For many years Hewlett-Packard has been criticized for lowering its spending on research and development (R&D), which contradicted the main principle of everlasting innovation set by the founders William Hewlett and David Packard. To show profitability and efficiency, HP’s management reduced R&D spending to around 2.5% of revenue. But analysts from Moody’s believe that at some point lack of R&D will slowdown HP’s growth.
“HP needs to get back to its roots and invest effectively in R&D in order to see sunnier days,” the conclusion from Moody’s examination of HP’s R&D spending reads.
Moody’s analyzed each of HP’s business units and compared its R&D spending to dedicated companies in the appropriate market segments, including Lexmark (printing), EMC (storage), Accenture (services) and Cisco Systems (networking). The company attempted to find out revenue share that HP needed to spend on research and development for each of its business units.
The analysts from Moody’s concluded that HP’s actual R&D last fiscal year of $3.399 billion was short about a billion dollars compared to the implicit appropriate R&D run rate, reports Tech Trader Daily.
For the fiscal 2011, HP spent $3.25 billion on R&D, or around 2.6% of its $124.7 revenue. During the same timeframe, chief executive officer Leo Apotheker made a number of very expensive acquisitions and the R&D budget was somewhat capped. Yet another former CEO of HP, Mark Hurd, cut HP's R&D budget to $2.8 billion, or 2.5% of HP's revenue, in his last fiscal year at the company from $3.5 billion, or 4% of earnings, in 2005, when he took over as CEO. By contrast, IBM has been investing around 6% of revenue into its own R&D in the recent years.
“Although revenue growth is also driven by many other factors, it is noteworthy that HP’s revenue growth began to lag competitors in 2010 (or, excluding the EDS acquisition, in 2009), two to three years after HP’s R&D investment started to trail its competitor group,” analysts from Moody’s claim.
As long as HP continues to invest less into R&D of each of its businesses, its revenue growth will continue to be low given its inability to offer truly innovative products on time.