NAVIGATING A SEA OF CHANGE

Bob Wayman to the Association of Corporate Travel Executives
February 13, 1996

Good morning. It is my pleasure to be here and to have this opportunity to give you a CFO's perspective. Now, I must say I don't receive many invitations to important conferences like this. I get invited by bankers and the like, but it seems CFOs aren't the most popular folks around. Somehow we're seen as skeptical of travel and conferences, some even say, cheap. So, we're typically not high on the invitation list. As a result, I'm particularly delighted to be here.

That then leaves the question of "what does a CFO talk about?" I've decided to frame mycomments this morning around the dynamics of change because competitive forces and technology are imposing change on all of us.

From speaking with the folks in HP's travel department, I know your industry is grappling with many changes: Electronic ticketing... commission caps... the imminent deregulation of European airlines and many others. Hewlett-Packard is also part of a dramatically changing industry The world of computers and electronics is undergoing many dynamics. So the issue of change management and the need to find new, more effective ways to improve productivity and become more competitive is constantly on our minds. That's why I thought I would share with you some of our approaches to managing a complex enterprise like HP in today's competitive world. Certainly, we don't have "the answer." Far from it. I just hope to shed some light on issues that we share.

I'd like to discuss two aspects of our experience. First of all, how we're working to control costs while boosting productivity both broadly within HP and in our travel function in particular. Certainly, to be successful in an increasingly competitive environment we're trying to do more with less by working smarter. This applies to innovations in how we manage our travel function.

The second thing I'll talk about is the people aspect of change. We've learned some valuable lessons about how we can help the folks in our organization embrace and effect change, and I'll describe them briefly. But before I launch into what we're doing at HP, and to help put my comments into context, let's take a quick look at some of the forces that are making the computer industry so dynamic.

Here are some of the trends at work in our environment... where we're experiencing dramatic change. We're seeing the rise of standards-based, open computing. Giving customers many choices; no more vendor lock-in or vendor control. One effect of open systems is more competition, now that niche players can focus on a single point in the value chain. And, of course, competition and performance improvements have driven prices down. At same time, indirect channels have grown and become more important.. That affects our cost structures. Dealers receive discounts because they perform selling function for us. While all this is going on, technology is changing very rapidly and product life cycles are shrinking as anyone knows who has ever bought a "souped up" PC and found it lost it's leading-edge in less than a year. At HP, many of our products roll over every 9 - 18 months. The result of these trends: gross margins are squeezed, and the pressure to execute is increasing. Our strategy: counteract margin pressure by improving operating expense structures.

Very proud of story this chart tells. HP's Cost of Goods: 48.1% in FY '88, 63.5% in FY '95 Op. exp.: 40.3% in FY '88, 25.2 in FY '95. This has allowed HP to maintain its profitability despite dramatic rise in Cost of Goods. Operating margin virtually unchanged from '88 to today. But this isn't the whole story.

Rev/person up 17%/ year. Over last three years, able to grow revenue over 20% annually while growing employment only 3 % . We did so by increasing productivity as I said before "by working smarter." I will give you a few examples of what I meant by that.

I will go through the first two examples briefly, and then spend more time discussing what we've done in the area of travel. You'll see a theme throughout these examples information technology as a key enabler.

First, financial services consolidation. Five years ago, we began consolidating all of the accounting transaction processing for U.S. We went from 56 general ledgers in '90 to two by end of '95. We have realized many benefits since we consolidated. We reduced the total cost for U.S. general accounting by 15%, while supporting dramatically higher transaction volumes. And we gained the critical mass we needed to justify investment to improve our processes. For example, we began using an Interactive Voice Response system to handle routine questions from suppliers about the status of their POs. It's been a big productivity boost. It's faster, and it frees our people to handle more complex questions. More than half of calls to FSC are closed in less than a day.

Now, sales force productivity tools. This is another area we've focused on, helping our sales force be more productive. In 1992, created an "information highway" for our sales people. Back then, sales representatives were inundated with paperwork and information from HP's product divisions. They were spending too much time thumbing through all the documents they receive. We wanted to increase the time they spend with customers. So we created a client/server application that links the 8,000 PCs in our sales and order-processing centers with computer servers at our U.S. sales headquarters in Atlanta.

