CAJOLING A GIANT
How finance is helping Hewlett-Packard ride high in Asia.
By Tom Leander

After years of turmoil and scandal, Hewlett-Packard could be forgiven a sense of exhilaration. At US$104 billion in sales, it has surpassed IBM as the world’s biggest tech company, and is on a roll with a 13 percent rise in revenues in the first quarter of 2008—the same period when global woes socked corporate icon GE.

Still, listen to its executives talk—from CEO Mark Hurd down to the Asia-Pacific finance staff—and a certain institutional modesty emerges. Managers rarely stray from talking about the basic strategy outlined by Hurd, and in the simplest terms: There’s an addressable world technology market of US$1.2 trillion. You have to build scale in the key markets where HP makes its money—PCs, imaging and printing, and services. To do this, you have to save money on operations and give it to sales.

It sounds simple enough. But apply this formula to a company the size of the Palo Alto giant—HP posts about US$8 to $9 billion in operating profits on costs of US$91 billion—and you’re looking at a monumental and complex effort. Sitting at the center of this project is HP’s global finance team, which is drawing on all of its skills to cajole, persuade, and push the world’s seventh-biggest company into a new strategic position.

“Finance has taken a major role in the redeployment of capital in the business,” says Tom Iannotti, until recently managing director for Asia-Pacific and Japan at HP (now head of HP in the Americas). “First they did it themselves, providing a benchmark for the company,” he adds, referring to a cost-reduction effort in finance. “They were obliged to lead by example. Then they helped us identify the opportunities and quantify the impact of new investment.”

Gilbert Ponniah, controller of HP for Asia-Pacific and Japan, stresses his gatekeeper role in the new order, in which finance has to be firm—if not Solomonic—when weighing in on how resources should be spent. “Because you have limited dollars, you have to have trade-offs,” he says. “That means making judgment calls based on the business strategy and operating framework, rather than on who shouts the loudest.”

“Great companies have done this before—GE 30 years ago, and IBM under Lou Gerstner in the early and mid ‘90s,” says David Axson, president of Sonax, a finance consulting firm, who has worked with HP over the years. “The scale of what HP is trying is significant,” he adds. Axson is quick to point out that it’s one thing to reallocate resources to sales, but another to find the talent and structure to make this happen. Just as important, it’s not easy to build the skills in finance required to garner growth and steer it in the right direction.

Busy Man

HP is sensibly, even admirably, diversified. Its success has kept its structure from harsh scrutiny. Critics look at Citigroup—smaller than HP at US$82 billion in revenues—and insist that it would create more value by being broken into pieces. Such a big, diverse company is almost impossible to manage well. But under Hurd, share price and earnings have boomed (see chart, page 26), and analysts have viewed HP as an exception to the law of nature that big must be broken up.

Part of this is due to the cross-selling and scaling opportunities inherent in HP’s three main businesses. Part of it can be pegged to Hurd’s no-nonsense, back-to-basics leadership in the wake of former CEO Carly Fiorina’s turbulent tenure, the long, troubled digestion of the 2002 Compaq merger, and the 2006 corporate spying scandal that rocked HP’s board and tarnished its image. But much also has to do with the focus on costs and the diversion of capital to sales, with finance as the guiding spirit.

HP has a high quotient of long-time employees, and Ponniah is no exception. He joined the company 18 years ago from NCR, and today is the region’s senior finance executive. He’s tracked the company’s expansion in Asia, where HP has had a long-standing presence. Becoming savvy about Asia was important to the company early on. HP has been operating in China since the early 1980s. Today, about 17 percent of its global revenue comes from Asia. HP is growing fastest in Asia, at 22 percent, compared with 15 percent in Europe, the Middle East and Africa, and 8 percent in the Americas.

Ponniah is soft spoken and conveys an air of helpful bonhomie when he guides guests through the long, colorful corridors of HP’s Singapore offices. The ease is deceptive. His job has gotten busier since 2005, when Hurd joined and tapped Catherine Lesjak as the global CFO. Like GE, HP is rich in committees. Ponniah chairs the regional Finance Leadership Board, and sits on committees overseeing strategy and risk.

He’s also in constant meetings with the leadership for HP’s three primary units—including Iannotti (and more recently Balu Doraisamy, who took over from Iannotti in February), Chris Morgan, head of the Asia-Pacific imaging and printing division, and Adrian Koch, who runs the personal systems group in the region. Ponniah takes part in discussions whenever a unit mulls M&A. He’s the conduit of finance policy and mood from headquarters in Palo Alto.

At HP, finance’s studied informality is part of everyday operating life. Quarterly, CFO Lesjak gathers the global finance team for a “coffee meeting” teleconference and discusses what Wall Street is saying about HP. Ponniah then leads an Asia-Pacific coffee meeting for finance, translating the message down to the troops. On top of this, committees on governance, credit, process, and more all report into him. As for closing the books, “We take that for granted,” he says. “It’s a lot of work, but I expect to see it happen on the given day.”

