Hewlett-Packard Watchers Fret R&D Shift

A nagging question has dogged Mark Hurd's revival of Hewlett-Packard(HPQ Quote).

While Hurd's knack for cutting costs and boosting profit margins has won him goodwill on Wall Street, H-P's chief executive has yet to articulate how he intends to grow the company's top line beyond the mid-single-digit level.

Investors perusing the company's latest annual report found more cause for concern: For the fifth year in a row, H-P's spending on research and development declined as a percentage of total revenue.

H-P spent $3.6 billion on R&D in its fiscal year ended Oct. 31, 2006, or 3.9% of revenue. That's hardly chump change, but it's down from the 6% that H-P spent on R&D in 2002.

In Silicon Valley, where innovation and success are synonymous, easing up on R&D is regarded as suspect, if not downright derelict. And while H-P's newfound focus on efficiency and cost savings has served it well, its approach to R&D raises questions about whether the company is shortchanging its own growth prospects.

Shane Robison, H-P's chief strategy and technology officer, says the company has not backed off its commitment to R&D and argues that looking at R&D spending as a percentage of revenue does not tell the whole story.

H-P's profile has changed over the past few years, as the company relies more on industry standard hardware and differentiates itself with software, meaning that the bulk of R&D efforts now go to software. Five years ago, H-P's R&D investment was 70% hardware-related, and 30% went to software; the numbers are now reversed. Funding software R&D is inherently less expensive than funding hardware.