That’s the classic line that companies often use when the choice was “resign or be fired.” It’s not exactly clear what happened. (Update: Not so much. See below.)

Suresh Vaswani was named to replace him. Vaswani is a 25-year veteran of India’s Wipro and is a former co-CEO of its IT business unit, and even served on its board of directors.

I spoke at length with Schuckenbrock in September. He had been co-COO at EDS, the IT services company that Hewlett-Packard acquired for $13.9 billion in 2008. (It later wrote down the value of EDS by $8 billion.)

Schuckenbrock was part of a new wave of senior hires at Dell — including Marius Haas, who’s running the Enterprise business, and former CA CEO John Swainson, who’s running the new software division and has been tasked with turning the old PC giant into an enterprise-focused full-service IT company.

It’s also odd that he would leave so soon, especially after Dell spent $1.9 million to move him and his family from Round Rock outside Austin, to Plano, Texas, which worked out to a cost of $9,655.19 a mile.

The move was to take over the services business, including the former Perot Systems business that Dell acquired in 2009. Before that, Schuckenbrock had been CIO and then for two years he had been President of the Large Enterprise Business Unit.

Update: I just checked in with a source familiar with the situation and he says it was definitely a resignation. The short explanation: Shuckenbrock wants to be CEO somewhere.

This in-sourcing plan was spearheaded by GM CIO Randy Mott, who happens to be the former CIO of HP itself. Mott, you may recall, was ousted at HP in a June 2011 management shakeup about three months before the end of Léo Apotheker’s 11-month tenure.

Mott’s plan to take GM’s IT in-house was first disclosed in a detailed story in Information Week in July.

Till now, GM’s IT services have been run by a patchwork of the usual suspects of the IT services industry: HP’s EDS, IBM, Capgemini and India’s Wipro all figured prominently. Only about 10 percent of the routine IT work has been handled by GM employees. Mott said his plan at the time was to flip that ratio on its head, to 90 percent internal and 10 percent outsourced.

Mott’s plan was seen as a potentially serious wound to HP’s already troubled IT services business, and people couldn’t help but see Mott as perhaps trying to punch his old employer in the nose.

The deal today says that moving the 3,000 HP employees to GM’s payroll is cost neutral. I checked with HP and am told by a spokesperson there the change doesn’t affect the expected number of headcount reductions over the next three years. The number remains firm at 29,000.

Other pieces of GM’s big IT transformation include cutting the number of data centers in use from 23 to two; reducing the number of applications in use, currently about 4,000, by about 40 percent; and the creation of three software development centers, two of which are to be in Michigan. I don’t know if these are the same as the four IT innovation centers mentioned in today’s release, but one is in Warren, Mich., another is in Austin, Texas, and the locations of two more have yet to be announced.

Also good news for HP is that GM bought a bunch of its software, including its IT performance and security suite, Vertica, and even some stuff from Autonomy. In the statement, George Kadifa, the new head of the software business unit, said GM is the IT performance suite’s first customer. Good news there.

GM shares are up about 44 cents, or nearly 2 percent, with a little more than an hour to go before the close. HP shares rose 5 cents to $14.78.

HP shares are setting new 52-week and 10-year lows after CFO Cathie Lesjak issued new guidance for fiscal 2013, saying the company now expects to earn between $3.40 and $3.60 on a non-GAAP basis, significantly lower than the $4.18 analysts had been expecting.

In afternoon trading, HP’s shares were down about 11 percent, in the neighborhood of $15.25.

Lesjak said HP continues to expect a difficult environment in Europe and a weak consumer market, and that every HP business segment except for software is bracing for a year-on-year decline in sales. She said she expects a 2 percent headwind from currency effects as the U.S. dollar remains strong against the euro. Operating margins are also expected to decline year on year, but the amount was not specified.

In remarks before Lesjak’s, CEO Meg Whitman painted a picture of a turnaround that at best wouldn’t be complete before 2016, with 2013 another year for declines in sales and profit.

Whitman said she sees 2014 as the year when the first signs of a turnaround would be apparent. “I believe that 2014 will be the year you see real recovery and expansion at HP,” she said. “You should see every business unit recover and grow. Our investments in R&D and IT will begin to kick in. And we will have demonstrated an ability to manage costs in line with revenue.” Also, more debt will have been paid down by then, she said.

HP indicated that much of the drag on its performance was in its Enterprise Services unit, the company formerly known as EDS. That unit is expected to see its sales drop by 11 percent to 13 percent, with operating margins expected to be flat to down 3 percent.

In another presentation, Mike Nefkens, the acting head of Global Services, and J.J. Chabon, senior VP and COO of the services unit, blamed the problems on “poor execution.” Operating margins in the services unit declined from north of 10 percent in 2010 to about 3 percent as of this year. They said that poor contracting practices led to pricing concessions to customers that turned out unfavorable to HP. Worse, HP Services saw revenue declines amounting to about 5 percent in relation to four major accounts, while an additional 2 percent was the result of currency effects.

It looks more or less like another example of HP taking its bitter medicine as it seeks to get things going in the right direction. You certainly can’t say that Whitman and Lesjak sugar-coated any aspect of the situation HP finds itself in. “HP did a good job self-diagnosing its many challenges and talking about optimizing near-term business, but they need to do more highlighting growth areas, analyst Patrick Moorhead, head of Moor Insights & Strategy told me. “HP must describe how it intends to win in a PC-plus, public cloud future before it will be seen as a growth company.”

Steve Schuckenbrock’s job is to change that. Last year, Dell named him president of the company’s Global Services Solutions Group, and his assignment is nothing less than to build Dell into the kind of IT services company that can compete with the likes of Hewlett-Packard, IBM and Accenture. Dell’s biggest move on that score came in 2009, when it spent $3.9 billion on Perot Systems.

And services is part of the big transformation that CEO Michael Dell is leading at the company that bears his name, and about which he talked with AllThingsD earlier this summer. Dell’s future is less about the PC around which the company was founded, and more about being a well-rounded player in the Enterprise IT business, and that includes services.

Before coming to Dell, Schuckenbrock was co-COO at EDS, the IT services company that HP acquired for $13.9 billion in 2008. That unit has taken a lot of lumps in recent months from current HP CEO Meg Whitman, who has said she wants the group to focus on more profitable deals. When I sat down with Schuckenbrock earlier this month, naturally, I couldn’t help myself from asking about that first. But his reflection on the troubles there are closely tied to his view that the IT services industry is changing fundamentally in ways that Dell is uniquely qualified to meet.

AllThingsD: Steve, given your history at EDS and the things that HP’s current management has been saying about it, I have to ask what you think about the challenges there?

Schuckenbrock: I was co-COO at EDS six years ago, and I left before the sale to HP. So I have a lot of history with it. I left to basically start up the services business at Dell. It has a lot of wonderful people, and a really good culture of walking through walls for customers. And these kinds of businesses, you can kind of push that culture to the edge once, which Dick Brown (CEO of EDS 1999-2003) did, and then you can pull it back, and then you can push it again, and at some point it becomes hard to fluff that pillow back up. It began even before HP bought it, where there was this emphasis on cost, cost, cost, and you just can’t sustain that for six or seven years in a row. At the end of the day, through that cultural issue, you have an industry that’s changing dramatically, where the kind of big, custom, traditional outsourcing deals are kind of dinosaurs, and those have been the bread and butter of the business. And so when I spearheaded Dell’s acquisition of Perot Systems, we wanted to buy a company that was big enough to give us credibility, but small enough that we could change it. Yesterday’s model is quickly dying.

So are you essentially running the old Perot Systems?

It’s part of what I do. When I first came to Dell, I put everything in services together as one team, and then we globalized everything, so when you a buy a notebook in the U.S. and you happen to be in India, we know where you are, and we can fix the machine. We couldn’t do that in the past. We ran things in India one way, and in the U.S. another, and in Europe a third way. So we fixed that in the first year or two. Then we acquired Perot, and that built other legs of the stool within the services business. I left services for awhile, and ran sales for large enterprises. And then I went back to services.

