P&G's Deal With HP Grows

A year after handing over the bulk of its IT operations to Hewlett-Packard, global consumer products company Procter & Gamble Co. is expecting HP to do a lot more than keep its data centers humming. It expects HP to help it meet key business goals.

Global growth is one, especially in China. Retailers there are different from those in the West, so P&G needs a new way to service them, says Linda Clement-Holmes, P&G's director of infrastructure. Among other differences, Chinese stores tend to be quite small and carry far less inventory.

So HP is developing wireless handheld systems, based on Windows technology, for P&G's Chinese account managers. Using the handhelds, managers can quickly transmit a store's inventory requirements from the store floor to P&G warehouses--making it less likely the store will run out of Pampers diapers, Crest toothpaste, or Tide detergent. "The kind of challenges presented by China are similar to what we see in Eastern Europe and Africa," says Clement-Holmes, noting shops in those regions also tend to be small.

P&G also is working with HP to manage initiatives in radio-frequency identification and integration of acquisitions, as well as driving down operating costs.

P&G tapped HP for the $3 billion, 10-year IT outsourcing deal in May 2003, and it became effective following a three month "cutover" period. Earlier this year, P&G expanded the scope to include operation of its accounts-payable systems in a business-process-outsourcing arrangement. Terms weren't disclosed. To implement the IT outsourcing deal, HP took ownership of P&G data centers in Cincinnati; Brussels, Belgium; and Singapore.

Following what Clement-Holmes calls a "honeymoon period," HP and P&G began working on the more-strategic projects. With RFID, HP is developing a system to help P&G comply with mandates from megacustomers such as Wal-Mart Stores Inc., which has told its largest suppliers to ship cases and pallets of goods with RFID tags by Jan. 1. HP is both a user and a vendor of RFID technology--it began in late April shipping some printers with RFID tags, one of eight companies in a pilot test at Wal-Mart's Dallas-area distribution center. Procter & Gamble also is among the eight test companies.

HP and P&G won't divulge details of the work. However, HP says it's applying many RFID technologies and practices it plans to use internally. "We've already gone through a learning curve, so they won't have to," says Dan Talbott, HP's P&G relationship manager.

HP also is helping P&G integrate the operations of German hair-care maker Wella AG, which P&G acquired last year for about $5.7 billion. Clement-Holmes says much of the work involves integrating Wella's SAP system with P&G's. The addition of Wella also has brought P&G new types of customers, such as high-end salons, and Clement-Holmes says P&G and HP need to develop business processes and systems specific to serving those types of operations.

For the outsourcing effort to be a success, though, it needs to deliver results on P&G's bottom line.

The fact that P&G will pay a variable rate over the life of the deal should drive the savings, Clement-Holmes says. "I can dial up, and I can dial down," she adds. HP will charge P&G based on personnel usage and the amount of computer power the company consumes.

During a conference call in late July with financial analysts, when P&G disclosed fiscal fourth-quarter earnings per share increased 16% and gross margins improved 26%, P&G CEO A.G. Lafley said the outsourcing relationship already is "a nice little contributor to overhead reduction." HP has guaranteed P&G specific levels of savings under the contract, though P&G officials won't cite numbers. But most of the savings are expected to start kicking in next year.