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Vendor Rating: HP

Gartner RAS Core Research Note G00147380, Carl Claunch, Andrew Butler, Kris Brittain, Laura McLellan, Peter J. Grant, Leslie Fiering, Ken Dulaney, John Enck, Ron Silliman, Tiffani Bova, Roger W. Cox, Mark Fabbi, Alex Soejarto, Dave Russell, 8 June 2007 R2354 6/29/2008

During the past two years, HP has driven its cost structure to healthy levels, while executing well in most areas of its business. The company is strongly focused on growth to complement profitability and consistent execution.

OVERALL RATING

Strong Positive

WHAT YOU NEED TO KNOW

Overall, HP is a solid vendor, with a portfolio ranging from hardware to software to services. In most of HP's major business areas, its clients should consider it a strategic partner. We have rated all major aspects of the business. Where HP is still evolving or facing specific challenges, its products or services should be evaluated tactically or situationally. We expect this vendor to progress by focusing its attention on its remaining areas of weakness, as well as by increasing its overall portfolio quality, revenue and market share.

VENDOR RATING

Analyst Comments

HP needs a clearer strategy to deal with increasing competition from its strongest partners, including Oracle, Microsoft and Intel, now that HP is moving into market segments it had previously left to those partners to cover.

Corporate Viability

For the most part, HP has dealt with the questions concerning its viability and health, having delivered solid results during the past several quarters. Attention has shifted to understanding its aspirations, strategies and principles, which is a consequence of HP having proved that it can achieve what it set out to do. The important questions from potential clients considering future interactions with HP, as well as the competitors that are eyeing it carefully, involve where the company is going.

Strategy

HP has clear, coherent strategies at all levels, based on its desire to be the world's leading IT company in each product segment and geographic area. The vendor's success is built on a solid strategy, bolstered by sound execution and tactical decisions. HP no longer appears to be an amalgam of seemingly independent businesses, and sustained good results have dispelled the idea that its divisions would be more successful as separate entities. Full communication and adoption of the company's foundational strategies throughout the enterprise are the last barriers to our increasing HP's rating in the strategy category ­ it will remain at Positive until HP's customer base and the market understand its intentions.

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Table 1. Detailed Rating Initiative Corporate Viability Strategy Financial Marketing Organization Market Offerings Product/Service ProLiant and BladeSystem Servers HP-UX Integrity Servers Other Servers Software Personal Computers Handhelds C&I Services Outsourcing Services External Controller-Based Disk Storage Tape and Tape Automation Storage Software Networking Consumer and SMB Printing Large Company Printing Graphic Arts and Creative Production Run Printing Technology/Methodology Adaptive Infrastructure Pricing Structure Customer Service/Support Sales/Distribution Channels Direct Sales Support/Account Management Product Support Account Management Source: Gartner (June 2007 Rating Positive Strong Positive Positive Strong Positive Strong Positive Strong Positive Positive Caution Promising Strong Positive Caution Promising Positive Promising Positive Promising Promising Strong Positive Strong Positive Strong Positive Promising Strong Positive Promising Positive Strong Positive Strong Positive Positive Positive Strong Positive Positive Change No Change Up No Change Up Up Up Up No Change No Change Up Down No Change Up No Change Down Up New New New New New No Change New No Change Up Up New Up No Change Up

Financial

HP is solidly profitable, increasing its level of profitability at a dependable rate and driving up revenue across all its business segments. The company is achieving this while, in most cases, holding or growing market share. Its cash position and financial metrics are respectable, arming the company with the capital and safety margins required to make sound investments in the future of its business.

Marketing

HP's marketing efforts are emboldened by improved execution, with crisper messaging and better collaboration with the sales organizations. Marketing momentum in HP's imaging and PC businesses remains strong, while the marketing stance of its Technology Solutions Group (TSG) is evolving toward a more tangible set of initiatives focused on business outcomes. Although synergies across the three major product groups are welcome and

© 2007 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

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necessary, closer integration among business units, products and services could challenge the traditional relationships with channel and technology partners that have been the cornerstone of HP's legacy success. acquisitions, as HP Software expands from IT operations management into application development management, business intelligence (BI) and vertical solutions. During the next three to five years, HP Software's acquisition strategy must demonstrate the ability to exploit potential synergies across a broad range of products. Given the software division's rapid expansion, customers should be informed of product road maps prior to acquisition.