And how big is services as a percentage of Dell’s business?

It’s about an $8.5 billion business, out of about $60 billion and change for all of Dell.

Let’s talk about this shift in model you brought up. What do services companies need now?

One of the things that attracted me to Dell a few years ago is that it’s a machine. Behind the 30-million-odd devices that we support is a really great standards-based machine. And our support services for our commercial customers has been ranked number one by TBR for something like 30 of the last 36 quarters. It has a really long track record of support. When you look at the big outsourcing contracts, they tend to be very customized, and so you do different things for each customer. And it’s generally driven by the large company’s view of the so-called “best way of doing things.” Well that customization worked in the old way, when margins were at 30 to 35 percent. When you start pushing margins into the teens and add in the capital intensity and then the risk profile of those contracts, it only takes a few bad deals to fundamentally break a good company. As x86 (systems based on chips from Intel and AMD) has become the dominant compute platform, services can start looking more like the machine that we have in the support business. Not identical, but more like.

How are they similar and how are they different?

Our field services are exactly the same, whether it’s for an outsource customer or our support services. Our service desks are run almost exactly the same as our support desk, with the exact same set of tools. I can get a lot of leverage from a call center with 30,000 people working with a customer that may only need 100. That’s a lot of leverage from a profit standpoint and a quality-of-service standpoint, because I don’t have to reinvent the wheel every time. So I think what Meg is saying about HP and EDS, and what I’m saying about Dell, is that we both want to go after customers that embracing a new compute model, and help them on the journey to get there. Customers who just want me to do it their way, but cheaper, I’m not so interested in. So you’ll see words like “cloud,” and “remote infrastructure” showing up in the services business, and “customization” will be a word from the past.

Are the customers getting it, or are they still fighting battles from the last decade?

Not only are the customers getting it, but they’re starting to push us, which is a good thing. About three years ago, I would talk to customers about all this standardization, and they would say it was more theoretical than practical. Today, it’s not. The cloud is standardized. When you access the cloud from a device, you don’t care whether the services are running on a Dell server or someone else’s server. What you care about is that you get the service that you want. It used to be that when you went to a customer, you had to do everything to their standards and specifications. Customers now say they want a service, and they’re less concerned with how it gets delivered. And that fundamentally shifts the model.

So why would a big company then choose Dell over HP-EDS or IBM?

I recently visited DuPont, which is a new customer, and they basically boiled it down to innovation, a conviction about the new computing models I talked about, rather than clinging to remnants of the past. And that’s sort of built into our DNA at Dell, because we’ve never been anything other than x86 and so we’re kind of wired to walk into the conversation and disrupt the old way of doing things. We also recently won a deal with CoreLogic, which provides all the real estate information for multi-listing services. And you can imagine how data- and storage-intensive that business is. And I won’t name the companies we were up against, but you can probably figure them out. And what the other guys proposed to do was to keep them running on the systems they already had. We proposed migrating to an x86-based big-data platform, and moving all their applications off mainframes and onto x86. We’re using our IP to help them move, and our storage technology that we’ve gotten from the various acquisitions over the past few years. So it’s another example of leaning into the future, as opposed to leaning into the past. Those are the kinds of deals I’ll do all day long.

The good news is that earnings, at $1 on a per-share basis, will be slightly higher than had been previously expected. The bad news is that those earnings will count only on a non-GAAP basis, because HP intends to take a combined $9.5 billion to $9.7 billion in charges this quarter, the most in its history: $8 billion for a writedown in the value of its IT services unit, the company formerly known as EDS; and $1.5 billion to $1.7 billion for restructuring charges associated primarily with the voluntary retirement and firing of some 9,000 HP employees.

The job reductions are only the first round of an expected 27,000 cuts that will occur between now and 2015. HP CEO Meg Whitman has said the restructuring is needed to get HP down to a size where its longer-term business prospects are more tenable.

However, the pressures on its many lines of business are numerous and intensifying. If the results that rival Dell reported yesterday imply anything, it’s that the state of the personal computer business, of which HP remains the global leader — though only by a whisker — is dismal.

Revenue from Dell’s PC business fell 14 percent, and its consumer business took the bluntest part of the blow, falling 22 percent from the year-ago period. HP may fare better, but only slightly so, says analyst Chris Whitmore of Deutsche Bank in a note to clients earlier this week. The consistent popularity of Apple’s iPad continues to eat into notebook sales, Whitmore says, while those still in the market for a new PC are waiting for Microsoft to get Windows 8 into the marketplace. “Looking ahead, we expect summer PC shipments to experience a slowdown ahead of the Windows 8 release, expected this fall and improving into the holidays with Win 8 related inventory restocking,” he wrote.

But PCs aren’t the only trouble spot for HP. Results from Canon, Lexmark and Xerox all point to a weak market for printers and printer supplies.

Then there’s servers and storage. Ongoing uncertainty in HP’s Business Critical Server business, brought on by the continuing legal fight with Oracle concerning the Intel-made Itanium chip, is hurting not only the sales in its high-end Integrity line of servers, but the associated service and support fees that HP collects from customers who buy them. Whitmore reckons that HP has lost some of its share of this specialized market to IBM. Meanwhile, sales of mainstream servers are also thought to have declined, as well, while in storage, EMC and NetApp are also thought to be taking business from HP.

If all that weren’t enough, there’s the vexing problem of HP’s services business: The writedown of EDS is only the first step in a long, complicated process that is intended to turn that unit toward a smaller number of more protein-rich, profitable contracts, and away from more numerous less-profitable ones. As Whitmore put it: “We expect these programs to take considerable time to develop and market. Increasing the size and depth of HP’s Services bench will likely take multiple quarters before translating into improving market share performance. As a result, we continue to expect a long, slow turnaround in EDS.”

On top of all that is the bitter frosting of the world economy. HP does more than one-third of its business in Europe, where the weakness of the euro versus the U.S. dollar adds additional headwinds that have only gotten worse since last quarter. And it’s unlikely to get better anytime soon, Whitmore says: “If the recent strengthening of the U.S. dollar is maintained, year-on-year revenue compares will continue to be a meaningful headwind in future quarters.”

See you later today.

Sources familiar with the matter tell AllThingsD that Dell is talking to Marius Haas, the former head of Hewlett-Packard’s networking business (and currently an industry adviser at investment firm KKR), about a job running its servers, storage and networking business. Haas declined to comment on the matter when reached by phone this morning. It’s unclear how far talks between Haas and Dell have progressed, or what his precise title would be. (See an update on this at the bottom of the post.)

It’s also unclear what Haas’s hiring might mean for Brad Anderson, Dell’s current president of Enterprise Solutions. Anderson is himself an HP veteran who ran its industry standard server business until 2005. A Dell spokesman declined to comment.

Haas (pictured from his LinkedIn profile, at right) was considered a key lieutenant to former CEO Mark Hurd. During a five-year stint as senior VP for strategy and corporate development, Haas oversaw some of HP’s biggest acquisitions, including the $14 billion takeover of the IT services firm EDS in 2008.

Later that year, he was named SVP and worldwide general manager of HP’s networking unit; during his three years in that role, HP spent $2.7 billion to acquire the networking concern 3Com. While running that business, Haas was behind an audacious promotional effort to attract customers away from industry giant Cisco Systems by offering its customers a 20 percent discount on HP gear if they would trade in old Cisco equipment. “People are tired of paying for Cisco,” he declared to AllThingsD in a 2010 interview. He left HP last year to join KKR, two months before things at HP got weird under former CEO Léo Apotheker.

