This blog was originally published in Harvard Business Review
I remember attending a Hewlett-Packard meeting for industry analysts in the early 1990s and hearing HP proudly declare that it was becoming a software company. Software had turned into a stronger driver of revenue in the computer industry than hardware, and HP management had realized that it had to make the shift to sustain its growth. I raised my hand and asked Lew Platt, HP’s president at the time, how much of overall revenue he anticipated would come from software within five years. His answer: by the end of the decade, about 10 percent.
Today, software is less than 3 percent of HP’s revenue. Clearly the transition has been difficult. The latest news is that HP may be considering a poison pill to fend off angry investors. They along with many analysts were rattled by Leo Apotheker’s announcement that HP would spin off its PC business and spend heavily to acquire software company Autonomy—and then rattled again by Apotheker’s abrupt replacement at the helm by former eBay chief Meg Whitman.
Such seismic moves would be unsettling in any company, but the real problem is that HP is not trusted to execute on its new strategy well. Fundamentally, people just do not see software as part of HP’s DNA.
DNA sounds like a soft thing and it is. It’s the company’s deeply embedded belief system, its prevailing ethics, and the way people within the company interact with each other and with customers. It governs an organization’s cultivation of its intellectual capital—how it leverages what it already knows how to do, and how it evolves its offering based on changing market demands. You see evidence of companies’ different DNAs in the ways they react to risks and opportunities. One company might be patient enough to allow a new strategy to evolve while another panics when returns don’t start coming quickly or positively enough. Usually when people talk of DNA they’re raising questions of corporate culture: Does the company rely on consensus among managers or are strategies and tactics directed from the top? How does the company deal with dramatic change? Is change viewed as a natural evolution that is necessary for the health of the company or is it seen as a threat to survival? How does the company nurture home-grown talent?
But just as in biology, DNA doesn’t start with these soft, impressionistic manifestations. It starts with the hard and detailed set of instructions that give rise to them. In a company setting, that would be the economics of its business model.
The DNA that has been in HP’s bones from the start is all about excellence in hardware engineering. Hewlett and Packard set out to create high-quality electronic equipment that was more accurate and precise and less expensive than competing products. That DNA served it well over several decades; even through the 1990s, HP succeeded through its ability to innovate with hardware, and its strong focus on quality won it strong customer loyalty. It was when HP decided to go beyond dabbling in software that its troubles began. Despite its clear excitement about the idea of becoming a software giant, HP did not seem to internalize the very different model of a software-driven company.
Companies that focus on hardware first can usually understand the economics of software intellectually, but at the day-to-day organizational level they don’t act as though they get them. With hardware markets, money is spent upfront to develop a system. However, once that product is launched, revenue streams in quickly and evenly. The lifecycle of that product may be a year or so, depending on the competitive environment. Then, the hardware company does the same thing again.
By contrast, when software is delivered to the market, it may take a year or even several years before it becomes a well-accepted and profitable endeavor. But that time investment is rewarded, because when software proves useful to customers its longevity is assured. Customers tend to stay with a software product for many years, continually investing in yearly maintenance agreements and follow-on products. A hardware company accustomed to instant feedback, in the form of revenues, on its products’ market success often panics at the slow pace of the software market revenue model. This is what I’ve observed at HP. As it has tried to invest in software, again and again it has killed products off before they had time to mature.
Many companies that have decided to shift course have done so largely through acquisitions, and HP is surely no exception. From the late 1980s through the present day, HP has acquired hundreds of software companies. Some were large and well-known entities such as Opsware, Mercury Interactive, and the recently announced Autonomy Software. Other companies such as Bluestone Software, Dazel, Novadigm, SPI Dynamics (to name a few) were emerging leaders in their day. While all of these acquisitions had potential to help HP grow software into a significant business, there was a problem: There wasn’t an overall, well-thought-out plan for how these technologies would be absorbed and combine to create a sustainable advantage.
This is the other “hard” part of DNA: strategy. People often talk of the “roadmap” a company needs to be successful, specifying not just what areas they will focus on but how these components form a solution to customers’ problems. An equally good term for this master plan is DNA. Given HP’s status as the largest IT company in the world, it is shocking that it does not have a comprehensive software strategy worthy of its leadership role. But at HP it has simply never emerged.
And so the softer elements never congealed either into any recognizable new shape. There was no software leader in the company who was allowed to mature and grow. There were a succession of software leaders who could have grown into important leaders given time but none lasted more than a couple of years. Other internal talent was either overlooked or left for greener pastures.
Here’s my belief: When a company sees a new business direction as its savior instead of seeing that change as what it is, the change cannot be successful. At HP, acquisitions have tended to be trumpeted and welcomed as potential saviors of its future. (Never mind that the same was said of the last one, and it is now yesterday’s news.)
In order to reassure investors, and ensure its continuing viability, it needs to have a software business executing on a viable software strategy, and deeply rooted in an acceptance of software economics. HP’s DNA has led to its predicament today. Only its DNA can save it.