Now the divisions put their product information on the server, what our sales people call their "electronic filing cabinet... so the reps can easily retrieve the latest price product availability and other data. Sales representatives also can use the system to track order status, access a customer's history, and receive info about competitors' products. They can get all this information either at the office, from their desktop PC, or on the road from their portable computer. Productivity has improved; and the average time our sales rep spends with customers per day is up significantly!.

Corporate Travel Efficiencies
Our Corporate Travel Department is also an excellent example of how we're working smarter at HP boosting productivity while controlling costs. Let's look at what they've done in a little more detail.

At a time when HP's travel activity is on the rise, our Travel Department, working in conjunction with HP travelers as well as some of you in this audience has been able to keep our average cost per trip basically flat. I'll share some of what they did to achieve this in a moment. It is important to note while we are working to control costs across the company, we are not trying to have our people travel less. In fact, travel activity at HP grew by 15 percent in 1995 alone. We view travel as a business tool. It's not a benefit and it's not a frivolous expense. Travel is important because it helps build relationships. As HP's business grows, we have more partnerships, more alliances, and most importantly, more customers around the world. And we need to stay in touch with them. We do watch costs closely. Controlling costs is only one of Corporate Travel's two key objectives. The other is to provide more convenience and hence more productivity for HP travelers. As you'll see in the next few slides, they've been able to achieve these goals largely through the use of information technology. I'll discuss four examples.

The first our Travel Analysis System. We collect raw data about our travel activity on a monthly basis from our agencies and travel vendors. In most cases, we receive the information in the form of a computer tape. In the near future, plan to receive this information via EDI. This information, combined with feedback from HP travelers, forms our travel database. Our Travel Analysis System is software we developed to turn this database into useful information. The system has a number of benefits. First, it allows us to leverage our buying power. We can negotiate better contracts with travel vendors if we know we can commit to booking a certain number of flights or hotel rooms or rental cars. The system also lets us confirm with our vendors each month thatwe met our commitment to them. Second, the system automatically generates monthly exceptionreports for managers whose employees have chosen not to book the lowest logical fare (LLF).This gives them a chance to discuss why the LLF wasn't chosen. Often there's a good reason (e.g., needed to book the same flight as a customer.) This process has helped us achieve compliance with the LLF 90 percent of the time. We prefer to do back-end, exception-based reporting. The manager's approval is not required to book a trip. This helps foster an environment of trust, an important part of our company culture at HP. A third benefit of the Travel Analysis System is it allows us to confirm our travel policies are working. For example, a while back, one senior manager told me that too many HP employees were flying first class, against our policy. Because of this system, our travel department could quickly run a report that confirmed for me that this was not the case. One last point about this slide an important kind of data we collect is feedback from HP travelers. We ask them to fill out a comment card whenever they travel, and once a year we do an annual survey. We have modified our program based on their input. For example, a few years ago we found that female employees didn't feel safe staying in hotels that had un-monitored entrances. So now all the hotels we select for our preferred list can only be entered through a lobby.

A second area of corporate travel where we've made innovations is in automating our process for generating itineraries. Here's how it works: The employee contacts an agency to make travel plans. They can do so via e-mail, phone or fax. The agent makes the reservation but instead of generating a paper document, we've developed a gateway that allows the information to come into our e-mail system as an electronic itinerary. Again, there are many benefits. One of the most significant is that employees don't have to be at the office to get their itineraries. This supports our idea of the virtual office. Because people can access information so much more easily now, any time any where they can be much more flexible about where they get their work done. They don't have to be in the office to get the information they need. They can telecommute from home. Or as many sales people do, work on the road. Other benefits of automated, electronic itineraries, they can be easily forwarded on to the traveler's host or others who need the information. And travelers can get their itineraries quickly, in as little as one hour plus the itineraries automatically includes information that helps us control costs. It compares the fare the employee has booked with the LLF. It gives the traveler a second chance to go with the LLF if they haven't already done so.

