Archive: Hurd and HP’s Spying Scandal

Aug 7th, 2010 | By businessnews | Category: Business

OCTOBER 9, 2006

Controlling The Damage At HP
Since he replaced Carly Fiorina, Mark Hurd has led an amazing turnaround. But can he keep HP humming in the face of a bruising scandal?

During Mark V. Hurd’s 25-year career at NCR (NCR
), the company had plenty of good reasons to launch internal investigations. There was the time 10 years ago when an angry, laid-off worker, after getting into a tussle with Hurd in a pickup basketball game, made repeated death threats against him and his family. Years later, during a painful round of cost-cutting for the 120-year-old cash register and computer maker, Hurd and other top executives had their tires slashed in the executive parking lot. NCR installed a security system in Hurd’s house and hired a guard. And several times employees posted sensitive financial data on Yahoo! (YHOO
) message boards.

In each investigation, Hurd, an executive who normally delves into the most minute details of daily operations, relied on his former chief counsel, Jon Hoak, to run the show. Hoak, who has since left NCR, vividly recalls Hurd’s peering over his rimless reading glasses after one Yahoo leak and telling him: “We can’t have this, so you go out and do what you have to. Just make sure everything we do is legal and above board.”

Sound familiar? The parallels with the drama that’s playing out today at Hurd’s new employer, Hewlett-Packard Co. (HPQ
), are striking. To hear Hurd tell it, when HP’s then board chairman, Patricia C. Dunn, authorized an investigation into press leaks from the board, he also trusted that she and the company’s legal and security personnel would handle it properly. Hurd figured he had enough work resurrecting the company. On Sept. 25, red-eyed and clearly humbled, Hurd explained to BusinessWeek: “I’m a detail-oriented guy by trade. But when you have a place of this scale, you have to pick your spots where you’re going to go dive. Compliance wasn’t the first process I was going to go look at. I was going to go look at the performance of the company.”

Even if Hurd is right about being mostly out of the loop, it’s a decision he surely regrets. On Sept. 22 he stood before a room of reporters and read a statement apologizing for the spying tactics that HP officials and security subcontractors used to track down the source of leaks. Hurd admitted that he was not paying close enough attention to spot some of the actions, which he called “very disturbing.” In the coming weeks, his version of events will be tested — through testimony by Dunn, Hurd himself, and other HP officials before Congress on Sept. 28, and in various criminal investigations that are under way.

So far, there’s little sign that the scandal will sidetrack an otherwise rousing turnaround story at HP, managed by the 49-year-old executive that some in Silicon Valley — at least until recently — had taken to calling the “Boy Wonder.” HP’s stock price faltered only when investors worried that Hurd’s job was in jeopardy: They had discounted the scandal until it threatened the leader who restored their faith in the company.

It seems highly unlikely that Hurd will be forced to resign. But the question for employees and shareholders of the $90 billion company is whether he can remain focused on performance. He spent three days in Washington preparing for his congressional testimony and will also have the duty of rebuilding a board whose atmosphere had turned poisonous in recent years. He took over as chairman after Dunn was ousted on Sept. 22; he is already trying to recruit replacements for her and the two directors who quit in the fallout over snooping, Thomas J. Perkins and George A. “Jay” Keyworth. “What you have here is a board that has had more infighting with themselves than with me,” Hurd says. “At the end of the day, we have to do the same work with the board that we’ve done with the company — that is, to rebuild its very foundation.”

Entirely separate from the scandal, Hurd faces major challenges to keep HP’s recovery on track. So far, he has cranked up earnings through smart cost-cutting moves, which have simplified the company’s operations and enabled it to take market share in products such as printers and PCs. There’s certainly more room for near-term growth in existing sectors. But at some point, HP will need to create major new markets, as well, to stay in Wall Street’s good graces. Many insiders wonder if Hurd is up to that. Says one longtime HP manager: “I think the honeymoon will last another year, until the analysts start wondering where the new growth will come from.”

