HP Layoffs -- Uh, Service Improvements -â€" Are Cloud Computing's Future

Last Updated Jun 1, 2010 6:13 PM EDT

HP (HPQ) announced that it would invest $1 billion in its enterprise services business. The fine print? Over a few years, HP will eliminate 9,000 jobs in the same division as it consolidates data centers and automates management. The investment is actually money spent now so the company will spend less on people, equipment, and software in the future.

Unfortunately, that's the brutal reality of cloud computing. The savings that clients see comes from employees and vendors, as customers in aggregate buy less hardware and software and price competition on the service front races like a wind-swept forest fire.

As I've heard from one IT outsource firm after another, consolidation and utilization are the the future. To remain competitive, the service providers must effectively use their computing capacity and consolidate infrastructure management. Those changes give them the necessary financial leverage to offer competitive service prices to customers that always seek a cut in cost.

Two issues result from the need to shrink operations. One is that vendors sell less hardware and software. I've called it the atomization of computing. When corporations increasingly rely on cloud services, and cloud vendors boost their efficiency, then more work gets done with less. Companies like HP, Cisco (CSCO), IBM (IBM), Dell (DELL), Microsoft (MSFT), and Oracle (ORCL) take it on the chin and need to make up lost revenue.

One way to do so is to become a cloud computing winner to at least partly offset revenue loss. Cost reductions then bolster margins and help close the profit gap.

The other part of cost containment is workforce reduction, because wage and salary expense is a major cost of operating a data center. Layoffs will make the next five to seven years look like 2008, only worse. Although executives will claim they have "freed up resources" to work in other areas, in candid moments they admit that the jobs will never come back and there's little to no room elsewhere in a company for displaced workers.

Look at HP again. Performance of the services division has been disappointing, both in revenue growth and profit. So HP will lay off 9,000 people and consolidate data centers at an expected cost of $1 billion. In 2008, HP laid off 24,600 employees after it acquired EDS and planned on a $1.7 billion charge, or about $69,105 per cast-off employee, to do so. Assume the same cost per laid off employee and 63 percent of the expected $1 billion charge for the "transformation" is headcount reduction.

Once the people and excess hardware and software is gone, HP expects that it will see annual gross savings of $1 billion and "net savings after reinvestment in a range between $500 million and $700 million." Reinvestment is deceptive, as the money will still be less than the company would have otherwise spent.

HP isn't doing anything that its competitors can avoid. Expect many tens of thousands to lose their jobs at HP and its competitors. This will add surplus IT workers, depressing wages and affecting hiring practices not just in high tech, but in any industry that uses computer experts. Which means all industries. It's the future of cloud computing, a formula that will appear over and over, and there's no way to avoid it.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.