Under Mark Hurd, HP Innovation Nose-Dived

Last week, HP (HPQ) took another round of lumps. Both the SEC and U.S. Department of Justice expanded their probes into alleged kickbacks. In addition, Oracle (ORCL) CEO Larry Ellison somehow overcame his natural shyness to razz HP as having "slow and expensive" hardware.

So it was probably good for HP supporters to see that the company's annual report showed at least one smart move: an increase in R&D. For years under former CEO Mark Hurd, HP research and development spending declined. But the impact on business operations isn't clear until you look at the nearest proxy for innovation available for a major corporation: patents. The company's patent activity per year paints an interesting picture of just how sharply HP's traditional R&D activity plummeted as Hurd came into power.

To get an idea of how R&D spending fell, here is a table I put together from HP's annual reports. It shows R&D spending, both in absolute dollars and as a percentage of revenue:

To be fair, although unlikely, it was possible that this could have been true. There is no absolute requirement that a company spend a certain percentage of its revenue in R&D if it is to sustain levels of innovation. However, a significant reduction of investment in research and development suggests that something fundamental may have changed.

After a couple of years of watching the pattern at HP, I finally thought to examine the company's patent production. (Realistically, two years ago, there wouldn't have been enough publicly-available data to do this analysis.) This is far from a perfect measure, I know, and could indicate a change in legal budget or strategy. However, even then, you might expect some rough parity in obtaining legal protection for inventions when patents form as important a defensive and offensive strategic tool as they do in high tech.

Using the U.S. Patent and Trademark Office patent database, for each year, 2001 through 2010, I looked at both patent applications filed in that year and patent grants whose filing dated from the year. Either applications were still in process, had received a grant, or had been denied by the UPSTO or abandoned by HP.

If anything, you might expect that a greater percentage of patent applications had been abandoned from earlier years. Then again, the use of provisional patents, which allow a non-public temporary placeholder application that, to remain in force, must be followed by a regular patent application, could cause recent year to appear as having less patent activity.

Also, you must factor in that patent applications generally take upwards of 18 months to become public, so the years 2009 and 2010 should already seem significantly under represented. And so, although I have listed the years 2001 through 2010, focusing on 2001 through 2008 will give a more reasonable picture of HP's activity.

Even factoring out 2009 and 2010, that is an astounding pattern. The year 2005, when Mark Hurd became CEO, seems like the pivotal point. Starting then and accelerating afterward, when Hurd had full control (he also became chairman in 2006), HP's patent activity sank like a rock, the company restrained historic percentage levels of spending in R&D, presumably to help feed the earnings machine. Ellison may mock HP now, but if he eventually gives power of the purse string to Hurd, I wonder how long before Oracle's patent record exhibits a similar pattern.

Related:

• HP Earnings: R&D Edges Up While Product, Not Services, Drive Sales
• HP Earnings: Product Sales Up, R&D Down, Strategy Dubious
• HP: Earnings, Product Revenue, R&D All Drop Year to Year
• HP Responds on R&D Spending Observations