Already, the scandal is filtering into Hurd’s day-to-day management style in surprising ways. He says half-jokingly that he finds himself repeatedly telling employees in meetings that whatever they do has to be “legal and ethical.” “We’re going to have to regain the world’s confidence one person at a time to prove that this is the company they thought it was,” he explains. Weighing in Hurd’s favor is that HP’s workers really want him to succeed. They seem more numb than outraged by the scandal — sadly predictable, perhaps, after years of boardroom intrigue and layoffs. It has been years since HPers felt their company was a paragon of ethical behavior. “I don’t think it’s affecting morale, because the HP Way has been dead for years,” says one staffer. “People are just glad to have [stock] options that mean something again.”

During the 18 months since jumping from Ohio to California, Hurd seemingly could do no wrong. He recruited just the right number of outsiders into top jobs, pushed through a 15,000-person layoff and other moves to trim the company’s annual costs by billions, and boosted operating margins from 4% to 6.9% in the past year. As unlikely as it would have seemed two years ago, HP has put PC king Dell Inc. (DELL
) on the run and will overtake IBM (IBM
) in revenues this year. Its shareholders have been rewarded with a nearly 80% rise in the stock price since Hurd took over.

Perhaps most impressively, Hurd buried the ghost of his charismatic but controversial predecessor, Carleton S. “Carly” Fiorina. Once Hurd set foot in Palo Alto, it was clear he was the anti-Carly. HP employees who Googled his name may have been given pause by the reports of cost-cutting at NCR, but they found hope in the dearth of personality profiles of their new CEO. Whereas Fiorina once had her portrait hung between those of founders William R. Hewlett and David Packard in HP’s lobby, Hurd refused to put his own picture up. Today, Hurd appears dispassionate about his predecessor, to the point where he claims not even to be aware that she’ll appear on 60 Minutes on Oct. 8 to pump her new book, Tough Choices. Hurd, who has no grudge and has been careful never to criticize her, says he’ll watch Fiorina’s TV interview “if I’m around, and if it’s on in the room I’m in.”

Some expect Fiorina to take a measure of credit for HP’s comeback. Hurd himself admits he’s pretty much running her strategy, albeit in a much more focused, disciplined way. “Mark could have been the best COO on the planet for Carly; they would have been a great team,” says one HP executive. In terms of style, though, the two couldn’t be more different. Fiorina’s public presentations were choreographed like rock shows. One of her credos was that “management is a performance.” Not so with Hurd — unless you relish sitting through a dreadfully detailed nine-hour business review.

On his first visit to HP’s Boise (Idaho) printer operations, where old-timers particularly disliked Fiorina, Hurd won points by driving up in a Hertz rental car, says one former executive. During his standing-room-only talk in the cafeteria, he scribbled on a flip chart the price-earnings ratios for IBM, Dell, and HP. “You know why ours is down here?” Hurd asked. “Because shareholders don’t believe we can do what we say we’ll do.”

Even when he’s taking subordinates to task, Hurd is more likely to challenge than to chastise. “With Carly, you’d walk out like you were a bad child and were going to be punished,” says one HP vet. “He talks like your favorite professor, leading you through things until you understand it.”

To understand how far Mark Hurd has lifted HP, you must first consider the trauma it has gone through. Fiorina arrived in 1999, after board members pushed out unexciting CEO Lewis E. Platt. HP was seen at the time as a laggard that arrived late to the dot-com party. IBM under Louis V. Gerstner Jr. had jumped into computer services in a big way, while HP slogged along selling servers, PCs, and printers. The board bet that Fiorina, a star sales executive at Lucent Technologies Inc. (LU
), would shake the company out of its slumber with her charisma and ambition.

She accomplished that, in spades. Within weeks, Fiorina had raised HP’s profile while emerging as one of the world’s most recognizable celebrity CEOs. Reality never matched the hype, though. Her ambitious efforts to transform HP quickly bogged down, particularly a complex structure that undercut the clear accountability that had been the bedrock of the company. Sure enough, HP’s financial performance grew unstable, the stock sank, and employees lost faith in her ideas. As they did, they began to resent her look-at-me management style.

As problems became visible within Fiorina’s company, they also began to emerge within her board. For decades, HP’s directors were a stolid group dominated by longtime friends and progeny of the founders. But it then played a controversial role in backing Fiorina’s decision to buy Compaq Computer Corp. in 2001. First, the board O.K.’d the $25 billion merger despite the concerns of scion Walter Hewlett. When the deal came under withering criticism from investors, the company called on directors — particularly Keyworth — to sing Fiorina’s praises to the press and discredit Hewlett, who nearly won a proxy fight to kill the deal. “They were not people acting like honorable people. That’s what we’re really seeing: the fallout from that,” says one HP insider from that time.

