Q&A;: Meg Whitman on fixing HP and Autonomy’s accounting troubles

Last month, the Los Angeles Times sat down with Meg Whitman, CEO of Hewlett-Packard, to discuss her first 15 months on the job. The story from that interview ran earlier this month.

The interview came just a few weeks after HP announced that it had uncovered a massive accounting fraud at Autonomy, the British software company it acquired in 2011.

When the Autonomy acquisition was announced in August 2011, Leo Apotheker was still CEO and Whitman was on the HP board. The controversy over that deal and its hefty price tag, coupled with an announcement that HP was thinking about selling its PC business (known as the Personal Systems Group, or PSG) led to Apotheker’s ouster and Whitman’s hiring in September 2011.

During the 30-minute interview, Whitman discussed her reasons for taking the job at HP, several of her major decisions as CEO, and the challenges, both expected and unexpected, that she has faced.

This transcript has been edited for clarity and length.

Q: When you were announced as the next CEO of HP, it was a surprise to a lot of people. What about this job appealed to you?

A: It was not part of my plan, as you probably know. I think I’d said many times that my last CEO job was going to be eBay. But I was on the board. And the board made the decision that Leo was probably not the right guy. And the board asked me to do it after going through a bit of a process. In fact, a fair amount of a process. And I said, “Hmm, you know what? I think I can help this situation. I think I can make a difference here.” It is a Silicon Valley icon company. And I have, through my entire career, a series of skill sets that actually would be helpful to HP. So that’s why I decided to it. But it was not the long-intended plan: Let’s go and be the CEO of HP.

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Q: Following your experience running for governor of California, did you have misgivings or hesitations about taking on a job that would be so closely scrutinized and so high-profile?

A: I thought about it a lot. But I was pretty used to high scrutiny (laughs). And I thought I could make a difference. But I thought about it long and hard, because it was a big commitment of time. And also a big commitment of seeing this turnaround through, which I knew, because I’d done turnarounds before, I knew this turnaround was not a one-to-two-year program. Even before I took this job, I knew it was a bigger undertaking.

Q: When the announcement was first made, you were very visible, going on TV and granting a lot of interviews. During the campaign, you were criticized by some for not being more accessible to the press and the public. Did you make a conscious decision that you needed to be more visible in this role?

A: A company like HP needs a leader and it needs someone who can be the face of the company. And by the way, there were some pretty big decisions that needed to be made right away. The spinning of PSG group, what do about webOS (the mobile operating system HP owned through its acquisition of Palm), leaders, etc. But I think companies absolutely need a face of the company. There needs to be a leader and there needs to someone who speaks for the company. And that has to be the CEO in 99.9% of the cases. In some cases, like at my eBay days, it can be the founder. My founder didn’t actually want to speak the for the company (laughs), but often it can be the founder. In this case, obviously, it had to be me.

You know, versus the campaign, it’s a juxtaposition. Because I felt like I did a lot of work with the media. I did a lot of interviews. Almost every place I was, I did television interviews. So the narrative was “Meg never speaks to the press.” But if you actually look at the record, of the number of round tables, press avails, TV, I actually did probably more than what was widely acknowledged. And you know how narratives stick in political campaigns. That was the narrative. But I don’t actually think the narrative was factual.

Q: Regarding PSG, it seemed like a no-brainer not to spin it off, given the negative reaction to the initial announcement. But how hard of a decision was it?

A: I assembled a team of about 100 individuals, and I split the team into two. And I said there’s a team that’s going to argue the case to keep the business, and there will be a team that will argue to not keep the business. And so we did a very significant amount of analysis, a deep dive into the business, a deep dive into the synergies, what it meant for customers, what it meant for our supply chain, what it meant for our brand. I was involved all the way along.

And then there was a presentation by both sides. I actually had people who, if you will, might have had a self interest in one outcome. I made them work on the other side. And then at the end of that day where we pulled all of the analysis together, it was obvious to me that the right thing to do was to keep PSG. So I don’t know that it was an easy decision. But I felt like it was the right decision. And any decision you make in business, or in politics or your life has pluses and minuses. But I felt like it was the right thing to do for the company.

