Hewlett-Packard, Autonomy and 'Rules of the Garage'

It remains to be seen if Hewlett-Packard's investors (or the SEC and the FBI) will accept a "shift the blame" defense for an $8.8 billion charge it is taking for the $10 billion purchase of Autonomy, a Big Data firm with a big accounting problem that was the landmine in an otherwise unimpressive Q4 earnings report. For those who missed the news from Palo Alto, heres a brief rundown: According to CEO Meg Whitman, Autonomy had been billing low margin hardware sales as high-margin software sales and booked some deals with partners as revenue even though no money changed hands. Making matters worse, the Autonomy charge was the second acquisition-related, $8 billion+ write down in two consecutive quarters. Shareholders quickly drove H-P down 12% to a nearly 52-week low. Now starts the fingerpointing. For his part, former CEO (for 10 months) Leo Apotheker is shocked, shocked that the deal he put together may have been massively flawed: "The due diligence process was meticulous and thorough," he says. Former Autonomy CEO Mike Lynch "flatly" rejects the allegations. An accounting firm that vetted the deal, Deloitte, "categorically denies that it had any knowledge of any accounting misrepresentations in Autonomys financial statements." And Meg Whitman, who as a board member voted in favor of the deal, says H-P was duped. Maybe looking for individual bad actors is the wrong way to think about whats going on. I think the bigger problem is a more simple one. H-P, which invented industries and a start-up culture based on simple concepts, simply forgot to take its own advice. Lets go back to H-Ps central role in the creating the culture of Silicon Valley. David Packard and his newlywed bride moved into 367 Addison Ave. in Palo Alto in 1938. William Hewlett slept in the garage yes, THAT garage. Soon Hewletts bedroom became a workshop; with $538 in capital Hewlett and Packard began creating audio testing equipment. And the idea of staying true to your roots innovating from the garage became the Valley mantra. In 1999, harkening back to the founders, H-P crafted 12 "Rules of the Garage" as an homage to founders Hewlett and Packard (see illustration above). They are great concepts and cultural touchstones, and outline a "no excuses" culture to innovation and problem solving. And, as it happens, a lot of them apply to the Autonomy debacle in particular, and H-P's direction in general. Know when to work alone and when to work together

and Share tools, ideas. Trust your colleagues Whitman owns the problem now and since she had been in favor of it, can only partially disown the acquisition. But at least one executive seemed to see what was coming: Business Insider dug up a Fortune story from this May which reported that CFO Cassie Lesjak vigorously opposed the deal. Working with that (evidently) lone voice, who spoke to power at the risk of her career would have at least decelerated Apotheker's single-minded pursuit of Autonomy. Boards needs to know when to listen past a CEO when to work with and trust any senior executive. "The buck is going to have to stop somewhere," said Lucy P. Marcus, an expert in corporate governance and host of In the Boardroom with Lucy Marcus." "Only careful analysis will determine who may have been willfully misleading and who was perhaps willfully blind, and if anyone was actually in control of the process." If it doesn't contribute, it doesn't leave the garage and The customer decides a job well done The Autonomy process was being driven by H-P's need to evolve the business. But other strategic decisions seemed as hasty and curious as the Autonomy deal. To buy its way into the mobile club, for example, HP paid $1.2 billion for Palm itself a punchline in tech circles primarily to acquire the WebOS mobile operating system. It killed WebOS two years laterbecause it could not compete with Apple's iOS and Google's Android. The customer had decided Palm wasnt a job well done; but that didnt matter to H-P, which needed to play catch-up. The same is true in Autonomys case, a software company that had long been rumored as a takeover candidate, but always passed by. Only H-P decided to take it out of the garage. Invent Companies often need to make strategic acquisitions, but doing so to enter new markets can be tricky. IBM, which pre-dates H-P by a quarter-century, has reinvented itself countless times in its 100-year history. But is better known for shedding businesses (ThinkPad laptops to Lenovo) than buying them (though licensing "DOS" turned out to be a pretty good idea). IBM still invents, things like Watson, which Big Blue is applying to the Big Data space. With Autonomy, H-P was buying, not inventing.

Believe we can do anything When you are battered and down your confidence and daring suffer. You become gun shy. Believing that it can still do anything must be H-P's mantra going forward. It can't be afraid to invent or to risk strategic acquisitions. As Winston Churchill might have told H-P: If you are going through Hell keep going. Look: It's easy to post-mortem from a safe distance. But H-P invented an industry on very simple principles, crystallized by "The Rules," so in a very real way it is the poster child for this kind of introspection. The moral is, adhering to simple rules and remembering to apply them can always save a lot of grief. And sometimes maybe even $8.8 billion.