Carly Fiorina didn't bring a bevy of lieutenants with her when she headed west to Hewlett-Packard Co. from Lucent Technologies Corp. in July 1999. In the finance area, she counted on CFO Robert Wayman, entering his fourth decade at HP, to reinforce her message that the transformation she envisioned would draw on--and not divert--HP's essential inventive culture.
But that was only the start of her reliance on Wayman. "He has an excellent understanding of HP's history, what we have done, what we need to change, and how the changes might be implemented most successfully," says Fiorina, who also values "his credibility with the senior team."
Their collaboration has paid off so far at the venerable 61-year-old company, literally started in a garage by William Hewlett and the late David Packard. Revenue growth doubled to 15 percent in its past fiscal year (ended October 31) as the nation's second-largest computer maker neared $50 billion in annual sales. Meanwhile, Wayman's asset management has reduced the percentage of revenue that net property, plant, and equipment represents in the past 2 years from 13 to 9, while holding the inventory-to-sales ratio steady at 12 percent.
Against this backdrop, Fiorina, 46, a Stanford University graduate in medieval history and philosophy, has launched a dramatic overhaul at HP. Last year, she sharply reduced the number of separate business divisions, stripping dozens of managers--albeit without layoffs--of the units they once headed. In September, her ambitions for IT services became clearer when HP announced plans to acquire the consulting business of PricewaterhouseCoopers LLP for $18 billion. The decision may have been hers, but it will be Wayman's job to bring the two diverse companies together. And the task must be accomplished as HP battles some of the keenest competitors in the New Economy--companies such as Sun Microsystems Inc. and Dell Computer Corp.
A healthy personal chemistry between the 55-year-old Wayman and his boss--whom he describes as "a CFO's delight" because of how she blends her vision with a bottom-line sensibility--seems to augur well for the company. Boeing Co. CEO Philip Condit, an outside Hewlett-Packard director who has watched Fiorina and Wayman work together this past year, says their mix of metered experience and boundless imagination represents a real strength. "I believe that a great team is not made up of a bunch of people who are all the same," Condit says. "There are huge challenges" facing HP, "but the only way to avoid those is to go hide in the weeds somewhere. And they are very definitely not doing that."
CFO magazine senior editor Roy Harris recently sat down with Wayman at HP's Palo Alto, California, offices to discuss his working arrangement with Fiorina, HP's culture, and the plans they are implementing.
You are the senior member among the Hewlett-Packard executives that Carly Fiorina left in place after her 1999 appointment. As such, do you see yourself having a special role here, carrying on some of the corporate culture at HP?
It's hard to describe yourself as special, at least it is for me. But there is no question that I'm an old-timer. I've been with the company for 31 years. But what's most important, as all of your readers know, is that at good companies, the CFO and the CEO must be joined at the hip, or at the very least the ankle.
So going forward, I think that Carly and the board expect me to play a role helping integrate her perspective, her fresh style, her desire to make needed changes within HP, along with what the organization needs, and what the organization is capable of achieving in a certain time frame.
Things have happened at HP in a very short amount of time. Last year's drive to reduce the number of business units affected all 86,000 of your employees. And the decision to acquire PricewaterhouseCoopers's consulting line marks a definite alteration of HP's vision. In terms of the changes you've seen over your tenure, how do you rate the past year?
I rate it very high, in terms of what this organization has accomplished. We've seen a very nice uptick in our growth rate. We've made some important strategic decisions. You referenced the Pricewaterhouse acquisition, but we've also recently announced an investment in a small printing company, Indigo, a leading provider of digital color printing systems. The alliance supports HP's printing E-services strategy, and will help us grow in the digital printing and publishing marketplace, beyond inkjet and laser printing.
How did the new CEO go about paving the way for such changes?
Shortly after Carly arrived here, we started discussions on a variety of matters, including the strategy of the company and the structure that would best support that strategy. We made some major announcements last fall about changing from a series of mostly fully integrated, product-focused businesses to a more dis-integrated approach, with pieces of the organization focused on what we term "product generation," and other pieces focused on the customer-facing activities--the sales and support activities. We believe this will lead to better execution in developing competitive products, and better customer relationships.
What was the rationale behind the internal reorganization?