As HP continued to struggle to meet its merger goals, more rifts emerged within the board. By late 2004, directors that included Keyworth, venture capital bigwig Perkins, and longtime HP executive Richard A. Hackborn began to demand better performance. When Fiorina resisted calls to share operating duties, the spat found its way into the press. (While Fiorina suspected Keyworth, he was not the source of that leak, according to his lawyer.) On Feb. 7, 2005, with Fiorina still fuming over the leak, Dunn and others offered to accept her resignation. Fiorina refused, choosing to be fired rather than give the impression she would leave a job undone.

Enter Hurd. His candidacy to replace Fiorina and run the 11th-largest U.S. corporation at first seemed like a long shot. His name was initially mentioned by headhunters relatively late in the process, and didn’t make much of an impression. One HP board member joked: “NCR? That’s in Iowa, isn’t it?” Hurd, somewhat spooked by the articles about Fiorina’s ouster, says his interest was only “mediocre,” as well.

But Dunn persuaded the other two members of the screening committee, Keyworth and Perkins — the two she would later enrage with her leak investigation — to meet Hurd at Perkins’ San Francisco office. They were quickly won over. Hurd showed a deep understanding of the way HP really made money, and they were impressed to know that each year he tracked how he spent his time to make sure it was split equally among employees, customers, and investors. Hurd also eschewed any notion of quick fixes. Says Keyworth: “I picked him one hour after we met him.”

Hurd almost balked at taking the position. The size of the job was daunting and, perhaps prophetically, he was worried about leaks after getting a call from a BusinessWeek reporter who said Hurd was likely to be named HP’s next CEO. According to one source involved in his recruitment, Hurd said: “‘I don’t want to go to a company that has a goofy board.’ He felt it was important to have a board that spoke with one voice.” It took Hackborn’s flying to Dayton for a two-hour talk to get him back to the table.

In the end, Hurd couldn’t resist the opportunity. “It was a chance to play in an arena he has always wanted to be in,” says retired NCR executive Bill Eisenman, a longtime mentor. “This was a chance that would only come around once in life.”

He was ready. All his life, Hurd had been confident. As a stockbroker’s kid growing up on Manhattan’s East Side, he put far more energy into sports than into grades. He was a tennis standout in high school and then at Baylor University, but gave up on dreams of a pro tennis career for something more lucrative. He found sales. After joining NCR’s Dallas office in 1979, Hurd quickly became the only computer salesman there to make his quota. He also met his future wife, Paula, who moved up the sales ranks along with him until quitting when he became company president in 2001. He moved up to corporate. Lee Panosian, a former NCR colleague who is now vice-president for global strategies at Lenovo, recalls walking for hours with Hurd through their Centerville (Ohio) neighborhood, smoking stogies and strategizing about how to land a deal or the optimal deployment of field salesmen.

While many of his peers jumped ship after AT&T’s takeover of NCR in 1991, Hurd smelled opportunity and stayed put. A few months later, AT&T bought Teradata, a maker of high-end data mining computers. It was a perfect match: Hurd helped the unit make inroads on Wall Street, in the Pentagon, and with huge corporate customers such as Wal-Mart Stores Inc. (WMT
) In the mid ’90s, he oversaw the decision to get out of the commodity PC business and put all of Teradata’s energy into machines running its sophisticated, market-leading software.

Hurd became known for his disdain for glossy, Band-Aid solutions that sounded good in a presentation. Instead, he would call people in the organization three or four levels down to get the details on some minute operational question. His muse was Teradata’s own software, which he would use to run scenarios and simulations for how to achieve the lowest costs and highest sales. “There was a saying at NCR: Mark would torture the data until they confessed,” says Steve Millard, who was Teradata’s vice-president for global strategic partners.

