HP 2008 Annual Report Download - page 30

costs or unanticipated delays in connection with the performance of these engagements,
including delays caused by factors outside our control, could make these agreements less
profitable or unprofitable, which would have an adverse affect on the profit margin of our IT
services business.
• Some of our IT services agreements require significant investment in the early stages that is
expected to be recovered through billings over the life of the agreement. These agreements
often involve the construction of new computer systems and communications networks and the
development and deployment of new technologies. Substantial performance risk exists in each
agreement with these characteristics, and some or all elements of service delivery under these
agreements are dependent upon successful completion of the development, construction and
deployment phases.
• Some of our outsourcing services agreements contain pricing provisions that permit a client to
request a benchmark study by a mutually acceptable third-party. The benchmarking process
typically compares the contractual price of our services against the price of similar services
offered by other specified providers in a peer comparison group, subject to agreed upon
adjustment and normalization factors. Generally, if the benchmarking study shows that our
pricing has a difference outside a specified range, and the difference is not due to the unique
requirements of the client, then the parties will negotiate in good faith any appropriate
adjustments to the pricing. This may result in the reduction of our rates for the benchmarked
services that could decrease the revenues and profitability of our IT services business.
If we fail to comply with our customer contracts or government contracting regulations, our revenue could
suffer.
Our contracts with our customers may include unique and specialized performance requirements.
In particular, our contracts with federal, state, provincial and local governmental customers are subject
to various procurement regulations, contract provisions and other requirements relating to their
formation, administration and performance. Any failure by us to comply with the specific provisions in
our customer contracts or any violation of government contracting regulations could result in the
imposition of various civil and criminal penalties, which may include termination of contracts, forfeiture
of profits, suspension of payments and, in the case of our government contracts, fines and suspension
from future government contracting. In addition, we are currently, and in the future may be, subject to
qui tam litigation brought by private individuals on behalf of the government relating to our
government contracts, which could include claims for up to treble damages. Further, any negative
publicity related to our customer contracts or any proceedings surrounding them, regardless of its
accuracy, may damage our business by affecting our ability to compete for new contracts. If our
customer contracts are terminated, if we are suspended from government work, or if our ability to
compete for new contracts is adversely affected, we could suffer a material reduction in expected
revenue.
The revenue and profitability of our operations have historically varied, which makes our future financial
results less predictable.
Our revenue, gross margin and profit vary among our products and services, customer groups and
geographic markets and therefore will likely be different in future periods than our current results.
Overall gross margins and profitability in any given period are dependent partially on the product,
customer and geographic mix reflected in that period’s net revenue. In particular, IPG and certain of
its business units such as printer supplies contribute significantly to our gross margin and profitability.
Competition, lawsuits, investigations and other risks affecting IPG, therefore may have a significant
impact on our overall gross margin and profitability. Certain segments, and ESS in particular, have a
higher fixed cost structure and more variation in gross margins across their business units and product
24