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HP challenges the big guns

By Graeme Hunt

Friday 29th August 2003

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Hewlett-Packard Co is building on its recent $US3 billion outsourcing coup. Editor-at-large Graeme Hunt has been to see the company Bill and Dave built

It's just before 1 o'clock at Hewlett-Packard's laboratories at Palo Alto in the heart of Silicon Valley. Outside it's a dry 79šF (26šC) with blue skies ­ the sort of summer's day Northern Californians take for granted.

Inside the labs ­ the former corporate headquarters ­ the modest cork-tiled offices of the company's founders, built in 1958, are just as Bill Hewlett and Dave Packard left them.

The lino that runs through the rest of the labs has been covered by carpet squares and much of the floor space is divided by half-partitions. But the offices, including the presentation room, have a 1960s feel about them which makes Kiwis like me feel at home.

I'm about to be invited into Mr Packard's office ­ the corporate equivalent of a visit to the White House ­ when the dulcet tones of chairman and chief executive Carleton S Fiorina come through the loud-speaker system.

Absolute hush descends ­ the sort of reverence once reserved for royalty in New Zealand ­ and my host, labs media relations manager Dave Berman, gesticulates that I take a chair. No one breaks the silence.

The message from the feisty Ms Fiorina (47) ­ known throughout the company as Carly ­ is a strange mixture of confidence and disappointment. It's third-quarter results time and HP has lifted revenues 5% overall in a tough economic environment, boosted profit on a non-generally agreed accounting principles (Gaap) basis for the quarter by 61% year-on-year and non-Gaap diluted earnings per share by 9USc year-on-year.

Even when Gaap is applied, HP has performed OK but, as Carly well knows, somewhat short on predictions. The analysts and the financial press, who watch her like a hawk, are going to eat her for the next day's breakfast.

So, anticipating a tech-stock slaughter on Wall Street ­ it comes later in the week ­ Carly is measured and contrite. No hype here.

"The third quarter is always tough but we still should have done better," she tells her team from somewhere on the corporate ether.

Her crime, as far as analysts are concerned, is that she didn't deliver on the promised growth in the personal systems market.

"Aggressive pricing," otherwise known as discounting, cost HP dearly in PCs ­ $US5 too low on a PC price trimmed $US25 million off revenues, executive vice-president (personal systems group) Duane Zitzner later tells me, adding that HP is "doing OK [and] very pleased with our progress since the merger."

But for now this is Carly's show and, in American terms, it's far better to fess up to the experts than being made to admit wrong. Carly decides to fess up.

It is a setback but not a crushing one for the woman who steered HP's $US18.9 billion takeover ­ HP prefers to call it a merger ­ of Compaq Computer Co, completed in May last year.

The sad thing is that some of the company's business units, notably imaging and printing, services and even part of the personal systems group (notebooks) have held their own. But this is corporate America post-Enron and WorldCom; nothing but absolute honesty will do and for an iconic company such as HP, a bare-all presentation is the norm.

Carly says she is confident about the company's strategy and the actions it is taking and expects to deliver a "strong fourth quarter with every one of our businesses profitable."

Until August 19 Carly had been walking on water. The previous four quarters since the Compaq merger were good and the merger itself, criticised at the time by analysts and attacked by Bill Hewlett's grandson, dissident director Walter Hewlett, appeared one of the more seamless in history.

Far from leading to widespread closures, rationalisation and a culling of the lesser partner's (Compaq's) staff, the merger seems to have been a true amalgam of common sense and strategic benefit. Fifteen months after it was completed, the media frenzy and Walter Hewlett's proxy fight have all but been forgotten.

In fact, they would have disappeared completely had not Deutsche Bank's asset management arm been done over by the Securities and Exchange Commission for failing to disclose a conflict of interest during the merger.

This glaring omission ­ Deutsche Asset Management failed to tell clients its investment bankers were advising HP on the merger when, at the last moment, it voted client shares in favour of the merger ­ earned it a piddling $US750,000 fine from the SEC. But the timing ­ the same day HP reported its third-quarter results ­ casts an unwelcome shadow over HP.