The move would also open up doors for more current and former HP employees to join Haas at Dell. HP is in the process of cutting 27,000 jobs, about a third of which are expected to go this year, with many employees taking voluntary buyouts.

Haas would be the second big hire at Dell this year. In February, the company hired John Swainson, the former CEO of CA, to run its new software unit, and he promptly announced some ambitious goals.

It may also signal a little of what Dell has in mind regarding acquisitions. After hiring Swainson, Dell got into a bidding war with a group of private equity investors over Quest Software, a bidding war it ultimately won. Dell has been on a steady acquisition pace for the last two years or so, buying storage company Compellent in 2010, security outfits SecureWorks in 2011 and SonicWall this year, and Wyse Technology, a virtual desktop player, in April.

CEO Michael Dell hinted in an interview with AllThingsD last month that he’s still in the hunt for more acquisitions. The company has some $13 billion in combined cash and short-term investments. Haas’s experience as a dealmaker is probably the reason he’s on Dell’s radar in the first place.

Update at 12:11 pm PT: I’ve just heard a little more from sources on this. They tell me that Dell will announce this move tomorrow, and that Haas’ title will be senior vice president. They also tell me that Haas will replace Brad Anderson, who will be leaving the company.

Yesterday, HP fired the head of its Enterprise Services unit, John Visentin, though the decision to let him go came before last week’s embarrassing service disruption that hit Commonwealth Bank, Australia’s largest bank, caused by a software upgrade gone awry.

Australian tech blog Delimiter published details of the problems said to have hit the bank. An operating system patch intended only for desktop PCs was pushed to server machines as well, causing service disruptions to many branches.

Commonwealth Bank has long been a client of EDS, the IT services firm that HP acquired in 2008. Sources confirm that Whitman, already in Australia on other business, went to meet with the bank’s CIO, Michael Harte, in the wake of the troubles in hopes of salvaging the relationship. Meanwhile, Oracle and IBM are eagerly seeking to make sure that HP doesn’t win its business back.

The disruption is about as ill-timed as could be. The bank has a six-year contract with EDS — and thus with HP — dating to 2006 that is up for renewal right about now. Its status is unclear.

Visentin, a former IBM general manager named last year to run HP Enterprise Services by former CEO Léo Apotheker, was let go yesterday because of ongoing problems at HP’s ES unit. And while the problems at Commonwealth Bank came after Whitman’s decision to replace him, sources say it’s an example of the sorts of problems that have plagued the troubled Enterprise Services group in recent months.

The unit has also had difficulty meeting its numbers. Though it’s hard to figure out exactly what’s going on because HP doesn’t break out ES results specifically, there are clues in the filings and public comments. The unit sits under the umbrella of the Services segment that reported about $36 billion in revenue last year. It combines two smaller units, the Application and Business Services group, and the Infrastructure Technology Outsourcing group, known internally at HP by their three-letter acronyms “ABS” and “ITO.”

For the first six months of this year, the overall Services segment reported $17.5 billion in sales, about flat from the year-ago period, though its earnings as a percentage of HP’s overall revenue has dropped from nearly 16 percent last year to about 11 percent this year. The worst performer of the bunch has been ITO, which last quarter saw its revenue drop 3 percent to $3.7 billion. CFO Cathie Lesjak attributed the drop to “being more selective” with the deals HP chooses to pursue.

Mike Nefkens, the senior vice president and general manager for ES in Europe, was named to run the unit on an interim basis, while Jean-Jacques “JJ” Charhon, the unit’s CFO, was promoted to its COO. Nefkens isn’t assumed to be Visentin’s replacement, and sources tell me that HP will be looking both inside and outside the company for the services unit’s next boss.

I said it yesterday and I’ll say it again today: Expect a lot more questions about, and a lot more attention on, HP’s services business in the weeks ahead.

Then word came, via AllThingsD, that something big was coming from the board of directors. And as AllThingsD first reported (again), HP directors made one of their own, Meg Whitman, the former eBay CEO who had become a director earlier this year, the new CEO. Léo Apotheker resigned, but don’t cry for him, because according to his contract, he made out rather well. Even before it was made official, investors applauded the move, sending HP shares skyward.

Analysts did what they always do, and, well, analyzed. And though it looked more like drama criticism, it’s not as if HP hasn’t known boardroom dramas before. Finally, the deed was done, meaning it was time to hold a conference call, but not before talking first to Kara Swisher of AllThingsD.

I got to talk to Whitman and HP Chairman Ray Lane yesterday, too, but I had to wait until after the conference call. With so many critics screaming that Whitman has no experience running an enterprise hardware company — and let’s be honest, there aren’t that many who do — I asked her to elaborate on the defense, made on the conference call with analysts, that her experience as a buyer of enterprise technology, during her years as CEO at eBay, provided important experience that will help her be an effective CEO at HP. I also asked about Autonomy, the British software firm that HP is in the process of acquiring for $10 billion, and how it will fit within HP; about the company’s plans for cloud services; and about the state of the HP brand amid all the corporate mishegas that has unfolded in the last several months.

AllThingsD: Meg, the main criticism of you, since you’ve been named CEO of HP, is that your primary experience before was at eBay, which is a consumer-facing company. The response on yesterday’s conference call has been that at eBay you were a purchaser of a lot of enterprise technology and that this gives you some important relevant experience. I get the point, but could you elaborate on it a bit? How does having been an enterprise buyer help you be HP’s CEO?

Whitman: What HP needs now more than anything else is management skills, communication skills and a commitment to executional excellence, all of which I know well, and are sort of core competencies from my 35-year career in business. I know technology because I ran a company whose very existence would not have been possible without it, and was a very significant buyer of technology products. And so that brings me a unique buyer’s perspective. But I have not spent 35 years in the enterprise business. Add so what that means is that I will be relying heavily on Dave Donatelli; on Todd Bradley; on the senior executives at HP; and also, frankly, on Ray Lane, who was at Oracle for many years, and EDS, and who knows this space well. So I think what customers will get is that one plus one equals three.

Lane: I agree with that. What we need here, and what we didn’t have before, is operational execution, communication skills, getting the team on the same page and leading them. The CEOs of $130 billion companies are not leading the technology development of those companies. I think Meg can go into any enterprise and visit with any CIO or CEO and do really well. So whether it is the technology side or the sales side, I don’t think anyone is giving her enough credit on those fronts. She can do just fine. And then on top of that she has strong operating executives under her who do know the enterprise business. But right now it is the need for leadership of the people, a focus on executing and operating. I could point back to Lou Gerstner at IBM, or even my own days at Oracle. When I joined Oracle, people thought the board had lost its mind, because I was a consultant at Booz Allen. People scoffed and said ‘How is a consultant going to lead the worldwide sales force at Oracle, a trained wolf pack?’ And somehow I figured it out. And I knew nothing about software, but I learned, and I learned from Larry Ellison, who is one of the best.

I want to talk a bit about Autonomy, and about unstructured data. You made a comment about that when you talked with Kara Swisher of AllThingsD yesterday. Talk to me about where you see Autonomy fitting within HP. Do you still intend to let it be independent? How do you see the alignment shaping up?

Whitman: It’s a big and fast-growing market. Of all the data out there, about 15 percent of it is structured and 85 percent of it is unstructured. And the unstructured data is growing by leaps and bounds. There are not a lot of good software companies that can help companies manage unstructured data and help companies make business decisions based on what they see in that unstructured data. So what we hope to do with Autonomy, and I’m enthusiastic about this acquisition, is take what is fabulous about Autonomy — they have a leading position in the marketplace — and put it through the very powerful HP distribution system. And I think what Mike Lynch is excited about — he is the founder and CEO of Autonomy — is taking this great product and getting it into more people’s hands. And we just need to grow this company as fast as we can; extend our lead and our accumulated experience in this area. So that’s the plan for Autonomy.

