What HP's New Chief Needs Most

Last Updated Oct 7, 2010 1:49 PM EDT

Léo Apotheker, the new CEO of Hewlett Packard, is the third outsider in a row to be called in to run the place. Carly Fiorina (1999-2005) came from Lucent; Mark Hurd (2005-2010) from NCR; and Apotheker from SAP. Actually he comes from the unemployment lines: At SAP, Apotheker replaced longtime CEO Henning Kagermann; he left in February, after just seven months, until and has been on the sidelines since.

I met Apotheker a few weeks before he became CEO of SAP and liked him immediately. He's smart, energetic, expansive, and growth-oriented. It's clear the HP board hired him because of the growth bit: At SAP, a very German b2b company, he raised hackles by trying to raise prices in a tough market. HP's announcement talked about wanting to recharge the company's research batteries, which had run down during the regime of Mark the Knife.

That may be an urgent task, but it shouldn't be his most important goal. Apotheker's Number One priority must be to see to it that he retires full of honor and of his own volition, and that his successor comes from inside. Though insiders served briefly as interim CEOs between Fiorina and Hurd, and Hurd and Apotheker, HP hasn't gone to its bench for a CEO in this century. That's not just a symptom of problems in leadership and strategy: It can cause them.

When a board looks outside for a CEO, it's usually because there's a problem. Need to reposition the company? Call Carly. Need execution? Hire Hurd. Squaring off with Oracle? Hire the ex-CEO of its rival SAP -- and pair him with the superb former Oracle COO and Silicon Valley insider Ray Lane. When you go for an outsider -- who by definition lacks credibility within the company -- you inevitably go for someone who has proven he can solve your problem.

But as Ram Charan points out, today's problem won't be tomorrow's; the hammer you hire today will almost certainly be unsuited for the task two years from now. Research by Harvard Business School professor Joseph Bower, as well as data from Booz & Company's decade-long tracking of CEO turnover and succession, demonstrate that insiders generally outperform outsiders. Furthermore, outsiders can't possibly see as deep into a company's leadership ranks as someone who has spent years there.

If you can't promote from within, you may have quality issues with divisional management -- or with your strategy. A company as big as HP ought to have (indeed, does) at least two or three credible CEO candidates among its top executives. After all, these people are running divisions that are as big as many Fortune 500 outfits. If the board can't find them, either they're not there or -- more likely -- the board has lost confidence in itself, its vision of the company, or its strategy. Given the track record of HP's oft-maligned board, I'd guess the problem lies there.

There's another problem with outsiders: To make their mark and establish credibility in the company, they often break something inadvertently -- or sometimes just to prove that they can. In their own ways, both Fiorina and Hurd rode roughshod over HP's culture. Was HP better off when the "HP Way" was ripped up and replaced with the "Rules of the Garage"? In a fight between a CEO and a culture, the smart money bets on the culture.

And that's especially why Apotheker should bend his every effort to building a cadre of people who can succeed him and seeing to it that one of them does when the time comes. A company's identity is the ultimate, essential source of its competitive advantage. All this lurching from one leader to another, from one strategic thrust to the next, has disconnected HP's culture from HP's business. It's time to put them back in sync.

Photo courtesy Philo Nordlund, CC 2.0