Big Blue's top competitor. But at a Wall Street Journal-sponsored event this week, Sam Palmisano identified the true cost of driving innovation with company purchases, rather than engineering. Deals like the mad bidding war for 3PAR are going to cost HP's customers in the longer term, he said in a Journal story.

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

Palmisano Despite what Palmisano said, not all of R&D was cut by Hurd, although the board which ousted Hurd continues to wade into the bog of acquisitions a month later, buying up security company ArcSight. Back before the R&D cutting started, HP built things. In the '90s HP developed an HP-UX technology called Virtual Vault, an OS version where "unlike most other UNIX systems, the superuser (or root) does not have complete access to the system without following correct procedures." A decade later, Virtual Vault's development had decayed enough that the vault was being hacked with multiple security warnings. ArcSight isn't offering a Vault replacement, but such outside firms are innovating at a rate that keeps pace with today's needs. HP is buying what it no longer can afford to invent.

The problem for enterprise users like our readers lies in the budgets stripped out of HP labs. The company still sells enterprise products of its own invention, such as HP-UX, OpenVMS, and Integrity servers. Keeping those solutions current with customer needs, well, it's got to be funded somehow. ArcSight cost HP $1.5 billion, and 3PAR came in at $2.3 billion. While you cannot invent services expertise like the EDS workforce, products used to be so essential at HP that one former CEO felt compelled to include the word "invent" in a revamped HP logo.

The R&D cutting started with Carly Fiorina's board 10 years ago. By percentage of HP revenues, it's about one third of its former strength. Palmisano says pursuing growth down that path hobbles a company's future. He also said HP got snookered in booting out Hurd, only to see the man's $35 million parachute land in rival Oracle's executive suite. So it's not all news coming from a CEO who's outlasted HP's previous two leaders.

Some of this is jousting between competitors, of course. Palmisano, whose company is just behind HP in total sales -- after shedding its PC business to Lenovo -- said selling PCs is so yesterday.

Those might be harsh words for anybody who wants to wander into a Best Buy or a Walmart or an Office Depot to scoop up the latest HP laptop. But by trying to be everything to every kind of computer customer, HP is risking becoming me-too at everything it sells by the billions. You can ask JC Penney or Sears how that "we sell it all to you" business model is working. A big company can always be outmaneuvered by innovation, or even the addition of invention to a just-smaller rival.

And you can ask the HP 3000 users what it means when a product's revenues drop off because sales have declined on the loss of innovation funding. You need to invent for durable growth -- or experience what happens in the barren aisles of Sears.