Lane: Yeah, I think the synergies are great, and I think it makes a lot of sense. It will make a lot of sense to customers if HP engages them in a dialogue of managing unstructured data.

You don’t think HP paid too much for Autonomy?

Whitman: You know what? It is what it is.

Lane: We wish we could have bought it for cheaper, but it was the market price. People thought we overpaid for 3Par, and you know what? We’re hitting it out of the park.

Is HP still going to be player in cloud services? That was a big commitment that Léo made in March. How far along is that plan?

Lane: Absolutely. The cloud is way ahead of plan. So our cloud services have gone live. So that is absolutely part of the plan, yes.

Meg, a lot of the same people who applauded your selection to HP’s board of directors are criticizing your selection as CEO. Why do you think there’s a disconnect?

Whitman: I don’t know. There’s always people who have different points of view on things. What I have to do — and I said this on the conference call — is lead this company, make it a great company again and fulfill its destiny as the icon of Silicon Valley and of California, and deliver the results. I will have to prove myself by delivering the results. If we’re going to restore the confidence that investors have in us, and that employees have in us, we have to deliver. We have to mean what we say and say what we mean and deliver the results. And that is what I intend to deliver.

Meg, you have a lot of history managing brands. I’m thinking of the job you had managing brands for Procter & Gamble. What’s wrong and what’s right about HP’s brand right now?

Whitman: I think HP is known as the world’s largest provider of information technology, and we are a trusted brand. We are a worldwide brand that touches both consumers and businesses. If you’re an enterprise, we have full suite of solutions. I know that when I bought enterprise hardware and software at eBay, I wanted one person to choke when something went wrong. I wanted one supplier to go to and say ‘Hey, this is not working.’ And so I think we have a fabulous brand in a world where technology is increasingly fundamental. I will say — and Ray would say this as well — I think we need crisper communications with all the constituencies. I think on Aug. 18 we confused people. We didn’t mean to do that, but we did. And so I think we’ve got some work to do around communicating crisply and cleanly about what we’re about — the moves that we’re making — to employees, customers, shareholders and, frankly, to the press.

It also said that it is engaged in talks with the British software concern Autonomy. Bloomberg News reported earlier today that HP was in talks to acquire Autonomy for about $10 billion, which would make it HP’s third-largest acquisition ever, after Compaq in 2001 ($32 billion) and EDS in 2008 (about $16 billion).

In addition, HP said it would discontinue operations of the webOS unit that came with last year’s acquisition of Palm, the handheld computing company for which it paid nearly $2 billion. Ina Fried has more about that here, but obviously the revelation that the TouchPad tablet device isn’t selling at Best Buy was an important indication that the webOS business was not long for this world.

The news came along with quarterly results that missed the consensus expectations of analysts. Revenue was $31.2 billion versus a consensus of $31.19 billion. Per-share earnings were $1.10, a penny short better than the consensus of $1.09. While HP managed to squeak by expectations on the earnings front, its outlook isn’t getting any better. It reduced its revenue forecast for the year to a range of $127.2 billion to $127.6 billion, down from its previously guided range of $129 billion to $130 billion. It also cut its estimated per-share earnings for the full year to a range of $4.82 to $4.86, down from $5. HP shares set new 52-week lows today, finally settling at $29.51, down 6 percent. The shares have lost nearly 30 percent since the start of the year, and are down more than 40 percent from their 52-week high set in February.

Update: In the sudden onslaught of HP news I misread the press release and said that HP missed the consensus by a penny per share when in fact it beat the consensus by a penny per share. Sorry about that.

A second update: Now HP has confirmed the terms of the Autonomy acquisition. HP has reached a deal to pay $42.11 a share for Autonomy in cash. The deal represents a premium of about 64 percent from Autonomy’s closing price yesterday. The deal will close by the end of the year.

And if that weren’t enough HP news for you, the company named John Visentin as executive vice president of HP Enterprise Services, effective immediately. Visentin previously led HP Enterprise Services for the Americas. Prior to joining HP, Visentin held several senior executive positions at IBM and, all told, has 27 years in the information technology industry. He replaces Tom Iannotti, who announced his retirement earlier this year.

Here’s the announcement. I’ll have more as I go through everything.

HP Confirms Discussions with Autonomy Corporation plc Regarding Possible Business Combination; Makes Other Announcements

Press Release Source: HP On Thursday August 18, 2011, 3:02 pm

PALO ALTO, Calif.–(BUSINESS WIRE)– HP (NYSE:HPQ – News) today commented on the recent announcement by Autonomy Corporation plc (LSE:AU.L.l – News). HP confirms that it is in discussions with Autonomy regarding a possible offer for the company.

HP also reported that it plans to announce that its board of directors has authorized the exploration of strategic alternatives for its Personal Systems Group (PSG). HP will consider a broad range of options that may include, among others, a full or partial separation of PSG from HP through a spin-off or other transaction.

In addition, HP reported that it plans to announce that it will discontinue operations for webOS devices, specifically the TouchPad and webOS phones. HP will continue to explore options to optimize the value of webOS software going forward.

HP today announced preliminary results for the third fiscal quarter 2011, with revenue of $31.2 billion compared with $30.7 billion one year ago.

In the third quarter, preliminary GAAP diluted earnings per share (EPS) was $0.93 and non-GAAP diluted EPS was $1.10, compared with third quarter fiscal 2010 GAAP diluted EPS of $0.75 and non-GAAP diluted EPS of $1.08. Non-GAAP diluted EPS estimates exclude after-tax costs related primarily to the amortization of purchased intangible assets of approximately $0.17 per share and $0.33 per share in the third quarter of fiscal 2011 and fiscal 2010, respectively.

For the fourth fiscal quarter of 2011, HP estimates revenue of approximately $32.1 billion to $32.5 billion, GAAP diluted EPS in the range of $0.44 to $0.55, and non-GAAP diluted EPS in the range of $1.12 to $1.16. Non-GAAP diluted EPS guidance excludes after-tax costs of approximately $0.61 to $0.68 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP estimates full-year FY11 revenue will be approximately $127.2 billion to $127.6 billion, down from its previous estimate of $129 billion to $130 billion. FY11 GAAP diluted EPS is expected to be in the range of $3.59 to $3.70, down from its previous estimate of at least $4.27, and FY11 non-GAAP diluted EPS is expected to be in the range of $4.82 to $4.86, down from its previous estimate of at least $5.00. FY11 non-GAAP diluted EPS estimates exclude after-tax costs of approximately $1.16 to 1.23 per share, related primarily to restructuring and shutdown costs associated with webOS devices, the amortization and impairment of purchased intangibles, restructuring charges and acquisition-related charges.

HP will host a conference call with the financial community today at 2 p.m. PT / 5 p.m. ET to discuss these announcements well as HP’s third quarter 2011 financial results. The call is accessible via an audio webcast at www.hp.com/investor/2011q3webcast.

About HP

HP creates new possibilities for technology to have a meaningful impact on people, businesses, governments and society. The world’s largest technology company, HP brings together a portfolio that spans printing, personal computing, software, services and IT infrastructure at the convergence of the cloud and connectivity, creating seamless, secure, context-aware experiences for a connected world. More information about HP is available at http://www.hp.com.

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• HP Pulls Plug on webOS Hardware, Leaves OS Future in Doubt
• HP And webOS: But They Seemed So Happy Together!
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• HP’s Apotheker: We Struck Out with WebOS, but Maybe Someone Else Wants a Swing?
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Plaintiffs in the lawsuit are seeking records related to Hurd’s departure from HP in August, including a letter that accused him of sexually harassing Jodie Fisher, a sometimes-actress who worked as a contractor for HP. The U.S. Securities and Exchange Commission is also looking into the possibility that Hurd told Fisher about HP’s then-confidential plans to acquire IT services firm EDS.

