HP Lagging In Innovation Race

HP’s quarterly earnings report seemed to catch observers off-balance, as illustrated by the divergent coverage given by the Financial Times and BusinessWeek, both of which know their way around an earnings report. The FT chose to accentuate the positive, noting that HP beat earnings projections, while BW harped on CEO Mark Hurd’s “tepid sales forecast.”

But one thing no one* seems to have noticed is that HP’s investment in its own future is declining continues to decline over time, and that may say more about the direction of the company than any reflection on macroeconomic trends that Hurd wants to deliver.

In the quarter ending April 2009, HP spent $716 million on R&D, a three percent decline over the previous quarter. That doesn’t look so bad, but year-over-year, it has cut spending on R&D by a whopping 21% (from $908 million). In contrast, the company only managed to cut its total expenses by two percent. In other words, the R&D department is taking a very disproportionate whack of the budgetary ax. If that doesn’t look like a company mortgaging its future, I don’t know what does.

Not only is HP scrimping on its own development efforts, but its competitors are doing quite the opposite. IBM, for instance, has cut back on R&D by six percent. At first blush, that actually looks worse than HP’s cuts, but not if you look at the bigger picture. IBM actually slashed other expenses much more heavily — the overall cut is nine percent — and kept R&D as a percentage of total costs flat, at 23% of total expenses. (By way of comparison, R&D represents a smidgen under three percent of the company’s total outlay.)

Surprisingly, Dell is doing even better when it comes to preparing for its future, and actually raised R&D spending by eight percent over the year-ago quarter. It also increased R&D as a proportion of total costs, at 8.5%, up from 7.4% for the comparable quarter. That’s not anywhere near IBM’s relative commitment to the future, but it’s a darn sight better than HP’s.

So where does HP go from here, aside from trying to cozy up to Microsoft? The two companies announced they’re teaming up for a so-called unified communications platform, which combines telephony, messaging and data applications into a single system; HP will provide networking capabilities, while Microsoft will provide desktop hardware and software, but the sad truth is that HP is Microsoft’s second choice and wouldn’t even be at the table if Nortel weren’t imploding under its own weight.

Cisco has made it clear that it wants to displace HP in the data centers, and even when the economy recovers, the printer segment isn’t really something to bank on in an increasingly paperless age (just as Xerox about that). Desktops and laptops? Not much a future there as customers increasingly turn to smartphones and netbooks for their quotidian computing needs. HP has taken baby steps in the netbook area, and should continue investing here, as the market is up for grabs, and the current generation of netbooks still leave a lot to be desired. The company is also developing a new cloud strategy on which I’m getting briefed next week, and that’s a big deal too. HP is still one of the world’s largest companies, and it needs to start acting like one by reinvesting in its future, rather than retrenching.

* When I say “no one,” I should exclude my colleague Erik Sherman, who tipped me off to this idea in the first place and did a pretty thorough job of repudiating HP’s ludicrous defense.