Q: Do you find it odd that there are now some rumblings from Wall Street saying, “Hey, maybe they should get rid of the business?”

A: When you have a company that’s not performing the way various constituencies expect, there’s always a lot of ideas about what you should do. Buy this, sell this, try this strategy, that strategy. And so I take it all in. But I think it was the right decision and we’re in the first inning of this turnaround. It’s a year in. And in the end, I think people will look back and say we plotted the right course for HP. But the proof will obviously be in the pudding.

Q: One of the next big decisions was to part ways with Shane Robison, chief strategy and technology officer. Can you talk about that move?

A: I think you know this, from talking to CEOs who come into new assignments, is that one of the first things you’ve got to sort through is how do you want to organize your team. Who do you want on the team? Who wants to be on the team. Right, it has to be a two-way street. And Shane decided he wanted to retire and he had a lot of years with the company. Gosh, he had 11 years with HP and before that he was at Compaq. And I said I understand, and good luck.

Q: Autonomy executives claim they were surprised and a bit distressed that Robison left the company because they had expected him to oversee the integration. Do you think Robison’s departure had an impact on the integration of Autonomy?

A: No. Mike Lynch (founder and then-CEO of Autonomy) reported directly to me. And I actually spent a fair amount of time on Autonomy from the beginning because it was such a big bet for the company. I spent a lot of time with Mike Lynch and a fair amount of time with the people from Autonomy, understanding the products, the technology. I think they felt like they were being managed by the CEO, which I think they appreciated. And which, by the way, was part of the deal Mike had struck with Leo, which is that he would report directly to the CEO. And I did not change that.

Q: And so initially the idea was to keep Autonomy as a separate unit. Did that change?

A: They are now part of HP Software, which is run by George Kadifa, and which includes what I call our IT performance suite, our security suite as well as our information optimization group, which is not only Autonomy but also HP’s information management group, which actually we rolled right to Mike right away. So, the minute the deal closed, the HPIM products and people actually became part of Autonomy. And we called it the AUIM business, the Autonomy information management business. Now that is part of Software.

Q: Mike Lynch was fired in May 2012. What wasn’t working at Autonomy in those first six months after the acquisition closed?

A: I think their Q1 results weren’t great, but they were okay. And, of course, the Q2 results were not up to expectations or up to their plan. And that was really the catalyst for Mike leaving the company.

But I have seen the movie before around companies that are more start-ups in nature without some of the processes and disciplines you would expect for a company that size. And I began to be concerned about the scalability of Mike and his ability to take this company through the 800, 900, billion-dollar sales barrier. Which for many companies, getting over that billion-dollar hurdle.... Listen, it was hard for eBay, it was hard for PayPal, it was hard for Skype. Once you go over roughly $1 billion, plus or minus 20%, you can’t manage it by just walking around anymore. You’ve got to have some processes and disciplines. Which often, to start-up executives, is not an exciting concept. But it’s absolutely necessary when you’re going to run at scale on three different continents with a number of different products.

Q: In March 2012, you made another big decision to merge the printer (known as IPG) and the PC groups. Over the years, these two groups have been merged and separated at times. Why did you want to put them back together?

A: I knew we had a couple of challenges. Challenge No. 1 was we had to create the financial capacity to make investments in the business. Said another way, we had to align our cost structure with our revenue trajectory. Which, by the way, we’ve been very successful in doing. And so I was looking for ... how do we reorganize ourselves to be more efficient, to do better service to customers and create the financial capacity to invest?

As it turns out, the printing and the personal systems group have almost entirely the same set of customers. So virtually all of the partners, our value-added resellers and distributors, are the same for PSG and IPG. And the same person in the enterprise typically buys PCs and printers. And it’s very different than the executives that buy servers, storage, networking and software and services. And there was, I thought, tremendous synergies in terms of supply-chain quality, go to market, that would outweigh any integration issues. And I think that’s turned out to be the case. I think this has actually gone very well. There were things I wanted the groups to learn from one another too. So when you are in the PSG business, you are running a 5% operating margin business. You are watching every dime. Because you make a mistake and you don’t have any money. The IPG side was a much higher-margin business. So I sort of wanted a little of the cost, supply chain, really-watching-every-penny DNA to go over to the printing side. But the printing side had tremendous intellectual property, tremendous R&D; capability, tremendous R&D; pipeline. And I wanted a little bit more of that to go to the PSG side.