Hurd has been trying to keep the letter from being made public, and argued to the judge that since it is his personal property, he should be allowed to join the lawsuit as a party to that end. In the motion, Hurd’s lawyers argue that the letter was sent to “achieve private resolution of a potential dispute” between Hurd and Fisher.

Mark Hurd doesn’t want you to read the letter that set in motion his ouster from the top job at Hewlett-Packard.

This is understandable, but one has to wonder–if the letter were to be made public, would that be so bad?

The episode involving the sometimes actress and former HP contractor Jodie Fisher turned into one of the more prurient news events of late in Silicon Valley.

While the nature of the relationship was much debated–although both denied it was sexual–attention quickly turned to expense reports Hurd had filed that HP alleged covered up his travels to meet with Fisher.

It all started with a letter sent by Fisher’s lawyers to HP that contained allegations of sexual harassment, which supposedly occurred during a period running from 2007 to 2009.

And as The Wall Street Journal reported today, the letter also alleged that during one of their visits in 2008, Hurd told her about about HP’s then-confidential plan to acquire IT services firm EDS.

It’s this significant allegation that has attracted the attention of the U.S. Securities and Exchange Commission, as the Journal reported earlier this week.

That’s because when CEOs talk out of school about confidential deals in progress, shareholder interests are at stake, and questions arise about what was said and to whom.

And while Fisher isn’t said to have traded on the information, making SEC charges ultimately unlikely, loose lips on Hurd’s part would be a very big no-no.

The letter is also evidence in a shareholder lawsuit against HP before the Delaware Chancery Court. Plaintiffs want the letter, currently sealed, to be made public. Hurd’s lawyers have filed a motion asking that it remain sealed. The judge will rule on the issue early next year.

Given what’s publicly known about the letter so far–and about a second letter from Fisher that followed it–one has to wonder whether Hurd might be better off if the judge rules in favor of disclosure, even if the letter contains some personally embarrassing allegations about his behavior.

We’ll see. The worst thing so far emerging from them is that Hurd appears to have used HP funds to pay for Fisher’s travel and meals and done a little administrative tap dancing with his expense reports. On top of that, the letter alleges that he talked too much about a pending deal.

And while the letter did contain allegations of sexual harassment, Fisher went on to say in public that she never intended for the matter to cost Hurd his job. And she later sent the board a second letter recanting certain unspecified “inaccuracies.”

Thus, the second letter may cancel out some of the more salacious actions alleged in the first. An internal investigation by HP found that Hurd didn’t violate the company’s own sexual harassment policy. And Hurd eventually reached a private settlement with Fisher.

But maintaining the seal on the letters only fans the public curiosity about them. A little sunlight on both letters may reveal their contents to be, well, mostly boring, even if marginally titillating.

And this may go a long way toward repairing Hurd’s dented reputation.

Releasing the controversial letters will also give HP shareholders something they’ve wanted since this entire episode began: The full story.

HP lost a lot of its market value when Hurd left, and its share price has not yet recovered. And Hurd wound up working for a competitor, Oracle.

None of this is an optimal outcome by any reasonable measure. So, it’s fair to say HP shareholders are entitled to a much more thorough explanation of the circumstances that led its board to show Hurd the door.

Now as head of HP Networking, he has a job that is no less daunting: Wrestling with none other than Cisco Systems, the powerful grandaddy of the networking business. HP’s networking unit, recently bolstered by its $2.7 billion acquisition of 3Com last year, caught some attention this week with an audacious promotion offering networking customers a 20 percent discount on certain products if they trade in old Cisco gear.

To be fair, HP has yet to take much business away from Cisco. As The Wall Street Journal noted, Cisco has so far held on to its 70 percent share of the enterprise Ethernet switching market in Q3, up from 67 percent a year ago, according to the research firm Infonetics. HP’s share was 11 percent, the same share that 3Com had before it was part of HP.

Still, it’s an interesting time to be trading barbs with Cisco, in part because it appears vulnerable given its uncertain market outlook when it reported earnings last month, but also because it’s eyeing some of HP’s home turf for expansion.

I met up with Haas at HP Headquarters in Palo Alto recently to talk about how the matchup with Cisco is shaping up, and what to expect from HP in 2011.

NewEnterprise: Marius, let’s start with the big question about the coming year. You were deeply involved with the EDS deal and several HP deals before that. Is there still an appetite for big deals in IT or at HP?

Marius Haas: “It’s not going to stop. The big are going to get bigger. The appetite for some of the niche technology players to get some funding so they can grow to a sufficient scale is not gone. Now it’s becoming clear that Cisco, Oracle, IBM and HP are all pretty much starting to build out their end-to-end stacks and I don’t see any stop to the deal-making. In order to get the kind of muscle you need to compete in this market you have to be pretty big and you have to be global.”

NE: So HP is not done doing deals?

MH: “No.”

NE: What kind of deals might we see?

MH: “I’ll give you a hint. Look at who our new CEO and Chairman [former SAP CEO Léo Apotheker] is. You can probably draw a conclusion that maybe we’ll continue to expand in the software arena, and then move up the stack. That’s a logical path he could be taking.

NE: Let’s talk about the competition, specifically Cisco–a networking company that’s going after the data center and IT. You run the networking division of an IT company. Talk to me about that dynamic.

MH: “We like the position we’re in. We have all the things you need in order to bring together and deliver a sort of holistic kind of cloud strategy for customers. It takes a lot of IP and we’re the only company on the planet that has it all. Servers, storage, networking, management software, services. And all the devices as well. No one else has that. And Cisco doesn’t have it. They will come from their position of strength which is networking, but they are going to have to partner to deliver the broader ecosystem. It’s easy to put on paper, but harder to deliver.

“They’re used to their network model with proprietary products. Customers are saying they don’t want proprietary stuff. They want something that’s standards-based, interoperable and at a much lower cost. Our offering is resonating. We don’t see the kind of slowness they are seeing. And the enterprise customers are telling us they no longer want a single-vendor-dominated networking market. They want competition for their business.”

NE: So where are you seeing demand?

MH: “Historically HP before we acquired 3Com was strong in the mid-market and in the edge of the enterprise. We were strong in the K-12, local government, hospitality and health care segments. Now we’re seeing broader momentum in the enterprise, especially from companies who are modernizing their environment and getting ready for the cloud. People are getting tired of paying a premium for Cisco. And you’ve got about $9 billion worth of gear from Cisco that is going end of life soon. Out of our top 1,000 enterprise accounts, 458 are doing proof of concept trials with us. People are now convinced we are that second horse in the race.”

Hewlett-Packard (HPQ) has finally named a new CEO, and, despite our prediction that it would choose an internal candidate like Todd Bradley or Anne Livermore, the company instead looked to an outsider.

On Thursday afternoon, HP named Léo Apotheker–former CEO of SAP (SAP)–as its new chief executive officer.

And, in a jab at Oracle–which hired former HP CEO Mark Hurd after his ouster–it tapped Ray Lane, a former president and COO at Oracle (ORCL), as its non-executive chairman of the board. Lane is currently a managing partner at VC powerhouse Kleiner Perkins Caufield & Byers.

Interesting choices. Particularly Apotheker, who was pushed out of SAP this past February after less than a year on the job. (He served as co-CEO with Henning Kagermann for a few years prior.)

Cathie Lesjak, who has been serving as interim CEO, will return to her previous role of CFO on November 1, when the new appointments become effective.

In a statement announcing the move, HP board member Robert Ryan said the company chose to hire Apotheker because he’s “a strategic thinker with a passion for technology, wide-reaching global experience, and proven operational discipline.”

At $40.80, HP shares are down about three percent on the news. Seems investors aren’t too keen on Apotheker’s appointment, even after weeks of leadership uncertainty.

