Poor performance by HP Enterprise Group has cost general manager Dave Donatelli his role, as Hewlett-Packard announced that former software chief and current COO Bill Veghte will take over the Enterprise Group. As part of the executive shift, Donatelli has been re-assigned to working on early-stage technology, focusing on his strengths and background as a technologist.

“Overall, the enterprise group’s performance was very disappointing,” CEO Meg Whitman said on a Wednesday afternoon call with analysts to discuss the quarter. “Fixing execution across enterprise group will be Bill’s top priority in his new role.”

But that won’t necessarily be an easy fix. The enterprise business dipped nine percent year-over-year in the quarter ended July 31, with Whitman listing a litany of challenges including “business model challenges” and “extremely competitive pricing” for servers and storage that is likely to carry on into the current quarter.

Overall, revenues dropped eight percent year-over-year, from $29.67 billion a year ago to $27.23 billion this year. While those numbers disappointed and trailed Wall Street expectations, not everything was negative in the numbers – despite the revenue dips, the company posted $1.4 billion in net income, compared to a loss of $8.9 billion in the year-ago quarter.

The company refined its guidance for the full year, raising its low-range number for earnings from $3.50 to $3.53 per share, but dropping its high-range expectations from $3.60 per share to $3.57. But Whitman said the same pricing and business model challenges that drove down revenues for the third quarter are likely to continue, and suggested HP isn’t likely to grow

HP Enterprise Group: Software gaining ground?

In handing the enterprise group to Veghte, Whitman is perhaps hinting at the increasing importance of HP Software in the company’s enterprise business. Veghte’s background – first at Microsoft and then later heading up HP Software before ascending to Chief Operating Officer – is steeped in software expertise.

Although it’s a comparatively small business for HP, software is gaining in importance in the company’s overall pitch to enterprise customers, especially with high-profile acquisitions like Autonomy and Vertica now integrated into the fold. Indeed, software was the only major part of HP’s business to show growth for the third quarter. Although it posted a paltry one percent growth rate, that stands in stark comparison to the growth numbers shown by other businesses, such as PCs (down 11 percent), servers, storage and networking, business services (down nine percent), and financial services (down six percent.)

On the call, Whitman reminded analysts that the company is in the midst of a five-year turnaround plan, and said that changes were needed to “accelerate into the next turn.”

“I need to match talent to challenges,” Whitman said of the executive shuffle.

Whitman hinted that the company’s enterprise group had work to do both in terms of having “the right products with the right cost structure, as well as a simplified sales model.

Putting Veghte and his software acumen atop the HP Enterprise organization should mean a higher profile and tighter integration for software within the traditionally hardware-focused enterprise group. Among other challenges, HP has found it challenging to engage the full breadth of its hardware-centric channel with its software offerings old and new, and Veghte, with his experience at Microsoft, may be able to help accelerate that change. HP is not alone in this challenge, one that’s inherent in shifting the conversation from a hardware vendor to more of a complete solution sale. Rival Dell is in the process of refining its PartnerDirect channel program to include its software business, which has been growing quickly but is still relatively small, and served by a smaller partner base than the masses of solution providers offering Dell hardware.

Future CEO?

Donatelli has led HP’s Enterprise Group, a fusion of its Enterprise Servers Storage and Networking (ESSN) group with HP Software and technical services, since joining the company from EMC four years ago, and his named was bandied about as a CEO candidate on the heels of the Leo Apotheker experiment.

But with his steady progression through the ranks, Veghte is likely to be the name getting much more mention as the company’s next chief executive. Whitman has said she’s committed to staying with HP through the transition period, but told partners at the company’s Global Partner Conference earlier this year that she’d like to see the company’s next chief executive come from inside the company, after introducing a string of outsides that includes Apotheker, Mark Hurd, and Carly Fiorina.

Donatelli is not the only top executive to be shuffled. The company also announced that chief marketing officer Marty Homlish will become chief customer experience officer, while marketing will full under the purvue of chief communications officer Henry Gomez. And earlier this year, Whitman gave former Printing and Personal Systems (PPS) group chief Todd Bradley a new “strategic assignment,” and named Dion Weisler the new head of PPS. Like Donatelli’s new role, part of Bradley’s new assignment involves identifying, working with, and potentially acquiring technology startups to bolster HP’s lineup.