We had come to the view that we were overspecialized, in terms of how we organized our activities. We had 83 product lines within the company, each with its own P&L, and each with its own general manager. We have now reduced that number to 17 product categories, as we call them, each of which is made up of a number of those product lines. And as a part of this, we are rationalizing management structures and overhead structures. Our marketing organizations, for example, which were decentralized among the 83 units, are now being consolidated.
The other focus of cost management is on the infrastructure side--real estate, finance, HR, information technology, and those kinds of capabilities. With Carly's arrival, we took a fresh look at what our options were for ways of running the business. One conclusion was that we were paying too high a price for our decentralization. So we have embarked on a number of initiatives to improve our infrastructure cost based on a new model that says that everything, if at all possible, will be global, and leveraged wherever it makes sense.
What effect will all this have on finance?
This has a huge impact on our financial reporting system. So we've had a major initiative under way this year to introduce what we call a three-dimension reporting matrix--one dimension being a product category, the second a customer category, and the third geography. And starting November 1, we will be able to slice the entire financial results of the company by geography, by 17 product categories, and by the two customer-facing organizations we have at this point. One is in the consumer space; the other is the business and enterprise space.
What system is this replacing?
It replaces a series of fully integrated P&Ls, which looked at global product-line results. We had a worldwide result for each of the 83 product lines. That was the core financial reporting mechanism that we had utilized within the company--quite successfully, actually--for a number of years.
When you reduced the number of business units, it must have caused some real dislocation. From the finance perspective, what have you done to ensure that people are not disaffected by these changes?
Once you make an organizational change like this, the way decisions are made and are supported by the finance function has to change as well. So we have had several efforts under way. One is related to the finance organization structure; we have moved financial people from one part of the organization to another, and we have consolidated them to some degree among the 17 product categories.
But we also needed new tools for these people, who are now looking at decisions differently. We have developed over the past nine months or so some pricing and profit evaluation tools that the new units can use in running their businesses. We have a cost/profitability analysis tool that shows revenue and gross margin down to the product-number level, scalable across product lines with two-year trend analyses, for example. Then, we have an order-gross-margin-by-sales-rep tool that can be broken down by hardware, support services, and the like. And we can also measure profit contribution by sales channel and customer.
At the beginning of the last fiscal year, Fiorina said you'd be benchmarking future cost-cutting this year. In the key expense areas, how do you stack up?
We stack up fairly well in most pieces of the company, very well in some, like our printing and imaging business. And in a few, including some parts of our computing systems business, we realize that we have opportunities to achieve significant improvement. We intend to do that through a combination of efforts. I've already mentioned rationalization. Also, we definitely have opportunities to apply information technology more effectively through the use of the Internet, and reinvent our business processes.
The decision to add PwC's consulting business, a huge operation, with 30,000 employees and $7 billion in revenue, certainly suggests new directions for HP. Your CEO says, "The days of talking to one company about business strategy and another about technology are over." What's that new day look like for HP?
We don't really see the PwC transaction as a new direction. HP's basic strategy is to bring value to customers within the intersection of E-services, information appliances, and always-on Internet infrastructure. E-services is one of the three key legs of what we do. We already have a reasonably sized, profitable high-growth services business. PwC is a huge step in expanding the capability of that business, but it is not strategically different.
But currently your services business is a rather small percentage of your overall business, in the area of $7.2 billion, with around $1.8 billion of that in consulting.
Right. Overall services are around 15 percent of the revenue total. Consulting is a smaller piece, but even there, we have about 6,000 people. So, it's small, but not trivial.
Some commentators suggest that the PwC move is really modeled after IBM's effort to combine the delivery of equipment with the broader services needed to support it. Where does the PwC acquisition put you in the competitive environment?
We believe that PwC has the right set of capabilities to allow us to be most competitive in that space. It has a strong presence in E-commerce, particularly in global trading exchanges, and strong partnerships with all the hot companies operating there--Ariba, Commerce One, I-2 Technologies, and many others. We think it's the right fit from a cultural point of view.
Still, analysts seemed skeptical about HP's plan to acquire a consulting business. What's been your response to the coolness from Wall Street?
To be honest with you, announcing an acquisition of this size in today's marketplace, we predicted a negative reaction to it in the stock price. If you actually look at the analyst reports, virtually every one has been positive from a strategic point of view about the PwC acquisition. Based on rumors, we were forced into an early disclosure, and therefore couldn't talk about details, because we didn't have a deal. So, that is an uncertainty, and we all know how the market likes uncertainty.