Addressable Markets

Ponniah sees his role as strategic, and mention strategy in HP under Hurd and you’re likely to be talking about cost.

In a company the size of HP, taking costs out requires a first mover, and Hurd tapped finance as the instigator. “Finance stripped out its costs by way of example to other parts of the company,” says Ponniah. HP doesn’t reveal its cost of finance operations, but Ponniah says that costs have been reduced by double-digit percentages year-on-year over five years in the Asia-Pacific region. [The Hackett Group, which establishes benchmarks for cost of finance, defines world-class performance as 0.67 percent of revenues.] This was accomplished by consolidating datacenters from 85 to six worldwide, and by a reorganization of regional finance centers, which helped standardize activities such as reporting across businesses.

This process was already underway when Bob Wayman, former CFO, handed the reins to Lesjak in 2005. She accelerated it and has now focused on a second, intriguing, step in finance’s role in the company’s shift of resources. CEO Hurd dramatically shifted responsibility for both cost and investments back to managers—and now they need finance to help illuminate the choices.

“Business managers didn’t own 60 or 70 percent of their own costs,” says former Asia-Pacific managing director Iannotti. With new accountability came new power to invest, to put capital closer to the people who had a daily view of the opportunities. As Iannotti says, “accountability can be done, but it has to be right.”

What does getting it right in real terms mean in fast growth markets like India, China, or Indonesia? “Figuring out how many buyers are out there,” says Iannotti. “Do we show up, do we have competitive offerings? More than half the time we weren’t showing up. Assuming we have competitive products, if we show up more often, we ought to win more often.”

Most important, Iannotti says, is for finance to “be the honest broker in this conversation.” But being that honest broker involves talents that aren’t always associated with finance—retrieving tough-to-get information, analyzing it, and driving the point home to busy and aggressive operating managers. This is no small job when dealing with managers determined to grow their businesses.

Consider the trade-offs for HP’s lucrative imaging and printer division. HP has a 47 percent share of the global printing market, and its imaging and printing unit accounts for 40 percent of the company’s profit. But the printing business is changing. HP has targeted commercial printing—as opposed to printing for home and office—as the likely area of greatest growth. It plans to offer customized printing for everything from wine labels to ads that cover buses and buildings. HP is also moving its focus from grabbing individual-printer market share to building on relationships with customers that print the highest total number of pages.

There’s a risk in all this—inkjet and laser printers still generate the bulk of HP’s revenue in this business and taking the eye off of the ball might be a mistake. And competition in commercial machines is already stiff, with HP facing fierce players like Japan’s Canon and the Netherlands’s Oce. New businesses will force HP to focus more on customer service than it has in the past—and that’s an area where rivals like Xerox already excel.

Meanwhile, pressure is being heaped on the imaging and printing group from within. With the PC market expected to slow worldwide, the imaging and printing business will have to find new ways to make money to maintain its current annual growth of between 5 and 6 percent and its 15 percent profit margins.

That’s where finance comes in. To help the imaging and printing group in Asia, Ponniah and his team have to help establish which customers yield the best margins. “Each printer is not worth the same to us,” says Chris Morgan, head of the imaging and printing group. “We don’t just look at unit share.” The customers Morgan wants, in other words, are the ones that use printers all the time, and who have expanding businesses that yield yet more customers. Making sure that HP is getting those customers involves knowledge that’s collected and filtered through finance.

Morgan says that he’s always interested in boosting sales coverage, but in the way that extracts the most value. In fast growing but relatively underdeveloped markets in Asia, the right approach may be to expand sales coverage now, but set goals for long-term payback. This requires fixing realistic intermediate goals to ensure that the business is progressing, and keeping a close eye on growth in the business “funnel.”

It also means looking at the value of a customer relationship in a different way. Morgan’s imaging and printing unit doesn’t just sell printers, but systems of printers and services associated with printing—customers may outsource some activities, such as printing labels or ads, to HP. The division needed a clear view of the value likely to emerge out of these more complex sales.

HP was already using a self-designed computer software model that helped managers make pricing decisions for stock keeping units, or SKUs—a standard numbered identifier, or tag, given to products and services—for its products. But it didn’t capture the true value of the customized solutions that Morgan’s group was increasingly selling. Finance upgraded this analytical tool, which can now model the mix of SKUs in a customized package, allowing a more sophisticated view of pricing. This has improved analysis of revenues and margins on a customer-by-customer basis, helping managers choose the best match of resources to devote to customers in a given market. The program, developed in Asia, has been adopted in HP’s other territories.

Magical Thinking?

For now, the effectiveness of all this has to be taken on trust. The actual results at the unit level in a given market aren’t revealed to questioning investors. But HP is growing faster in Asia-Pacific than most tech companies. So the approach must be working, right?

