The full-throated confidence that HP CEO Meg Whitman voiced last quarter about the company’s Enterprise Services business was replaced by some stark realism on Thursday.
Enterprise Services is HP’s consulting and IT offshoring business — it helps HP customers use technology more efficiently, and handles their IT needs.
In the quarter ended in April, it showed a revenue decline of 16% from last year, and this continues a trend that’s been going on for at least the last two and a half years.
In HP’s last earnings call in February, Whitman promised to increase profits from the unit, and she reiterated that promise on Thursday.
By the end of this year, she says HP Enterprise Services, which includes consulting and IT outsourcing for big customers, will be solidly hitting 4 to 6% profit margins and “long term” 7% to 9%.
During a quarterly conference call with Wall Street analysts, Whitman indicated one way she plans to achieve this: Offshoring jobs from expensive wage regions to low-cost regions, and automating more jobs in the data center.
She said the unit needs “to make a faster labor mix shift to low-cost resources” and explained this meant two things:
- Using more automation technology, rather than hiring people do certain administrative jobs.
- And “more aggressive labor pyramid shifts…in onshore/offshore locations.”
Troubled for years
Enterprise Services is HP’s outsourcing and consulting group. A big part of its services is old-school outsourcing, where HP steps in and runs an entire IT department. That’s a dying business as companies shift towards cloud computing and update their data centers with new tech that allows them to be more automated and easier to manage.
The business has struggled. Every quarter for at least the last two and a half years, the unit has shown lower revenues than the year-ago quarter.
Or to put it another way, the unit brought in almost $7.3 billion in the quarter that ended on January 31, 2012, and brought in $4.8 billion in HP’s most recent quarter, which ended in January 31, 2015.
Profit margins have been all over the map, too.
Whitman has given up predicting when HP will start growing revenues in general. She is now concentrating on splitting the company into two. She’ll run one company, HP Enterprise, and HP Enterprise Services will stay with her.
Given its long troubled history, why not try to divest it?
Whitman says Enterprise Services remains “strategic” to the new company, HP Enterprise. HP Enterprise needs consulting services to help the company sell HP technology like newfangled servers, networks, storage, and software.
“If we don’t have a healthy services business it compromises the overall business,” she says.
There is definitely an accelerated move to a consumption model, which is going to require us to make a faster labor mix shift to low-cost resources, and frankly, the transformation of the physical data center footprint to much more streamlined footprint that are far more automated.
So there are real market shifts going on here. And basically, the additional savings plan that we mentioned today would de-risk our plan for ES to reach that 7% to 9% operating margin, but more importantly would enable us to sustain that level of profitability over time. So we’ve got more aggressive labor pyramid shifts that have to take place in onshore/offshore locations to make sure that we stay competitive in that market, and the market is changing dramatically.
We’ve reached out to HP for additional context and will update this post if we hear back.