Update: HP plans to cut 14,500 jobs and save $1.9B a year

Hewlett-Packard hopes to save $1.9 billion a year through a massive reorganization in which it will cut 14,500 jobs, or around 10 percent of its workforce. It will also link sales and marketing efforts more closely to business units, eliminating the Customer Solutions Group which sold to enterprise customers, it said Tuesday.

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Few positions will be cut in sales or research and development. Instead, HP will eliminate management layers and restructure support functions, for a saving of $1.6 billion a year in staff costs. It will also cut U.S. retirement benefit programs, saving a further $300 million a year, it said.

Most of the staff cuts will be made in central support functions such as human resources, finance and IT. The others will be made in individual business units.

In the U.S., longer-serving staff will be offered voluntary early retirement. Plans will vary in other countries, depending on local laws or the outcome of consultation with employee representatives, HP said.

The company will spread restructuring charges of $1.1 billion over six quarters, beginning with the fourth quarter of its 2005 fiscal year.

HP won't benefit fully from the savings until 2007, but in its 2006 fiscal year it expects to save between $900 million and $1.05 billion, it said. About half of those savings will be turned into operating profit, the company said. In the year to April 30, HP had revenue of $83.3 billion.

HP's financial performance has been uneven in recent quarters. The company appears to have stemmed the losses in its PC and server groups, but those divisions are not as profitable as management and shareholders would like. HP has its printer business to thank for most of its recent profits, but the company trimmed positions from that group earlier this year in order to further reduce costs.

When the Customer Solutions Group (CSG) is closed, sales staff there will transfer into three business units: Technology Solutions Group, Imaging and Printing Group, and Personal Systems Group. CSG's head, Michael Winkler, will retire at the end of this month, and senior sales positions will be created in each of the three business groups.

Chief Executive Officer Mark Hurd separated the imaging and personal systems groups last month, undoing a change made by former CEO Carly Fiorina.

The moves give each group more control over its business, HP said.

CSG was HP's point of contact with market segments such as the public sector, small and medium-size businesses, or consumers. Those relationships will also be divided between the three business segments, with the technology solutions group taking on public sector customers, the personal systems group handling small and medium-sized businesses and the imaging group dealing with consumers, Hurd said in a conference call with analysts.

"The objective is to create a simpler, nimbler HP with fewer matrices," Hurd said. "I don't have very high affection for matrices."

The restructuring will reduce the number of people involved in each decision, and shorten the path from idea to customer, he said.

Within the company, morale is higher than outsiders would expect, despite the planned job cuts, Hurd said. He put this down to a hope that the company will go on the attack.

The company recently appointed three new members to the executive council, bringing the number of members to 10 following Winkler's departure. Cathy Lyons became chief marketing officer after 26 years with the company. Todd Bradley became executive vice president of PSG; he was formerly president and chief executive officer of palmOne Inc., now Palm Inc. Randy Mott was named chief information officer after 22 years in similar roles at Dell and Wal-Mart Stores.

The Palo Alto, California, company's business is increasingly reliant on low-margin lines like PCs and low-end servers. In order to compete with a lean company like Dell, HP would have to look into trimming positions in those divisions, said Charles King, principal analyst with Pund-IT Research in Hayward, California, in a recent interview.

Hurd also plans to make some changes in the company's relationships with its channel partners. In particular, he said, he wants to move more of HP's business to partners who will offer an all-HP package to their customers, rather than mixing HP equipment with products from other vendors.

When Hurd was hired on March 29, many financial analysts wondered if he would take on the big problem that HP has faced in the past few years: how to digest the acquisition of Compaq. Tuesday's announcement would be an indication that Hurd is planning to address strategy only after he has taken care of reducing costs and improving performance, said Cindy Shaw, senior analyst with Moors & Cabot, in a June research note predicting the layoffs.

HP plans to report its third-quarter earnings on Aug. 16.

(Tom Krazit in San Francisco contributed to this story.)