Experts caution, however, that it’s hard to sustain momentum in a reallocation of capital to sales on this scale. It requires a deep understanding of customer lifetime value, a metric developed by the telecom and power utilities industry to capture the long-term value of a sales relationship. “To get an intelligent view of customer lifetime value and how resources should be allocated to sales, you need constant refreshment of insight,” says Simon Littlewood, president of Asia Now, a Singapore-based consulting firm. Elements like the cost of acquiring customers and the costs of servicing and supporting them—whether directly or on a shared basis through channel partners—change constantly.

Then there’s the issue of talent. It makes good sense to take finance people out of the back office, where some of the jobs can be standardized, and teach them the more strategic skills demanded as partners of sales. But those skills take time to learn, and not all back-office employees can make the switch.

“It’s all well and good shifting budgets,” says David Axson, “but getting people to change is a little harder. They either need retraining or there needs to be a substitution of finance for customer talent.” There’s also the risk of neglecting the businesses that are building value today. This happened, he says, at 3M, another diversified U.S. technology company. 3M began concentrating more on sales and less on products. It was overtaken by competitors that made wiser investments in R&D.

CFO Lesjak appears to have thought this through. The worldwide plan for finance transformation is aligned with the company’s need for a new kind of finance acumen. The regional finance leadership boards are setting up what Ponniah calls “business analysis centers of excellence.” In them, there is a “core of people who receive training, learning how to do this after ten years of transactions.”

Within these hubs, analytics teams have three areas of inquiry. They sift through internal sales data and data from independent sources to define the size of the market. They produce a view of the scale—sales resources and support—needed to achieve a stated goal, comparing this to the actual sales coverage in the area. This involves having a working, accurate sales coverage model, which defines desired margins based on such inputs as field selling costs and the number of sales people per account.

Next, there’s performance monitoring and corrective action. Ponniah says that if this is done right, you should be able to “tell where every single dollar brings the best return, where sales is performing to expectation and where it’s not, where you need to improve efficiencies, orders per sale, per territory, and where you may need more resources.”

Benefits of Scale

The danger in all of this is that the process becomes bureaucratic. For one, a flood of information can drown accountability. It’s refreshing, then, to hear Adrian Koch, head of the Asia-Pacific personal systems group, talk about the benefits of the transformation.

“The scale increase helped our business,” says Koch. “We needed scale not only in supply chain, but in marketing and channels. Customers were looking for vendors who have the full portfolio.”

Following the Compaq merger, the personal systems group has become HP’s largest, accounting for 38 percent of the company’s revenues in the first quarter this year. The PC division’s growth represents a remarkable turnaround. At the time of the merger, the combined results of HP’s PC division and Compaq amounted to a US$800 million loss. Its global profits in 2007 hit US$2 billion on US$36 billion of revenues. HP’s personal systems division is number two in PC sales in the Asia-Pacific region, after Lenovo.

The Compaq merger, which imposed demanding cost savings and synergy targets on the entire company, has now been fully digested. It’s a common observation, with the 20/20 hindsight of analysts, that Fiorina had the right idea. But it was Hurd’s method of making managers accountable under the new structure that enabled the combined businesses to take off. Koch says that this has played out well in Asia. “The two former companies had different strengths and weaknesses. We were able to focus strongly on execution.”

Following Lenovo’s purchase of IBM’s PC division in 2005, critics said that Lenovo had made a huge investment in a sunset industry, and that IBM was wise to get out. To Koch, laptops and PCs are less of a sunset business in Asia, but a maturing business that needs to be approached in a new way. Part of that approach is in understanding the customer lifetime value and how to interact with the customer throughout its duration.

“It starts with experience before you even bring a product out. You do surveys, customer feedback installations. People purchase through channel [partners], so another important area is channel satisfaction surveys,” says Koch. The process can feed ideas back into R&D.

In poor, but fast-emerging, countries throughout Asia, environmental conditions can matter hugely to purchasers. A student may need a PC in an area of scattershot power supply in Sumatra, or a technician may need to bring a computer to a power plant over rough, dusty roads in Bangladesh. The company was an early mover in producing equipment that drains less power, giving it an advantage as environmental standards gain prominence.

The point is that the diversion of capital into marketing “scale” has made Koch’s unit more attuned to the Asian customer and has not leeched attention from R&D. HP has a large R&D presence throughout Asia, including China. Koch says that a new idea can go into the system and emerge on the shelves as a product in eight weeks.

Koch, too, has a yen for simplicity. The diversion of resources and the complementary structure developed by finance to support allows him to “define the strategy and execute like hell,” he says. For HP’s managers, however, simple doesn’t mean easy, and no one is taking a victory lap.

There is a sense that accountability, with finance as the arbiter of investment and watchdog over value, has given managers a new freedom to succeed. Iannotti says that attitude has always been in the company, and that the changes rippling through finance and operations have drawn it out.

“It was there to be tapped,” he says.

Tom Leander is editor-in-chief of CFO Asia