And, actually, that’s turned out to be quite good. And you can start to see we’ve got movement of executives. Ron Coughlin ran the laser business and he now runs the consumer PC business. We’ve taken Tony Prophet, who ran the supply chain for PSG, now runs the supply chain for the whole entity. So we’re getting a lot of what I had hoped would happen in terms of cross-fertilization, cost savings, better go-to-market.

Q: When you announced third-quarter earnings last August, you discussed a lot of the big head winds HP faced, including the Chinese market and the global economy. At the same time, almost every segment of HP’s business either declined that quarter or was under heavy pressure. Were the challenges facing HP becoming even more extreme than you had expected?

A: HP has been under revenue pressure really since the second quarter of 2010 (quarter ending April 2010). If you look at what happened in 2011, almost every quarter was revenue decline. You will recall Leo Apotheker actually reduced guidance, I think, three quarters in a row. So this decline had started, in my view, around Q2 of 2010. So when I took over, we were in the middle of that and that decline in revenues was not entirely across the board. 3Par was growing at 80% at HP Networking. There were bright spots. But generally speaking, revenue was declining. So I understood that we had to take action against this. And what you do in that set of circumstances is you align cost structure with your revenue trajectory. And then you begin to figure out, OK, how am I going to turn revenue trajectory?

What you can see is that we did a good job of aligning the cost structure. And the best evidence for that is that in Q1 our earnings per share declined by 32%. In Q2, it was a 22% decline. In Q3, it was negative 9%. And in Q4, it was negative 1%. Now, negative 1% is not what we aspire to. But you can see, as revenues continue to decline, we have begun to get a cost structure in place that was aligned with the revenue trajectory. And that’s the first thing you do in a turnaround.

Then you think, OK, now while I’m doing that, how do I get the revenues growing again. And that’s first and foremost product. And we’ve done a lot of work. We’ve put money back into R&D.; I think we’ve got some of the strongest product that this company has had in many years. And I think most HP observers would tell you that. And whether that’s our new storage products. Just two weeks ago we introduced our mid-tier storage product. Our software-defined networking product. Our new moonshot server. Our line of mobile devices. Our ink in the office printers. Our multi-function printers. We’ve also stabilized our enterprise services business. Now what we have to show the world is that we can grow these businesses. What I told the market at the security analyst meeting is that probably wouldn’t happen until late 2013 or early 2014. This was sort of a fix and rebuild year where I think you’d start to see revenues stabilize. But I think all the work we’re doing will lead, if it turns out the way we hope it will, then it will start to turn in 2014.

Q: Speaking of that analyst meeting, during your remarks HP’s stock fell 8% as you detailed just how extensive were the problems HP faced and how long you thought it would take to turn things around. Investors were clearly shocked, and yet many analysts also gave you kudos for being so blunt. Was it your intention that day to deliver such a blunt assessment of the company?

A: I am a pretty transparent communicator. And I think when your company is not performing the way it should, you’ve got to actually explain to people why that is, what you’re going to do about it, and what the journey is that you are on. And that’s why I laid out the five-year turnaround plan. I characterized Year 1 as a diagnosis and lay-the-foundation year. Year 2 is fix and rebuild. Year 3 is begin to accelerate. And then I was quite specific about the challenges this company faced. I think the other thing I was transparent about was, we’re trying to set this company up for the long haul. Listen, could you have taken out more cost in 2013? Yes. Would it have looked better? Yes. But you would be in the exact same position in 2014, not having made the investments that you need to get HP on a sustainable growth pattern. And whether that’s the investment in IT, the investment in R&D;, the investment in the new products and the new go-to-market strategy. We’re building this thing so that we’re not repeating the cycle.