In many ways, the table was perfectly set for Hurd’s arrival at HP. He stepped into a company with 150,000 people hungry for his informal, straight-talking style of leadership. He immediately jelled with rank-and-file and veteran managers alike, most of whom had long since tired of Fiorina’s soaring rhetoric and simply wanted clear, smart direction. “We had grown used to hearing vision and abstractions, but nothing you can sink your teeth into. It doesn’t mean anything,” says one insider.

Several Fiorina initiatives were teed up and ready to deliver. Chief Technology Officer Shane V. Robison had finished an exhaustive benchmarking study, giving the data-addicted Hurd plenty to chew on. The printer group, which was still dominant but facing increased competition and falling prices, had already begun a project that would involve hefty job cuts and reallocate spending to the most promising projects. After years of playing the patsy to Dell, even HP’s PC division was making solid progress and had much improved products in the pipeline.

But huge changes were under way that would enable HP to start keeping its promises. Hurd gave the heads of the main businesses far more control over such things as their own sales forces and marketing dollars. He killed projects that seemed designed to gain PR rather than profits, such as reselling Apple’s (AAPL
) iPods. And he began a slew of investments to increase the efficiency of corporate functions, especially a state-of-the-art data warehouse and lightning-quick information systems network. The central cog of Hurd’s plan: pump the billions saved over time into the engineers and salespeople who could keep HP growing. “It’s not a Phase 1, Phase 2 thing,” he says. “It’s one thing. We have to grow and cut costs simultaneously.”

Sales may not be as sexy in Silicon Valley as a new music player or Web service, but it has been a critical factor in HP’s turnaround. Besides nixing an über-sales staff for one that lets salespeople focus on the products they know best, Hurd brought in almost 1,000 new reps to improve service to major accounts. And he carefully targeted areas that had been left unaddressed. While HP always sold printers and consulting services, it never provided services to help companies manage all their printers, as IBM did. Says Hurd: “The consistent message I get from customers is: We just don’t show up enough.” Adds Intel (INTC
) CEO Paul S. Otellini: “He really has reenergized their sales forces.”

Also crucial to the recovery is Hurd’s success in attracting top outsiders to push through his agenda — traditionally not an HP strength. Former Dell Chief Information Officer Randall D. Mott is pushing his staff to the breaking point to replace 87 poorly integrated data centers to create that cutting-edge network. Ex-Palm (PALM
) CEO Todd Bradley now runs the resurgent $27 billion PC unit, with the help of former Apple marketer Satjiv Chahil. Says HP board member Bob Ryan: “Before Mark arrived, you had a lot of ideas but not a lot of action. There were too few operating managers — people who can really run businesses.”

What’s most striking about Hurd’s work is not the big strokes, but the many smaller ones. He has demanded accountability in a company that had gotten lazy, in any number of ways. One staffer notes that he is now questioned on expense reports if he goes over $45 for a dinner. Many say this renewed focus on details starts at the top. While Fiorina rarely sat in on divisional reviews, Hurd not only holds them but keeps staffers busy with his follow-ups. Former software chief Nora Denzel marvels at one meeting held to discuss the cost structure of HP’s customer service group. At one point, Hurd got interested in what cars tech reps drove when they had to make an on-site repair. How many had company cars? How many didn’t have their own cars they could use? What model cars did HP provide, and were they automatic or manual?

Denzel says Hurd is “tough, but fair.” Once, her software business missed its targets when expected deals didn’t materialize in the final days of the quarter. She approached Hurd’s office with trepidation, but once she had explained the reasons, he asked what he could do to help. She named three things: Call one regional sales leader to push him to focus more on software, call another to insist he make a key hire, and call an analyst who was spreading talk that Hurd was going to divest the software group. “I asked for three things,” Denzel says. “By the time I got back to my office, they were all done.”

Now, Hurd must apply that detail-oriented mindset to the scandal that has cast such a pall over HP’s recovery. The Boy Wonder must oversee an investigation, respond to criminal probes, hire new directors, and make his quarterly numbers, all while under the glare of scrutiny he could have never imagined back in Dayton.

Editor’s note: Writer Peter Burrows is one of the reporters whose private phone records were sought by investigators for Hewlett-Packard.

By Peter Burrows, with Louise Lee and Robert D. Hof in San Mateo, Calif., Adrienne Carter in Dayton, Lorraine Woellert in Washington, and Moira Herbst in New York

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