Here’s the release:

Léo Apotheker Named CEO and President of HP

Ray Lane Joins HP as Non-Executive Chairman of the Board

PALO ALTO, Calif., Sept. 30, 2010–The Board of Directors of HP today announced the election of Léo Apotheker as Chief Executive Officer and President. Apotheker, who previously served as CEO of SAP, will also join HP’s Board of Directors. The Board also elected Ray Lane, Managing Partner at Kleiner Perkins Caufield & Byers, as a new member of the Board and designated him as non- executive Chairman. Both elections are effective November 1.

During Apotheker’s more than 20 years at SAP, he was a driving force in making it the largest business software applications company in the world. Apotheker helped develop and implement the most significant changes in SAP history. During his tenure, he transformed R&D and technology platforms and expanded business models and customer segments. Apotheker also helped lead SAP to 18 consecutive quarters of double-digit software revenue growth between 2004 and 2009.

Lane has served on the Board of Directors of more than 20 public and private companies and joined Kleiner Perkins in 2000. Previously, he served as President and Chief Operating Officer at Oracle Corporation. Earlier in his career, Lane also worked at Booz Allen Hamilton, EDS and IBM.

“Léo is a strategic thinker with a passion for technology, wide-reaching global experience and proven operational discipline–exactly what we were looking for in a CEO,” said Robert Ryan, lead independent director of the Board. “After more than two decades in the industry, he has a strong track record of driving technological innovation, building customer relationships and developing world- class teams.”

Ryan continued, “Léo has been a leader in anticipating the transformation taking place in our industry, and we believe he is uniquely positioned to help accelerate HP’s strategy. He has demonstrated success in the U.S. market and also has vast international experience – which will be a major asset as HP continues to expand globally, particularly in high-growth emerging markets. HP has the right assets and market positions, and now we have the best team to realize the company’s enormous potential.”

“HP has a powerful mix of businesses, products and services, one of the most innovative cultures in the industry, and an accomplished management team who have played a critical role in its success,” said Apotheker. “I am deeply honored to be joining the more than 300,000 dedicated HP employees.”

Apotheker continued, “Given HP’s diversified products and services, its financial strength, and its leadership position across markets, no other company is as well positioned to drive – and profit from – the revolutionary changes under way in the marketplace. As we move forward, HP will continue to be a valued partner with our customers as well as a fierce competitor. I look forward to working with the outstanding people at HP to write the next chapter in the company’s long and proud history.”

“I am excited to join the Board of this pioneering company, and look forward to working closely with Léo – and the rest of the Board and senior management team – as they capitalize on the changes taking place across the industry,” Lane said. “I have known and admired Léo for almost 20 years. He is ideally suited to build on HP’s strong foundation, leverage its many assets and keep the company at the forefront of innovation.”

Apotheker will succeed Cathie Lesjak, who was named interim CEO in August 2010. Lesjak, who has served as HP’s Chief Financial Officer since January 2007, remains CFO and continues to serve as a member of the Executive Council. Ryan said, “Cathie is and will continue to be an important part of HP. We are extremely fortunate to have one of the deepest, most talented senior management teams in the industry and to have someone of Cathie’s caliber lead HP during this interim period. On behalf of the entire Board, I would like to thank Cathie and our senior management team for maintaining HP’s focus on serving customers and continuing to execute our strategy.”

HP today said it will reduce its employee roster by 3,000, or one percent of its workforce, over the next few years. Nine thousand workers will lose their jobs, with 6,000 new staff to be hired in the same period.

Evidently, the completion of HP’s integration with EDS, which it bought in 2008 for nearly $14 billion, has made the move necessary. And the continuing automation of the company’s computer services business has made it possible.

“We think the next 5 to 10 years will be all about automation,” Ann Livermore, Executive VP of HP’s enterprise business said during a conference call about the ugly news this morning. “These changes will allow HP to reinvest in further growth….We have a chance to further accelerate our competitive advantage. This is a substantial opportunity for us and something that we think is a good opportunity for our clients as well.”

HP expects to take a $1 billion charge for the cuts and says it anticipates they will will ultimately generate the same amount in annual savings.

“I mean damn, did you even see the test
You got D’s, motherf*$@%&, D’s! Rosie Perez”
– Kanye West

No position in a company is more important than the CEO, and as a result, no job gets more scrutiny. Sadly, little of this analysis benefits CEOs, as most of the discussions happen behind their backs. This post is a step in the opposite direction. By describing how Andreessen Horowitz evaluates CEOs, I am at the same time describing what I think the job of the CEO is. Here are the key questions we ask:

Does the CEO know what to do?

Can the CEO get the company to do what she knows?

Did the CEO achieve the desired results against an appropriate set of objectives?

1. Does the CEO know what to do?

One should interpret this question as broadly as possible. Does the CEO know what to do in all matters all of the time? This includes matters of personnel, matters of financing, matters of product strategy, matters of goal sizing, matters of marketing. At a macro level, does the CEO set the right strategy for the company and know its implications in every detail of the company?

I evaluate two distinct facets of knowing what to do:

Strategy–At Andreessen Horowitz, we like to say that in good companies, the story and the strategy are the same thing. As a result, the proper output of all the strategic work is the story.

Decision-making–At the detailed level, the output of knowing what to do is the speed and quality of the CEO’s decisions.

The Strategy and the Story

The CEO must set the context that every employee operates within. This context gives meaning to the specific work that people do, aligns interests, enables decision-making and provides motivation. Well-structured goals and objectives contribute to the context, but they do not provide the whole story. More to the point, goals and objectives are not the story. The story of the company goes beyond quarterly or annual goals and gets to the hardcore question of why? Why should I join this company? Why should I be excited to work here? Why should I buy your product? Why should I invest in the company? Why is the world better off as a result of this company’s existence?

When a company clearly articulates its story, the context for everyone–employees, partners, customers, investors, and the press–becomes clear: When a company fails to tell its story, you hear phrases like:

“These reporters don’t get it.”

“Who is responsible for the strategy in this company?”

“We have great technology, but need marketing help.”

The CEO doesn’t have to be the creator of the vision. Nor does she have to be the creator of the story. But she must be the keeper of the vision and the story. As such, the CEO ensures that the company story is clear and compelling.

The story is not the mission statement; the story does not have to be succinct. It is the story. Companies can take as long as they need to tell it, but they must tell it and it must be compelling. A company without a story is a usually a company without a strategy.

Want to see a great company story? Read Jeff Bezos’s three-page letter he wrote to shareholders in 1997. In telling Amazon’s story in this extended from–not as mission statement, not as a tagline–Jeff got all the people who mattered on the same page about what Amazon (AMZN) was about.

Decision-making

Some employees make products, some make sales; the CEO makes decisions. Therefore, a CEO can most accurately be measured by the speed and quality of those decisions. Great decisions come from CEOs who display an elite combination of intelligence, logic, and courage.

Courage is particularly important, because every decision a CEO makes is based on incomplete information. In fact, at the time of the decision, the CEO will generally have less than 10 percent of the information typically present in the ensuing Harvard Business School case study. As a result, the CEO must have the courage to bet the company on a direction even though she does not know if the direction is right. The most difficult decisions (and often the most important) are difficult precisely because they will be deeply unpopular with the CEO’s most important constituencies (employees, investors, and customers).

In my personal experience, the best decision that I made in my career–the decision to sell the Loudcloud business to EDS and become Opsware the software company–would have lost by landslide had I put it to a vote with my employees, my investors or my customers.

As CEO, there is never enough time to gather all information needed to make a decision. The CEO must make hundreds of decisions big and small in the course of a typical week. The CEO cannot simply stop all other activities to gather comprehensive data and do exhaustive analysis to make that single decision. Knowing this, CEOs must be continuously and systematically gathering knowledge in their day-to-day activities so that they will have as much information as possible when the decision point presents itself.

In order to prepare to make any decision, the CEO must systematically acquire the knowledge of everything that might impact any decision that she might make. Questions such as:

What are the competitors likely to do?