Q: One thing that you didn’t mention at that October analyst day was that there were any accounting issues at Autonomy. There have been some reports that you were aware of possible problems as early as last summer. Why it take until November to disclose the issues? And were there any other options to consider other than making such a big public announcement and contacting securities regulators?

A: I’ll answer the second question first. No. There was no alternative. Because the magnitude of the write-down we took, the seriousness around the accounting improprieties, the disclosure failures were significant enough that there was nothing else to do except to say, “Hey, here’s what we know.”

So when Mike [Lynch] left, it was three or four weeks, and a senior executive from his team came forward and said, “Listen, I need to tell you what has been going on at Autonomy for the three years prior to when you bought it.” And I’m not sure that we would have been able to figure out the accounting improprieties had we not had a guide on that journey. Because it was pretty sophisticated. So we took that very seriously. Did a forensic review of the accounting. Hired PWC. That was a very detailed and quite long process. Because you’ve got to make sure you understand as much as you can. And you’ve got to make sure all the analysis is ticked and tied and all of it makes sense. And really, that was not completed until mid-October, late October.

And then we’ve got to also say, given what we know around the accounting, what does that mean for the impairment charge. And recall, the impairment charge is really in two pieces. It’s in the piece around the fact the company is smaller, less profitable and slower growing than we were led to believe based on the audited financials. And then, of course, the market cap reconciliation, which is the same challenge we had around the EDS acquisition.

All this needed to be ticked, tied, triple checked and laid out in a way that people could understand. And we didn’t have all the data. And we couldn’t have done it any sooner than we did. Because a lot of pieces had to come together.

Q: Lynch granted several interviews denying the allegations and demanding that you release more information. He’s insisted that he has not been contacted by any authorities regarding possible investigations and only really learned of the issues when you announced them. Did you expect Lynch to make such a public defense?

A: I didn’t spend a lot of time thinking about what Mike Lynch’s reaction was going to be. I knew what we had to do for HP. I knew the situation in which we found ourselves, and I knew we had to lay it out for employees, for shareholders, for partners, for customers. I just knew we had to lay it out. My sense is that this is exactly the right thing do. And I can only control what I can control.

Mike, I think, knew that we had some concerns. But the recommended course, as we thought through all the alternatives with our legal counsel, was to turn this over to the authorities. And that’s what you typically do in these situations. And because this was both a U.S. issue and a U.K. issue we went to both the [U.S. Securities and Exchange Commission] and the British Serious Fraud Office.

Q: As HP’s stock as continued to struggle, there have been some rumblings on Wall Street that perhaps it would be better to break up HP into smaller companies. Is such an extreme step being given any consideration?

A: No. Listen, I have a lot of faith in Hewlett-Packard. This is a company with remarkable assets. I mean, given what HP has been through the last six or seven years, I think it’s a testament to the people and what we do for customers that we are a $120-billion company that last year generated $10.6 billion worth of cash flow, that is a Fortune 20 company. And I think we can turn this around. I happen to think that given the changes that are going on in the technology industry, we are advantaged by being able to go from devices that access this new style of IT to the hardware to the software to the services that can help companies of all sizes go from the old style of IT to the new style of cloud, virtualization, in a way that very few other competitors in our industry can do. And by the way, we have assembled a very powerful set of assets. Credit goes to Carly Fiorina, Mark Hurd. We’ve assembled a great set of assets. You saw at the security analyst meeting that just 10 years ago, 40% of revenues and 90% of profits came from the printing business. And today we are a big, diversified technology company with a set of assets that can really help our customers.

I actually think there is a huge amount of value to keeping HP together in its current configuration. And now we’ve got to go show that we can do it. We’ve to turn the revenues, we’ve got to improve the earnings per share over time and we’ve got to deliver the vision. I spent a lot of time thinking through the strategy of each individual business and the company as a whole. And now we’ve got to go prove it out.

Q: Are you still glad you took the job?

A: I am. It’s been a huge challenge. But it’s been a lot of fun. The people are fantastic. I love the technology. I love what we do for customers. So it’s a ton of work. But it’s actually great fun.

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