Organization

Although the structure of its three autonomous product groups survives, cooperation among these groups is more obvious. The management style of HP's chairman, CEO and president, Mark Hurd, has given the groups more synergistic responsibility and financial accountability, and this has rejuvenated morale and selfesteem at all levels of the company. Centralized functions have been aligned with the product groups to harmonize branding, design and outbound messaging, without imposing the rigid topdown structure that had previously limited execution. More work is needed to integrate the complementary strengths of HP's three product groups, but market confidence in the vendor's corporate value proposition is higher than it has been in years.

Personal Computers

The Personal Systems Group (PSG) has been completely revitalized during the past two years to become a strong PC supplier and partner. This group has benefited from strong management and from broader HP initiatives, including supply chain management efficiencies to produce competitive pricing, channel optimization to improve reach to small and midsize businesses (SMBs) and emerging economies, as well as the empowerment of the sales team to improve large-enterprise account management. HP has successfully leveraged consumer desktop and notebook products to maintain economies of scale and innovation.

Market Offerings

ProLiant and BladeSystem Servers

The ProLiant and BladeSystem rating addresses HP frame-based, rack-mounted and blade servers housing Intel and AMD x86 processors running Windows, Linux or Solaris x86. Through 2006 and the 1Q07, HP has fielded a strong, balanced portfolio of products in this category. ProLiant has regained the market share it had lost to Dell, and HP has increased market confidence in ProLiant. In BladeSystem, HP invested in c-Class technology and gained market share against IBM BladeCenter.

Handhelds

iPAQ's market share fell from 21.3% in 2004 to 9.7% in 2006. HP's road map is less clear than those of HTC, Motorola, Nokia and Research In Motion. To regain leadership, HP needs to realign its offerings with key market trends: · Cellular service · Integration with PBX services · Support for applications (especially e-mail) · Combined business/personal offerings Carrier neutrality gives HP an advantage over Nokia and Motorola. Windows Mobile 6 should boost iPAQ. Other pluses include: · Having the same models in the consumer market · Direct support · Integration services

HP-UX Integrity Servers

The HP-UX Integrity rating addresses frame-based, rack-mounted and Integrity blade servers with Intel Itanium processors running HP-UX. Through 2006 and 1Q07, HP has built a technically sound portfolio of Integrity products and gained traction and momentum in the market ­ particularly in PA-RISC-to-Itanium conversions. Integrity needs to show strong growth outside HP's installed base, as well as benefit from migrations from PA-RISC. This will be a challenging task in a market (Unix) that is flat at best.

Consulting and Integration Services Other Servers

This is a compound rating addressing frame-based and rackmounted servers with Intel Itanium processors running Windows, Linux, NonStop and OpenVMS, as well as PA-RISC processors running HP-UX. With respect to Windows, Linux, NonStop and OpenVMS, these solutions are safe for targeted (and proven) applications; however, none are experiencing significant market growth. C&I is developing consultative competency and delivery capability to fully execute on HP's new value vision, where it today only has pockets of strength. For its Business Technology Optimization (BTO) initiative, C&I supports HP's software strategy, application development and legacy modernization offerings; however, it needs to develop further capabilities for application services. For its Business Information Optimization (BIO) initiative, HP's strategy includes infrastructure competencies with new application capabilities for a full suite of BI offerings on the HP platform. For the Adaptive Infrastructure (AI) initiative, HP leverages C&I's historical infrastructure competencies where they are at their strongest. Developing global delivery is a crucial next step across all solution areas.

Software

In two years, HP Software has gone from a failing business unit to having a central strategic role for HP. Success will depend on creating a software portfolio that quickly integrates significant

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Outsourcing Services

HP's commitment to outsourcing is paying off. It is now a credible alternative to global information technology outsourcing (ITO) providers for infrastructure outsourcing, and it aggressively bids new business and partners, as needed. Application outsourcing (AO) is a target growth area that HP will use to penetrate its installed ITO base and build end-to-end accounts; enterprise applications, SAP and offshore delivery will be emphasized. Success in AO depends on critical wins, cost competitiveness and quality in the 2007 through 2008 time frame. In business process outsourcing (BPO), HP focuses only on F&A; it has yet to fully optimize its delivery potential. HP has a small number of BPO deals, predominantly for single-process areas and in the manufacturing sector. capabilities for supporting disk-based backup and replication. HP has reorganized in an effort to improve storage software sales, aligning its SRM software with its server portfolio and moving backup and archiving into a new Information Management group.