What’s possible technically and in what timeframe?

What are the true capabilities of the organization and how can you maximize them?

How much financial risk does this imply?

What will the issues be, given your current product architecture?

Will the employees be energized or despondent about this promotion?

Great CEOs build exceptional strategies for gathering the required information continuously. They embed their quest for intelligence into all of their daily actions from staff meetings to customer meetings to 1:1s. Winning strategies are built on comprehensive knowledge gathered in every interaction the CEO has with an employee, a customer, a partner, an investor, and so on.

2. Can the CEO get the company to do what she knows?

If the CEO paints a compelling vision and makes fast, high-quality decisions, can she then get the company to execute on her vision and decisions? The first ingredient in being able to do this is leadership, as I outlined in a previous post, Notes on Leadership.

In addition, executing well requires a broad set of operational skills. The larger the organization, the more elaborate the requisite skill set.

In order for a company to execute a broad set of decisions and initiatives, it must:

Have the capacity to do so–in other words, the company must contain the necessary talent in the right positions to execute the strategy.

Be a place where every employees can get things accomplished–the employees must be motivated, communication must be strong, the amount of common knowledge must be vast, and the context must be clear.

Is the CEO building a world-class team?

The CEO is responsible for the executive team plus the fundamental interview and hiring processes for all employees. She must make sure that the company sources the best candidates and that the screening processes yield the candidates with the right combination of talent and skills. Ensuring the quality of the team is a core part of running the company. Great CEOs constantly assess whether or not they are building the best team.

The output of this capability is the quality of the team. It’s important to note that team quality is tightly tied to the specific needs of the company in the challenges that it faces at the point in time that it faces them. As a result, it’s quite possible that the executive team changes several times, but the team a) is high-quality the entire way and b) there is no attrition problem.

Is it is easy for employees to contribute to the mission?

The second part of the evaluation determines whether or not the CEO can effectively run the company. To test this, I like to ask this question: “How easy is it for any given individual contributor to get his or her job done?”

In well-run organizations, people can focus on their work (as opposed to politics and bureaucratic procedures) and have confidence that if they get their work done, good things will happen for both the company and them personally. By contrast, in a poor organization, people spend much of their time fighting organizational boundaries and broken processes.

While quite easy to describe, building a well-run organization requires a high level of skill. The skills required range from organizational design to performance management. They involve the incentive structure and the communication architecture that drives and enables every individual employee. When a CEO “fails to scale,” it’s usually along this dimension. In practice, very few CEOs get an “A” on this particular test.

Netflix’s CEO Reed Hastings put great effort into designing a system that enables employees to be maximally effective. His presentation on this design is called Reference Guide on our Freedom and Responsibility Culture. It walks through what Netflix (NFLX) values in its employees, how they screen for those values during the interview process, how they reinforce those values, and how they scale this system as the number of employees grows.

3. Results against objectives

When measuring results against objectives, start by making sure the objectives are correct. CEOs who excel at board management can “succeed” by setting objectives artificially low. Great CEOs who fail to pay attention to board management can “fail” by setting objectives too high. Early in a company’s development, objectives can be particularly misleading as nobody really knows the true size of the opportunity. Therefore, the first task in accurately measuring results is setting objectives correctly.

We also try to keep in mind that the size and nature of the opportunity varies quite a bit across companies. Hoping that VMware (VMW) can be as capital-light as SolarWinds (SWI) or trying to get Yelp to grow as fast as Twitter doesn’t make sense and can be quite destructive. CEOs should be evaluated against their company’s opportunity–not somebody else’s company. Let me share a funny story, which illustrates a CEO really owning delivering against results. This story is from Robin Li, CEO of Baidu (BIDU). He shares that on the day of Baidu’s IPO–usually one of an entrepreneur’s most exhilarating days of his entire life–he sat at his desk terrified. Why? Listen to how Robin owned delivering results:

In 2004, we raised our last round of VC money led by Draper Fisher Jurvetson…and Google, one of our great colleagues. Then a year later, in 2005, the company went public. The ideal price was $27 [the stock's initial offer price] and it closed on the first day at $122. It was great with us for many of the Baidu employees and for all of the Baidu investors. It was a very miserable thing for me because when I decided to take the company public, I was only prepared to deliver financial results that match the price of $27 or maybe a little higher, $30, $40. But I was really shocked to see that the price went to $122 on the first day. So that meant I needed to deliver real results that matches an expectation much, much higher than what I had prepared to do. But in any case, I thought I had no choice. So I put my head down and focused on operation, focused on technology, focused on the user’s experience, and I delivered.

Once we’ve taken all of this into account, we see that black-box results are a lagging indicator. And as they say in the mutual fund prospectuses, “past performance is no guarantee of future performance.” The white box CEO evaluation criteria–“does the CEO know what to do?” and “can the CEO get the company to do it?”–will do a much better job of predicting the future.

Closing Thought

CEO evaluation need not be a byzantine, unstated art. All people, including CEOs, will perform better on a test if they know the questions ahead of time.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

The presentation catalyzed a movement. Start-ups everywhere adopted a lean, low-burn, low-investment model. To this day, companies seeking funding at our venture firm, Andreessen Horowitz, proudly proclaim in their pitch decks that they are raising tiny amounts of capital so they can run lean.

On the one hand, it is a fact that capital invested is negatively correlated with returns in the venture capital industry. Pumping too much money into a small start-up is unhealthy for both the company and the investor. On the other hand, Facebook has raised several hundred million dollars and is on track to produce fantastic returns for all of its investors.

So what’s a start-up to do? Much of what has been written and said about lean start-ups makes good sense. However, that advice is often incomplete, and some of the things left unsaid are the least intuitive. In this article, I will articulate some of those things left unsaid in arguing the case for the Fat Start-up.

Here is my central argument. There are only two priorities for a start-up:
Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.

What the hell do I know?

“Al Pacino couldn’t be no gangsta, DeNiro in ‘Casino’ he no gangsta
Wanna be, wanna see, wan’ get a shovel
dig Tookie up n*&%^!, cause he know gangstas”

–The Game

At this point, some of you are asking yourselves, “What the hell does Ben know? If he were really smart, then he’d know that thin is in.” It turns out that I have some experience in managing a fat start-up through the dot-com implosion of the early 2000s. This chart offers a brief summary of equity market history when I was CEO of Loudcloud and Opsware (click to enlarge):

Note that the Nasdaq index is very highly correlated to the start-up funding environment. During the two years I was CEO of Opsware, the Nasdaq fell 80 percent, far more than it has fallen during the current 2008-10 downturn. So the 2000-02 environment was at least as traumatic as this one for Silicon Valley companies–and arguably much worse.

Here is a brief summary of Loudcloud/Opsware’s fund-raising history during that time:

• September 1999: Loudcloud founded
• November 1999: Loudcloud raises $21 million at a $45 million pre-money valuation (Benchmark Capital is the lead investor)
• January 2000: Loudcloud borrows $45 million from Morgan Stanley (MS)
• June 2000: Loudcloud raises $120M at a $700M pre-money valuation
• March 2001: Loudcloud goes public on Nasdaq, raises $160 million and is valued in the public markets at approximately $480 million. Total funds raised to this point: $346 million.
• August 2002: Loudcloud sells the managed services business to EDS (this was the only actual business we had at the time) for $63.5 million and becomes a software company (and changes its name to Opsware).
• September 2002: Opsware trades for 35 cents per share or approximately a $28 million market cap.
• September 2007: Hewlett-Packard (HPQ) acquires Opsware for $1.6 billion

During this period, Loudcloud/Opsware had over 20 direct competitors. Almost all the competitors from the Loudcloud era went bankrupt, including MFN/SiteSmith, Exodus, LogicTier, Williams Communication, Global Crossing, WorldCom/Digex and Storage Networks. Those that survived got bought with valuations of less than $100 million (e.g., Totality) or still have very low valuations (e.g., Navisite).

