Procurement the HP way

No doubt about it, William R. Hewlett and David Packard, revered founders of the eponymous company in Palo Alto, California, will go down in history as business innovators. Their renegade strategy of forming independent business units free to do as they choose (as long as their product offshoots made money) helped Hewlett-Packard rocket past slower- moving rivals for decades. But in recent times, the HP Way had started to show signs of wear.

One hidden price of divisional autonomy began to surface in the late 1990s, as the company's indirect procurement spending for basic office supplies and services shot ever skyward. By late 1999, HP was laying out around $2 billion a year for these goods.

"HP conducted this massive internal investigation back in 1998 and found that corporate buying was way too decentralized," said Gregson Sui, former manager of HP's operations procurement center. "And there were lots of employees picking up items at Fry's [a local office-supplies and computer store] instead of using the supplier we had negotiated a contract with, and that was costing the company tons of money."

The company began to explore implementing a Web-based procurement system. The great hope was that by prompting HP's 84,000 employees to buy their pencils, calendars, and computers from a standard set of suppliers through a Web browser, the company could eliminate "rogue buying" and streamline the paper-heavy purchasing process. As a side benefit, HP figured it could winnow down its 100,000-member supplier base.

After reviewing the options, the internal e-procurement team landed on Ariba's solution, and in September 1999 the first phase went live. More than 100 users were on-board within four months, and officials at HP, including Sui, estimated that the new system would enable the company to save $60 to $100 million per year in MRO spending.

An interesting thing happened on the way to e-procurement at HP. Though the company was pleased with the initial results, officials decided they didn't really want to manage and maintain this beast internally. This past February HP's e-procurement group was spun off into a separate, privately held company called Alliente, which happens to be Sui's current employer. He's chief technology officer there.

Alliente is one among a new class of companies that industry observers are calling business service providers, or BSPs, and it looks to be one of the first to play in the relatively specialized area of e-procurement. Although this is clearly an emerging market, analysts believe it is one with legs.

"The original philosophy about e-procurement was that it should be buyer-hosted," says Lori Orlov, research director for e-business applications at Forrester Research in Cambridge, Massachusetts. "But the reality is that it's really tough to pull off, especially when suppliers don't have their catalogs online or simply don't want to participate. A hosted procurement solution is an incredibly sensible alternative."

So far, Alliente has stuck pretty closely to HP's original vision. On the software side, the company runs the Ariba package, which has made the transition to Alliente go smoothly from a training perspective. The only real difference for HP employees is logging on to Alliente's systems instead of a procurement site on HP's intranet (see diagram).

On the supplier side, Alliente already has 100 of HP's largest suppliers online. One of the most aggressive of those is Software House International, a corporate hardware and software reseller based in Somerset, New Jersey. SHI, which has been an HP supplier for nine years, was one of the originals when the company decided to make its e-procurement move. According to Matthew O. Martin, a national account executive at SHI, the Internet-based system has made dealing with the $47 billion HP far more efficient from both order-processing and customer-service perspectives.

SHI's statistics indicate that some 90 percent of the products HP employees order now get to them within two days, compared with two weeks or longer under the old system. And the time Martin's employees spend on tedious invoicing, requisitioning, and credit card issues now accounts for only 20 to 40 percent of their workday, against a former high of 70 to 80 percent.

"We literally had about 20 different models in place for getting orders and payment from HP, which was just a nightmare, but we're now standardizing on Alliente," says Martin. "To be honest, we still get payments and orders from some of those other 20 programs, but we've also found that once HP employees get used to ordering electronically from us, they never go back."

Like other businesses forging ahead with e-procurement initiatives, HP and Alliente still have plenty of work to do. HP faces the task of convincing employees to buy goods using the Ariba system and from the approved suppliers. Alliente, on the other hand, must continue to add new suppliers and services.

"We're at the very beginning of the curve in terms of what e-procurement can accomplish with pricing, service, and even logistics," says Sui. "The day will come when you don't even have to remember to order paper or a new printer cartridge; the system will be smart enough to do it for you." Now that would be e-easy to take.