Networking

ProCurve has continued its strong execution in LAN switching through 2006, as revenue and market share have increased. ProCurve offers an attractive alternative that can transform the economics of the LAN switching, while retaining key functionality. However, ProCurve is limited in its expansion into a broader, more strategic player in enterprise networking, because of the financial constraints of being a small player in HP's large empire. ProCurve needs a broader vision and the financial resources within or outside HP to continue to affect the market.

External Controller-Based Disk Storage

HP offers a line of block-access disk arrays that span the SMB markets. The XP, Enterprise Virtual Array (EVA) and Modular Smart Array (MSA) systems represent competitive offerings as individual product families; however, there are no usable, controller-based software synergies among them. Sourced from Hitachi, the XP satisfies users' needs for extreme performance, capacity, availability and business continuity. The EVA is HP's internally developed flagship disk array for the midsize enterprise market; however, its performance and capacity scalability characteristics need enhancing. Optimized for ProLiant server compatibility, the MSA is a high-volume, entry-level disk array that integrates well with Windows, NetWare and Linux infrastructures. The PolyServe acquisition materially strengthens HP's competitive position in the enterprise network-attached storage market. The HP Proliant Storage Servers, based on Microsoft's Windows Storage Server 2003 r2 operating system, are file-based storage solutions suitable for entry-level environments.

Consumer and SMB Printing

HP has a dominant position in the consumer inkjet market. During the past year, HP: · Grew market share for A6-size photo printers critical to capturing the photos printed at home · Extended its All-In-One inkjet line to include small offices and SMBs · Expanded supply choices, offering high-capacity ink tanks for users that are sensitive to cost per page vs. a low purchase price · Improved the experience of sourcing supplies through its Web or retail presence · Strengthened its low-end monochrome and color laser printer offering to meet the price point and performance requirements of SMBs ­ many of these devices also come in a multifunction product (MFP) version to help space-conscious users

Tape and Tape Automation

HP is well-positioned with its tape assets. As revenue has declined, gross margins have remained stable. HP is rebalancing its tape portfolio, because fewer servers ship with embedded tape drives; however, the demand for Linear Tape-Open (LTO) drives and libraries, as well as virtual library systems (VLSs), is strong. The upcoming DAT160 and LTO-4 products, along with the new D2D Backup System, should enable HP to grow revenue. HP will need to deliver solid encryption key management, and the vendor needs to bring a de-duplication solution to market on its VLS product to keep pace with competitors.

Large Company Printing

HP has long been the established leader in office printing. LaserJet had a strong year delivering market share growth for monochrome and color printers, and HP has expanded its MFP products to include Edgeline enterprise-grade color devices. During the next two years, competing head-to-head with the top-five copier/MFP vendors will be HP's challenge, as it works to gain a foothold in the departmental color MFP segment. HP is looking to reduce costs associated with supporting a fleet of its printers by providing a Universal Printer Driver (UPD), which will enable large companies with thousands of HP printers and up to a hundred different models to use a single printer driver.

Storage Software

HP has been investing in storage software, having made three acquisitions in 18 months. Traction for storage resource management (SRM) and archive products has been slow in coming, but it is improving. Its new, channel-friendly SRM version is a solid move that should improve attach rates with HP midrange disk products. The data protection family has rejuvenated

Graphics Arts and Creative Printing

Capable of imaging on a wide range of substrates and sizes, HP has opportunities in creative agencies, specialty "point of purchase" print providers, online "Web to print" providers and inhouse marketing departments. HP's challenge will be to fend off competitors with lower-cost and/or newer technologies. Inkjet printing, for example, offers print service providers the ability to

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produce images with "commercially acceptable" image quality that may be "less" than HP's print quality, but which people and businesses will buy because the output costs less. Similarly, developments in inkjet technology enable its use on a wider range of substrates, including non-porous surfaces that the Indigo has been unable to print to for years, which threatened HP's position in the markets for custom graphics. Enterprise and is the latest refinement of HP's vision for the future for IT to power the business, rather than just support it. AI is one of three components ­ the others being BTO and BIO ­ that have the common aim of delivering technology to help HP customers optimize the business outcomes of their IT investments. Whereas HP's Adaptive Enterprise program had become nebulous and theoretical, the focus on delivering business outcomes through the AI, BTO and BIO solutions represents a palpable future that customers should be able to understand if HP can learn to articulate its message clearly and consistently.