How did we do it?

“I had a dream I could buy my way to heaven
When I awoke, I spent that on a necklace”

–Kanye West

So how did we navigate through the great dot-com crash, crush the competition, emerge as the No. 1 company in our space and sell the company to HP for $1.6 billion? Did we “cut spending, cut now, and preserve capital?” Did we make cash preservation our No. 1 priority?

No, we didn’t. To underscore the point, here are Loudcloud’s average monthly cash burn figures for the quarters ending in:

• Apr 2001:  $39 million
• Jul 2001:  $35 million
• Oct 2001:  $29 million
• Jan 2002:  $25 million
• Apr 2002:  $22 million
• Jul 2002:  $19.4 million

As you can see, we were aggressively investing in the business throughout 2001 and 2002. While we did reduce our cash burn, we did not make cash preservation our No. 1 priority. As it was, over the course of the transition from Loudcloud to EDS, we sadly laid off 400 employees and transferred another 150 to EDS. However, we didn’t scrimp and save our way to a $1.6 billion acquisition: Instead, it’s what we chose not to cut that ultimately got us there.

Loudcloud was a Web-hosting business. Today, we’d call it a “cloud services” business, but people weren’t quite ready for the “cloud” in 2001. We supercharged our hosting business with software (called Opsware) that automated our Web-hosting operations. The other cloud services businesses of our day also had software investments. However, as the macroeconomic climate changed, they all “cut deep and cut now.” In the end, they ended up putting their software in maintenance mode and stopped building new features.

As we weighed a decision to make the same deep cuts in our own software R&D efforts (a move advocated by the intelligentsia of the day, as well as nearly every MBA we had working in the company), I faced a hard decision: Cut deep and get to cash flow break-even quickly or continue to invest heavily in software?

In the end, I decided to run fat so that we could continue to invest in the Opsware software. At the end of the day, I realized that much larger companies like IBM (IBM) could hire smart people and train them. But without a lasting technology-based advantage, it would be increasingly hard for us to defeat them and build our customer base despite early wins with Ford (F), Fox Sports, and the U.K. government (to name just three of our early customers).

Running fat meant that I laid off zero software engineers so that we could keep on investing in our technology, find our product/market fit, and build a lasting technological advantage.

Still, we had to reduce costs or we would clearly go bankrupt. With this new view of the world, I decided that rather than divesting our intellectual property, I would divest our business. Now, that may sound logical the way I’ve described it, but consider these facts:

• We were generating $65 million/year from the Web-hosting business.
• We were a publicly traded company with a market capitalization of close to $200 million.
• All of our investors (pubic and private) believed in and invested in the Web-hosting business.
• We had close to 500 employees at the time. Nearly all of them were supporting the Web-hosting business.
• We had no other business. We had software, but we did not have a software product and certainly did not have a software business.

Despite all of this, we sold the Loudcloud hosting business to EDS and became Opsware the software company. It was not clear that this was a good idea at the time. In fact, the market thought it was a terrible idea: Our stock promptly lost 80 percent of its value, putting our market cap at about $28 million. It’s worth pointing out that this was about $40 million less than the cash that we had in the bank.

During the transition, we shrank our payroll from 450 employees to fewer than 100. Even with this massive reduction in expenses, it would take another three quarters to reach cash-flow break-even, a milestone we finally reached in Q2 of 2003.

One could argue–and many did–that we should have cut a lot deeper than we did given that we only had one customer. Although EDS was a very large customer (it generated $20 million/year in revenue), a brand new software company doesn’t need 100 people. We could have taken steps to reach cash-flow break-even immediately (clearly, that might have helped us get above 35 cents per share). In other words, we could have “gone lean” by cutting deep, cutting now, and preserving capital.

But rather than do what seemed obvious, I decided to keep on investing. Here’s why: In an economic boom, cash is great, but not necessarily a meaningful competitive advantage. If every company is well funded, being super-well funded doesn’t help you win. In fact, being super-well funded can actually screw you.

But in a bust (like the one we were in), having a lot of cash can be a huge competitive advantage because you can use that cash to put enormous pressure on your underfunded competitors. And that’s what we did.

We spent aggressively to match our best competitor’s product, feature for feature. And we used our public currency to acquire important adjacent functionality (network, process and storage management) that our competitors did not have and couldn’t acquire because they didn’t have the cash (or the equity).

In doing so, we were able to beat a really high-quality start-up (Bladelogic) that did not have the massive technical and cultural baggage that came from exiting the managed services business. Bladelogic was eventually sold to BMC (BMC) for $800 million. But I’m firmly convinced that had we not spent the money, Bladelogic would have emerged as the No. 1 company in the space and gotten the $1.6 billion exit instead of Opsware.

In the end, by continuing to invest aggressively in our technological advantage despite a hellacious funding environment, we were able to turn a doomed business into a winning one.

That is the very short version of how we won the market during the great tech recession of the early 2000s.

So did we learn?

“Hegel was right when he said that we learn from history that man can never learn anything from history.”

–George Bernard Shaw (1856-1950)

Every start-up is in a furious race against time. The start-up must find the product-market fit that leads to a great business and substantially take the market before running out of cash. As a result, the top two priorities are always to:

1. Find the product that 1,000 enterprise or 50 million consumers want to buy and grab those customers before your competitors do.
2. Raise enough cash and spend it intelligently so that you don’t go broke along the way.

Clearly, you can’t succeed if you don’t achieve both priority No. 1 and priority No. 2. So why is taking the market more important than not running out of cash? Because the only thing worse for an entrepreneur than start-up hell (bankruptcy) is start-up purgatory.

What is start-up purgatory, you ask? Start-up purgatory occurs when you don’t go bankrupt, but you fail to build the No. 1 product in the space. You have enough money with your conservative burn rate to last for many years. You may even be cash-flow positive. However, you have zero chance of becoming a high-growth company. You have zero chance of being anything but a very small technology business (see Navisite). From the entrepreneur’s point of view, this can be worse than start-up hell since you are stuck with the small company.

You recruited all the employees, you raised all the money and you made all the promises. You either see it through or leave–without your good reputation. No one wants to work for an entrepreneur who quits his or her own company. This is start-up purgatory, where you work just as hard, reap none of the rewards, and watch all your best people leave you. It sucks to be you.

The Bottom Line

Spending a little or spending a lot is a means, not an end. Choose the right strategy to win the market or you may end up going straight to purgatory.

As you listen to the virtues of the lean start-up–lightweight sales, light engineering, and so on–keep the following in mind:

• If you are a high-tech start-up, your value is in your intellectual property. Don’t stare at your spreadsheets so long that you get confused about that.
• You cannot save your way to winning the market.
• The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition.

Thin is in, but sometimes you gotta eat.

Ben Horowitz is co-founder and general partner of Andreessen Horowitz. He co-founded Loudcloud, later renamed Opsware Inc., in 1999 and served as CEO of the company before it was acquired in 2007 by Hewlett-Packard. He was most recently vice president and general manager of Hewlett-Packard’s Business Technology Organization Unit.

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The latest trend in the tech industry–at least among its biggest companies–is to offer products and services that used to be provided by partners. H-P (HPQ) expanded into consulting last year when it bought EDS, Cisco announced in March that it was moving into the server business, in April SAP’s (SAP) software rival Oracle agreed to buy hardware maker Sun Microsystems (JAVA), and in June, Intel (INTC), which makes chips, agreed to buy a software company.

SAP has no such ambition, says Apotheker. Whereas Cisco (CSCO), Oracle (ORCL) et al. say that they can reduce complexity for customers by developing all-in-one products, SAP plans to keep making software and work with partners to achieve the same goal. “People want to reduce complexity, but they don’t want it all to come from one company,” he says.

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