The other big issue, of course, is that it's a major integration challenge. For that reason, I think the market is right to be a little bit skeptical. I hope as we are able to finalize the deal and describe why we think it is the right deal and serves our shareholders well, we will see that reverse.
Analysts also worry about your mixed-bag strategy as a diversified maker of printers, which must take on aggressive computer competitors that are focused more narrowly, including Sun and Dell. Have you been closing the gaps at all?
Absolutely. Let me just run through three big pieces of our business. About 40 percent of our revenue is in imaging and printing, with wonderful levels of growth and profitability, and huge market opportunities. We are the market leader by a long shot. The Unix server business went through a tough period back in 1999. We now have new products in place, and as we have improved our product program and our sales efforts, something that Carly has focused on since she's been here, we are gaining ground.
In the PC space, we feel we've achieved a lot in the past couple of years. Our PC business has been growing faster than any other major player's. Our notebook business is growing at 250 percent in the U.S. over the prior year. Our consumer PC business has gone from 30 percent market share to close to 50 percent in the past year in the U.S. retail channel. And the business is profitable. It's a tough, competitive business, and we have executed at least as well as the best in the past year and a half.
Overall, however, cash flow has been shrinking a bit. Your net cash from operating activities fell from $4.8 billion to $3.1 billion last year. What's the cause?
As our revenue growth has begun to accelerate, so has our cash usage. We have built up inventory and A/R in support of our revenue growth.
What were your first impressions of Carly Fiorina's leadership style?
At a three-day offsite about a month after she got here, I was struck by Carly's communication abilities. I still see her stepping up to the flip charts and choosing just the right numbers to help us immediately see where we were, compared with our competition. Obviously, she was new to our business, and didn't develop the strategy right then. But she drew out of us strategic options that we may not have imaged before, and got us focused on what was possible.
There is sometimes a fine line between a visionary and a dreamer. I wonder, when you hear Carly talk about goals like "bringing an ecosystem with us--partners, appliances, infrastructure, and service together," as she did in your last annual report, what you think of such descriptions of HP from a nuts-and-bolts perspective?
I'm not going to evaluate a particular set of words in a particular context. But indeed, that statement does incorporate the three key elements of the strategy focus--the E-services, appliances, and always-on Internet infrastructure--that we have as a company today. As for Carly, she operates at many different levels. While she's a visionary, she is also a CFO's delight--packaging that vision, and creating the tension and desire along with it, and translating it on the bottom line. She says to managers, "What can be done? There is no bag of money beyond what we have collectively here, and there is no free lunch." That comes just as easily to her lips as do grand descriptions of what our opportunities might be.
As a self-described old-timer, what do you personally think is the Hewlett-Packard culture? Is it going through a dramatic change this year?
Let me start with the last question. I do not think the HP culture is going through a dramatic change, if you define the HP culture in the way it was originally intended. If you look at actions, if you look at tactical decisions, yes, a lot has changed. But I don't think it contrasts with what was intended. Much has been written this past year about how we are slow or stodgy. Well, I assure you, there is nothing intended in the HP culture that even hints at those directions.
So, what is the HP culture? First, it has always been a culture of invention. Carly picked up on that very much, and believes that it has been and will be the core of what we bring to the future.
It is a culture that trusts people. Business goes through phases. We're certainly in a hot market right now, and maybe trusting employees isn't valued quite as highly today as it was five years ago. But I think over the long term, we all believe--certainly top management believes--that trusting employees, giving them objectives, but then giving them free rein to accomplish them, is absolutely at the core of our past and future culture.
With Carly's arrival, we talked about the strategy of the organization and about culture, and after about three months, we came up with a new, catchy approach to restating what we want the culture to be. It is embodied in what we call the Rules of the Garage, a simple guide for employees that encourages them to believe that they can change the world, to work quickly, keep the tools unlocked, and work "whenever." The rules celebrate sharing and trust, the power of the customer, and radical ideas. And the last word is our watchword: "invent."
A recent news article said that keeping up with a hard-charging CEO has been a challenge for you personally. Did you really give up a family vacation because of the pressure to deliver?
Yes, I really did. Actually, the family continued with the vacation, just without me. You expect that kind of thing when you're going through radical change.
But things aren't going to slow down next year.
Oh, I still get some small time off, and I enjoy it when I do.