Production-Run Printing

In high-volume printing, such as transaction documents and direct-mail campaigns, HP is unable to compete with the faster printers offered by InfoPrint Solutions (the former IBM Print Services division), Oce or Xerox. Nevertheless, its Indigo production printer line offers high image quality, making it wellsuited to the short- and medium-length, high-end targeted marketing. HP's printers are capable of rivaling the quality of the best lithographic printing. As a result, HP will find its production printers in "mixed shops" in direct-marketing service bureaus, creative agencies and commercial print service providers. HP will have to work to keep those users from migrating to its competitors, as new inkjet technologies enable low-cost, commercially acceptable image quality on a wider range of substrates. High-volume monochrome production printer shipments continue to decline, while low-volume color production printers increase. This indicates that users are producing an increasing number of CRM-based, targeted marketing materials, playing to HP's broad mix of printers.

Pricing Structure

As one might expect in a complex company with a panoply of products and routes to market, the pricing structure used by HP is extremely diverse, as appropriate to each segment and route. HP is growing and profitable, which demonstrates that its pricing mechanisms are performing well; however, there are periods during which HP loses market share, overshoots expecting volumes or otherwise indicates that its pricing mechanisms have not been perfected. As HP exploits its pool of capital to acquire companies for technologies, markets or installed bases, each acquisition brings with it the risk of short-term perturbations in pricing execution ­ this is part of the "cost" side of such events.

Customer Service/Support

Sales and Distribution Channel

Although its rate of innovation is slowing, HP continues to fine-tune programs to support its partner community, which collectively delivers two-thirds of total revenue. HP's channel lead model in the SMB market and co-selling model for enterprise accounts has improved market coverage. The umbrella PartnerOne program defines a consistent framework for the channel strategies in each region. Big changes have been made, and HP is moving into a phase of progress consolidation. Although HP's programs are complex, many partners report increased sales, improved profitability and closer engagement with HP field sales. In Europe, the Middle East and Africa (EMEA), the Preferred Partner Program is improving the alignment of reseller activities with business objectives. In North America, solution provider organizations feel they're not merely outsourced salespeople, they're full-fledged partners. Reconciling PartnerOne regional differences would reduce complexities for its global partners.

Technology/Methodology

HP has an extremely deep technology base, strong research activities and enormous intellectual property. That the company chooses in some instances to hold back on delivering new technologies, while others rush to market with early implementations, reflects its strong culture of quality and its concern for its customers' experiences, rather than any deficit of capability.

Adaptive Infrastructure

More than just a marketing strategy, AI is a technology initiative aimed at delivering next-generation data center capabilities for HP's customers. It evolved from an initiative called Adaptive

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Direct

During the past year, HP has demonstrated that its direct sales model can compete with Dell's when the strategic value of deals merits the effort. Meanwhile, large end-user organizations increasingly value HP's relationship selling model, which values assets such as geographic distribution, vertical industry focus, and support and service excellence. These are all inherent strengths of a vendor such as HP. program introduced in the past four years. This is a testament to the depth of the portfolio, the design of which has continued to provide the flexibility and requirements of customers over a long term.

Account Management

Disbanding the unpopular and disjointed Customer Solutions Group was an early priority for Mark Hurd, and this has resulted in steady improvement in account satisfaction, particularly in North America, during the past two years. HP continues to refine its ratio of sales and sales support staff, with an aggressive recruitment policy in North America and other regions.

Product Support

HP's service division receives high customer marks in product support, from desktop to high availability. Users can access strong technical resources at all levels, as well as advanced support knowledge databases. The company continues to invest in customer-facing support technology, and has an excellent esupport solution, based on its Instant Support series. HP's software support portfolio has been stable, with only one new

Company Information Hewlett-Packard

Rating Definitions Strong Positive Is viewed as a provider of strategic products, services or solutions: · Customers: Continue with planned investments. · Potential customers: Consider this vendor a strong choice for strategic investments. Positive Demonstrates strength in specific areas, but execution in one or more areas may still be developing or inconsistent with other areas of performance: · Customers: Continue planned investments. · Potential customers: Consider this vendor a viable choice for strategic or tactical investments, while planning for known limitations. Promising Shows potential in specific areas; however, execution is inconsistent: · Customers: Consider the short- and long-term impact of possible changes in status. · Potential customers: Plan for and be aware of issues and opportunities related to the evolution and maturity of this vendor. Caution Faces challenges in one or more areas: · Customers: Understand challenges in relevant areas, and develop contingency plans based on risk tolerance and possible business impact. · Potential customers: Account for the vendor's challenges as part of due diligence. Strong Negative Has difficulty responding to problems in multiple areas: · Customers: Execute risk mitigation plans and contingency options. · Potential customers: Consider this vendor only for tactical investment with short-term, rapid payback.

Source: Gartner

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