Uli Holdenried, a German-born senior vice-president of HP who leads the managed services business, says no one in the company talks about the merger now. But to current and prospective customers, the HP merger "experience" has been positive.

"The merger had a couple of things other companies can learn from. We can help you create this adaptive enterprise ­ not how you run the technology but how you run the company," he says.

Without the experience of the merger and the giant enterprise it created, there is no way HP could have won Proctor & Gamble's IT outsourcing business ­ a 10-year contract worth $US3 billion.

Among industry coups, this was a biggie ­ the outsourcing of the most important part of P&G's back office, the worldwide computer systems network. For strategic reasons P&G had planned to outsource everything in the one contract and was close to signing a $US8 billion deal with outsourcing specialist EDS. But at the last moment it changed course, breaking the contract into pieces. This opened the market to outsourcing big league's Johnny-come-lately, HP but HP still had to convince P&G it had the wherewithal to match the gold-plated service on offer from EDS and IBM.

On April 11 P&G delivered a stunning blow to EDS and IBM: it would award the contract to HP. The anecdotal reasons were simple: HP was a newcomer, it was highly focused and, according to US business magazine Fast Company, "very, very hungry."

Price helped HP to some extent but Mr Holdenried puts the success down to "trust, openness and teamwork."

Dan Talbott, P&G bid manager from HP, says lower cost, better service and commitment to innovation (HP's R&D budget tops $US4 billion a year) counted heavily in HP's favour but "shared values" between HP and P&G were also important.

"P&G did really look at the HP story and say they are trying to do the same things as we are," he says.

Signing a contract is one thing; delivering the goods, quite another and HP had little time in which to work.

"We signed the contract on May 5. We assumed operation on August 1 and from the customer's perspective it was flawless," Mr Talbott says.

"We put a considerable amount into transitional planning to make it [the handover] a non-event. Things continued to function as expected."

HP's expert on what the company describes as "business transformation," Joe Hogan, says no one factor led to HP winning the P&G contract.

"It was a combination of things that occurred. The fact we merged the two companies gave us the capability we needed to approach P&G the way we did," he says.

"I wish I could name the silver bullet [that won us the contract] because I would love to coin it and sell it."

P&G, likewise, attributes HP's contract success to several factors.

Linda Clement-Holmes, director (infrastructure services) with P&G global services and an IT guru in her own right, says HP was P&G employees' preferred outsourcing partner. She ranks staff satisfaction up there with "competitive costs" and HP's ability to provide the same or better service than P&G was providing.

"You have to take a great leap of faith and you have to do a lot of due diligence of your own," she says.

So far that faith has proved well founded. P&G set up a Y2K-type unit in the event of problems at handover time but there weren't any.

"Overall the transition went very smoothly," Ms Clement-Holmes says.

For P&G, of course, outsourcing has to work well.

With 141,000 employees worldwide and business in more than 160 countries, "computer problems" excuses just won't wash. But then, the relationship between HP and P&G isn't entirely virgin.

HP has long been a major IT supplier to P&G but, until the merger with Compaq, was never a serious contender in big-ticket outsourcing.

HP's keenness to impress me with the strength of its new relationship with P&G has more to do with hard business than corporate pride.

HP is bidding for Fonterra Co-operative Group's huge IT outsourcing business ­ a plum contract although tiny compared with the P&G deal.

Fonterra is saying little about the bid but, according to the Dominion Post in July, it is a neck-and-neck battle between HP and EDS.

The contract is said to include all of Fonterra's infrastructure, including desktop, local area networks, servers and voice and data networks across 327 locations in 30 countries.

The same report said Fonterra would make a decision on the contract by the end of September.

This is huge deal in this part of the world and one that will boost the victor's standing enormously in Asia-Pacific.

Watch this space.

Graeme Hunt travelled to California as a guest of Hewlett-Packard NZ

Bond Offer: Infratil Ltd, 7.2 year & 10.2 year unsecured unsubordinated bond


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