HP’s CFO Speaks on the Cloud, Shadow IT, and Tumultuous Times at HP

In its most recent 10-K filing, HP, number 11 among the 2011 Fortune 500, lists among its business risks “the growing demand for an increasing array of mobile computing devices” as well as the “development of cloud-based solutions,” both of which could “reduce demand for some of our existing hardware products” and consequently require HP to “transition to an environment characterized by cloud-based computing and software being delivered as a service.”

So far, that transition could not fairly be described as smooth. It has been marked by former CEO Leo Apotheker’s announcement last August that HP would abandon its TouchPad tablet (an “existing hardware product”), meaning, essentially, that it would write off its investment in the WebOS operating system (for “mobile computing devices”) HP got by acquiring Palm (for $1.2 billion) in 2010…



About a month later, Apotheker was fired and replaced by Meg Whitman, who announced in December that HP would release WebOS to the open source community for further development and would not, in fact, be giving up on tablets. Whitman, HP’s third sitting CEO since Mark Hurd’s firing (after a sexual harassment probe) in August 2010, also intimated that HP would pull back from its recent spate of high-profile acquisitions (including the aforementioned Palm, the $2.3 billion September 2010 purchase of storage company 3PAR, and the August 2011 $10 billion purchase of cloud enterprise search company Autonomy) in order to focus on organic growth and the R&D needed to ready HP for the aforementioned transition to cloud computing and software-as-a-service.

Indeed, in a conversation Tuesday with HP CFO Catherine (Cathie) Lesjack, who conducted the 3PAR acquisition in a fierce and public bidding war with Dell while serving as interim CEO between Hurd and Apotheker, the cloud — and the 3PAR affair — was very much on her mind.

The Cloud
“3PAR is the architecture of the future for cloud storage,” says Lesjack, defending a purchase that was criticized by some as too expensive. “It’s built to be scalable; it goes from low end to high end, allowing customers to build capacity as they need it.” She also notes that because 3PAR is mainly U.S.-based, it lends itself to easy network access, a cloud-computing necessity.

“Whenever you look at an M&A transaction,” Lesjack continues, “you look through three lenses: Does it make strategic sense, economic sense, and does it make sense operationally? You also determine what the maximum price you’re willing to pay is. We knew another company [Dell] was looking at 3PAR. But we bought it below our maximum price.

“Would I have preferred not to have done it in public? Yes.”

Given the fact that finance’s influence over IT has been increasing due both to recent hard economic times and to the financial transparency the cloud presumably offers CFOs, Lesjack notes that the cloud model has risks CFOs must learn to manage. In fact, HP Financial Services is launching a series of roundtable discussions on cloud computing for CFOs beginning with one led by Lesjack in Singapore in March.

“Paying cash over time is better than paying cash up-front,” Lesjack explains, referencing the cloud’s transfer of IT investment from a capital expenditure to an operating expense, thanks to its primarily use-based or subscription-based price model. But managing IT as opex instead of capex is not something with which most CFOs have experience. “[Financial] processes are well timed around capex. There’s a depreciation schedule; it just happens,” says Lesjack. “But opex is driven by usage and how well things are going. CFOs need to think about the financial ramifications over time, when those expenses are going to hit.” The total cost of cloud ownership, Lesjack implies, is more complicated to assess than that of traditional, on-premise IT.

Lesjack sees cloud computing as an evolutionary process, particularly for large enterprises with large investments in on-premise IT. It will begin, she believes, with the private cloud, in which companies retain control over their computing environment, and then “burst out” to the public cloud as CFOs become more comfortable with cloud security and with the value proposition of having a third party providing computing power to the organization. For smaller companies, she sees the cloud as offering an opportunity to acquire IT functionalities — and therefore competitive capabilities — that otherwise would be out of their financial and operational reach.

Shadow IT
The relatively low cost of entry to cloud-based applications has also given birth to a scary new enterprise creature: “shadow IT,” in which software is brought into the business without the approval or sometimes even the knowledge of IT or the CFO.

“Today,” Lesjack says, “when a business leader goes to the CIO and says he wants a new service and the CIO says it will take six months to set up, test, and deploy, the business guy goes to a cloud provider who says he can get it set up in two weeks.”

Two problems with shadow IT are, one, that while it may serve the individual business leader’s needs for the moment, it can lead to data silos that resist integration, thereby becoming a barrier to operational efficiency; and two, the costs of shadow IT services can quickly mount, leading to a significant amount of uncontrolled spend hidden under operating expenses in a balance sheet. Lesjack, while admitting that some shadow IT exists at HP (“Frankly, there has to be some”), emphasizes that former HP CIO Randy Mott, widely credited for making Wal-Mart’s inventory management systems the envy of the retail world and for consolidating HP’s data centers from around 80 across the globe to just 3 during his six-year HP tenure (a consolidation that places HP in far better shape to provide cloud-based services), worked hard “to get our processes right for stamping out shadow IT.” 

Lesjack strongly suggests that CFOs pay attention to shadow IT and that they could start determining how widespread it is in their organizations by looking “at your Amex expenses and seeing if there’s something there that says Amazon. That’s where it shows up.”

Tumultuous Times
“The last 12 months have been difficult for HP,” admits Lesjack. HP’s profits fell in the last quarter of 2011. Last month, Standard & Poor’s downgraded HP’s long-term credit rating from A to BBB+, citing concerns over the company’s “inconsistent” strategies and senior management turnover.

“The consumer market was difficult in 2011,” Lesjack says. “Then there was the tsunami in Japan and the flooding in Thailand [affecting HP’s manufacturing, inventory, and supply chain]. That was hard for the people there and for business.

“Also, we didn’t execute or lead as well as we should have.

“In 2012,” she continues, echoing Whitman, “we’ll be stepping back, looking at our investment levels, focusing on our cost structure and growing the top line. The first facilitates the second. Financial professionals need to be adaptable, to help the business understand and anticipate changing market conditions.”

Indeed, Lesjack says the last few years, hard and tumultuous as they’ve been, have been critical to the development of HP’s finance team’s skill set.

“Not to sugarcoat it,” says Lesjack, turning the old Chinese curse “May you live in interesting times” on its head, “but if everything’s going well, it may be lucrative, but it’s just not as interesting.”