By Mary Hayes Weier, InformationWeekMFeb. 10, 2007
In Boston last week, 2,400 Hewlett-Packard software salespeople braved the frigid weather for a boot camp of education and training. It was more like reprogramming. The message: HP is an enterprise software player, so it's time to start acting like one and storm the market with a united front instead of with a disparate collection of products.
HP needs to convince more than the sales staff. The company's history with software is marked by an erratic record of investments and divestments. The result? While HP is the world's largest tech company, with $92 billion in revenue last year, it's never gained much recognition in software beyond OpenView and HP-UX.
That may be about to change. The company is doing enough interesting things, in development and acquisitions, that the results could be different this time. For one, HP looks sure to do more acquisitions with its $16 billion cash horde. It bought more than 10 software companies in the three years leading up to the $4.5 billion deal for Mercury Interactive in November. Last week, it bought Bristol Technology, a small company that makes software to monitor customer transactions.
"We're open to doing software acquisitions like Bristol, or very large-scale, headline-grabbing acquisitions like Mercury," says senior VP Tom Hogan, who heads up HP Software. "We have the balance sheet and the cash to do either."
Hogan describes three pillars of the software group, any of which could be spurred by acquisitions. The most substantial is business technology optimization, or BTO. It includes OpenView for managing servers, PCs, and other IT infrastructure; and the Mercury software, for monitoring and testing application performance. The business information optimization, or BIO, unit is more fledgling, including an HP-developed data warehouse, Neoview, that the company will start marketing this spring. The third group is OpenCall, software for delivering voice, video, and data services. HP-UX is tied to the server hardware business.
Bristol, with its emphasis on monitoring whether customer transactions are on track, is being plunked into BTO with Mercury and OpenView, a unit with an annual revenue run rate of more than $2 billion. The recently acquired Knightsbridge Solutions, which specializes in business intelligence and data warehousing services, becomes part of BIO alongside the Neoview data warehouse, which HP is deploying internally but also selling against Teradata, IBM, and Oracle. It's this unit that will likely see the most action in terms of acquisitions, Hogan says. HP just opened a lab in St. Petersburg, Russia, to develop software for managing business information, but if HP wants to be a player, organic growth alone won't cut it.
Yet building by acquisitions is tricky. Just look at CA, a roughly $4 billion-a-year software company. It bolted on acquisition after acquisition until it stood for nothing but a hodgepodge of products. CEO John Swainson has brought a clearer focus--systems management, security, and storage--but the company was still scooting along at 4% sales growth last quarter. HP wants the same thing CA does: that coveted position as one of a customer's strategic software partners. It's tough to get. Kevin Frederick, director of technology at Roger Williams Medical Center, which uses HP storage systems, is curious but cautious. "In the tech arena, there's been a lot of companies going into new branches trying to create new revenue, and they don't quite make it all the way," he says.
Can HP execute? Its software strategy has lacked direction. After acquiring middleware company Bluestone Software in 2000, for example, it created two product lines, OpenView and Netaction. In 2002, it divested Netaction after the Compaq merger, choosing to partner with Microsoft and BEA Systems. Software never seemed a top priority for former CEO Carly Fiorina.
Things are different now, says Hogan, a purebred software sales guy. Before joining HP a year ago, he was CEO of content management vendor Vignette. He headed up sales at Siebel Systems during a few of its finest years, and he sold software for 17 years at IBM. When CEO Mark Hurd first approached Hogan 18 months ago, "the discussion was, 'Tom, I'd like you to come help turn HP into one of the world's greatest software companies,'" recalls Hogan, who reports to executive VP Ann Livermore, head of HP's technology solutions group. In 12 months, the number of people in HP's software group has doubled, to 7,500 people.
HP's Products--And Problems
The products of most immediate interest to business technology managers are OpenView and Mercury--names HP plans to phase out, since it's trying to sell them together. OpenView's the cornerstone, used to manage and monitor servers, PCs, and networks. Sales tend to piggyback on HP hardware. With the $425 million acquisition of Peregrine a year ago, HP got software for tracking and controlling IT assets, expenses, and services. The Mercury acquisition added software that monitors application response time, by watching messages as they go in and out of apps. Mercury software also plays in IT governance, helping CIOs align systems with business goals, and manages service-oriented architectures. Bristol makes software that monitors complex transactions common to financial services; JPMorgan Chase and Empire Blue Cross Blue Shield are among its customers. Put together, HP should have a better pitch against IBM Tivoli, CA, and BMC Software.
HP has further to go in the area of business information optimization. Hogan can articulate the opportunity: "Digitized information is doubling every 18 months, and business intelligence is now top priority," he says. But HP doesn't have a rich set of tools to help companies solve that problem. Neoview becomes the centerpiece.
HP isn't interested in developing software or acquiring a company focused on front-end business intelligence, such as query and reporting tools. Hogan describes a data assembly line that starts with data cleansing through a company such as Informatica, with HP's Neoview data warehouse (and others) in the middle, and then business intelligence products from Business Objects, Cognos, and SAS, other third parties "pounding queries against those data warehouse engines." The Knightsbridge deal brings 700 employees, many of whom are data warehousing, data integration, and information quality consultants. Hogan says acquisitions aren't critical to this area of HP's BIO unit. Still, it's hard to ignore that NCR recently spun off Teradata, potentially setting it up for an acquisition--by someone.
HP is more likely to make acquisitions to fortify the information management arm of the unit, focused on data archiving and retrieval, where its offerings are thin. Products today include HP's ILM application, which the company sells for archiving and accessing information contained in e-mail, databases, and health care systems. Hogan sees an opportunity to bring to market software that better manages unstructured data from the Internet. There's no shortage of strong rivals here, including EMC, IBM, and Symantec.
Perhaps least known to most IT managers is HP's group centered on OpenCall, software that helps telecom companies. It includes the OpenCall Media Platform for developing and delivering messaging, portals, and voice-enabled interactive services. It also includes service control software for things such as televoting, VPNs, and prepaid phone services.
Pressure To Diversify
With more than 60% of HP's revenue coming from PCs and printers, investors want to see the company expand. It took baby steps in 2006, growing software revenue 23% to $1.3 billion--70% of it from OpenView--before the Mercury acquisition. That's more than double the growth rate of any of its other businesses, but the group's earnings were a mere $85 million. Add up all the software HP sells across divisions, and it comes to well over $3 billion a year, IDC estimates. When HP issues its first-quarter financial report this week, it'll be the first to reflect the Mercury acquisition.
HP has a long road, though, to convince business technology buyers it's an expert in infrastructure and information management software. Kevin Donnellan, assistant CIO at the Screen Actors Guild-Producers Pension and Health Plan, buys most of the organization's systems from HP--servers, PCs, storage, and management software. But HP doesn't come to mind for business information, says Donnellan, whose organization developed its own data warehouse. Still, Donnellan's interested in HP for reasons other IT execs share: The more technology he uses from one vendor, the less time he spends managing others.
Hogan says HP will never be an applications vendor like Microsoft, Oracle, and SAP. Nevertheless, he points to the rapid consolidation in the software industry and thinks that before long, there will be a short list of critical vendors, with very few midtier players. HP, he promises, will be on that short list. That's a lofty goal. But if HP doesn't get it right this time, it's one Hogan won't come close to reaching.