Carly's P&G Outsourcing Bonanza Lives On

The much-maligned "Era of Carly Fiorina" at Hewlett-Packard wasn't all bad. She leaves behind what is considered the biggest outsourcing contract of all--with Procter & Gamble--which promises to continue to produce big dividends for both companies.

In addition to being the foundation of HP's outsourcing and services effort, the P&G contract demonstrates how the Latin American country of Costa Rica--emerging from third-world status where cattle still wander the streets--can quickly adapt to the latest technology advances, absorb the latest IT developments, and originate advances of its own.

When the outsourcing effort began in Costa Rica's capital city of San Jose, in 1999, P&G faced a "greenfields" dilemma: there were no fiber links to speak of in the country, just some random satellite connections. And while P&G had operations in 86 countries, Costa Rica wasn't one of them. Today, the operation in San Jose consists of four large, modern skyscrapers in an office park that would be envied in Silicon Valley or Boston's 128 corridor.

"Procter & Gamble envisions its partnerships as being deeper than just outsourcing," said the company's San Jose spokeswoman, Alejandra Cobb, in an interview, as she described P&G's relationship with HP, IBM, and some local Costa Rican firms. "We're not just a cost center, but a value-creation center, too."

Cobb, who is external relations manager of P&G's Global Business Services in Costa Rica, noted that the San Jose operation is instrumental in the company's Final Reporting Services, closing the books on financial reporting for legal entities, treasury, banking, and fixed assets. It's carried out with data delivered from HP and IBM.

The Procter & Gamble people still remember the day when Carly Fiorina showed up at P&G's Cincinnati headquarters with HP's services chief, Ann Livermore, after a flight on HP's Gulfstream. They helped nail down the $3 billion contract, and Fiorina seemed to exploit a very sensitive spot in the psyche of the $40 billion-plus P&G: the growing tension of dealing with retailing giant Wal-Mart.

"If you select HP, we will be your Wal-Mart," Fiorina is reported to have said at the time. "We were competing for a bet-your-business relationship." In addition to being a hard bargainer with its suppliers, such as P&G, Wal-Mart is increasingly making its own consumer products that compete with P&G.

While HP's contract with P&G has been undeniably successful, the firm is still struggling, in the broader world of IT computing, to make its services operation compete with outsourcing powerhouse IBM, as well as with a host of smaller, aggressive companies.

Much of HP's services operation had origins in its acquisition of Compaq, which, in turn built much of its services on its acquisition of the Digital Equipment Corp. "HP wanted to create a company that could compete with IBM," said HP-watcher Terry Shannon, describing HP's acquisition of Compaq. "That meant security, storage, servers, and software. That was the irony. Things certainly went awry."

Shannon, who edits and publishes industry newsletter "Shannon Knows HPC," said HP is "an increasingly-marginalized giant that's steadily ceding market share in key areas, including storage, PCs, and enterprise servers."

HP's services area is growing, and its $4 billion VMS operating-system business is blessed with high margins and continued growth, Shannon said.

"The services deal with P&G showed that HP was big enough to compete with IBM," Shannon said. "It was one of the successful parts of the Compaq acquisition." HP has continued to add new pieces to the P&G contract--for instance adding corporate-wide transactional accounts-payable operations in 2004.

P&G's Cobb said the transition of IT operations in San Jose from P&G went smoothly. "We all work in the same buildings," she said. "All we had to do was change badges."

The Costa Rican operation now works on sophisticated and innovative IT projects, using balanced-scorecard techniques, among others. The move into innovative and original tasks followed a P&G re-evaluation carried out 18 months ago, resulting in a decision to have the outsourcing centers bring more to the table in the way of strategic contributions.

The outsourcing utilizes a "follow the sun" strategy, in which other services centers in the U.K and the Philippines pick up IT operations as Costa Rica shuts for the day. The main servers remain in Cincinnati, along with P&G's main IT operation.