Live Dispatch: Transforming Indirect Procurement at HP

I thoroughly enjoyed listening to Larry Welch's keynote at Ariba LIVE (NASDAQ: ARBA). Larry is Vice President, Indirect Procurement, at HP. For those MBAs reading this blog that think that academic training is the best route to the corner office, think again. Larry got his start in the mailroom. He began his presentation by describing the culture of innovation and growth at HP (I will leave my cynical hat at the door for this post, making no Carly references or jokes). Needless to say, HP has recovered well from its flirtation with disaster during Carly's reign, and has returned to its R&D roots, churning out 11 patents a day of late. It's also a cash machine, generating $6.6 billion in free cash flow from operations annually.

From a Spend Management perspective, HP's procurement budget is $67 billion annually. Individual business groups within HP manage their own direct materials procurement for spend that is unique to their business. Within these "decentralized" buys, direct spend breaks down in the following ways: $14.9B for imaging and printing, $11.5B for personal systems and over $10B annually for technology solutions. Central procurement manages $15.4 billion of direct spend across the operating units, $13.2 billion in indirect spend, and $1.4 billion in logistics procurement. In the past decade, HP has implemented a number of processes and programs to better manage spend. This includes consolidating and outsourcing transactional processing, building tactical purchasing centers, and creating a distributed workforce of experts for strategic procurement and shared services. The results they have achieved through these various initiatives have created a "self-funding" investment model that drives accountability and team member to think about actual, bankable cost reduction rather than just negotiated savings.

Technology has played a key role as well. In the late nineties, the indirect procurement group within HP purchased and built a combination of off-the-shelf (including Ariba Buyer) and home-grown solutions. This included building its own data warehousing solution while buying sourcing and contract management capability. The combination of these investments saved $100 million despite "the duck-tape" approach. But this was note enough for Larry Welch and his indirect team. Now, HP is transitioning entirely onto a new Ariba platform, ditching the home-grown and individual best-of-breed approach

These investments have saved HP over $100 million dollars, despite the duck-tape; but now HP is transitioning onto Ariba's product, ditching the home-grown and individual best-of-breed approach to save even more. The move to a single platform came out of a Hackett analysis that benchmarked HP’s indirect procurement as "world-class" but still found much opportunity to consolidate systems and information, creating new levels of process and operational efficiency. As a result of this analysis, HP went through a formal RFP process with vendors to standardize on a single platform, and ultimately decided to commit to the Ariba platform.

HP is moving forward on its savings-funded investment model and is justifying its new Ariba platform investment based on sourcing ROI across indirect categories. In 2006, HP plans to do 1000 sourcing events with Ariba to drive savings (it was not clear during the presentation if these are self-service sourcing events or "Full-Source" engagements). They plan to follow this aggressive sourcing foray with new contract management and compliance capabilities to capture identified savings. By 2008, HP's indirect procurement team has signed up for an additional $325 million in incremental savings based on the additional functionality and "integrated spend management" capabilities of the Ariba platform.

Jason Busch

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