Here's my third example: We've used our "intra-net", our own internal Internet, to make two important travel documents available to our employees on line: the Official Airline Guide, and "HP Passport to Travel", a directory of our preferred hotels, maps and phone numbers of HP facilities, and a worldwide listing of ATM machines. There are a number of reasons why getting this information electronically is preferable to print. For one thing, the information we put on-line is refreshed regularly so it's always up to date. Having up-to-date information helps us control costs because then the employee has current information about which flight or which hotel will offer the best deal for HP. Another benefit is you don't have to lug these booklets around anymore. Employees can download the information to their portable computers so they literally can access it anytime, anywhere.

My final example comes from our Financial Services Center. Part of managing travel includes the issue of how to track and reimburse employees for travel expenses. This can be a cumbersome, time-consuming process, dealing with a pocketful of crumpled receipts, filling in a myriad of little boxes. We're working on a whole new approach that will essentially do away with the travel-expense report, per se. We hope it will make the process of getting reimbursed for travel expenses much less of a hassle. We plan to implement this program within the year. Here's how it will work. Instead of having an expense report devoted just to travel, there will be one way to deal with reimbursement for all kinds of business expenses. Since many travel expenses are charged to corporate credit cards, let me tell you first about this part of the process. Once a month, the employee will get a statement via e-mail that shows what she charged to her card. She'll be asked to check off which expenses were for work and which were personal. We believe people will find this a lot easier than filling out an expense report. Once the statement is returned via e-mail, the business expenses automatically will be paid by HP. The employee will be responsible only for their personal charges. For expenses paid in cash, employees will use a system we instituted last year that's also completely electronic. The employee fills out an e-mail request for reimbursement. It's processed by our Finance Services Center, and automatically deposited in the employee's bank account. Management approval, and receipts are only required for large expenses. Part of the environment of trust I mentioned earlier. Reducing the administrative expenses related to travel is part of what's allowed us to achieve what you see on the next graph.

While travel isn't an administrative cost, executing travel paperwork is. Streamlining these processes has helped us dramatically reduce administration expense ratio to less than 1/2 over the time period shown.

Well, I've talked about how information technology has helped us do more with less in many areas, highlighting our travel function. In just a few year's time we believe technology will allow us to do even more in the area of travel management as well as just about every other aspect of our business. Because, from now on, all computing is networked computing. As Joel Birnbaum, our director of HP Labs has said "In the future, most computers will be linked by open networks. This will make them pervasive a part of everyday life for most people." Some analysts project there soon will be 100 million users on the Internet. Our own Web Site, "Access HP," is viewed by 30,000 to 40,000 people every day. More and more businesses are involved in electronic commerce. For example, we do almost half a million electronic transactions monthly with some 3,000 external partners. So, the information age is truly upon us. For more than a decade HP has been talking about how computers, networked together, could give people better access to information.

Now, just as the theme of your conference says, our vision is becoming a reality. As the information superhighway becomes better established and more and more of the information we use is in digital form we'll surely see changes in many aspects of how we conduct our daily lives, how we bank, how we shop and how we manage travel.

For example, there's a lot of talk these days about electronic ticketing. This is a perfect example of taking information we once interacted with in a hard copy form, as a paper ticket, and now using it solely in a digital form. You still have a ticket. It's just an electronic ticket. The natural next step will be to buy your ticket on the Internet. At HP, we're very interested in electronic ticketing for two reasons. First, we're part of the solution. SouthWest airlines implements their ticketless travel program on HP computers. Second, we think it's a great option for many of our travelers. It supports the idea of the virtual office I spoke of before. People don't have to worry about where to get their ticket. They simply show up with their electronic-ticket information.

Let me give you another example of how we anticipate technology will help us be more effective in the area of travel. This summer in Atlanta we are going to pilot something we call a "personal travel guide." It's an idea HP and several of our partners are testing as part of the "Atlanta Traveler Information Showcase", a project of the Federal Highway Administration and other agencies. It takes place at the same time as the Olympics. Here's how it works. We'll give a selected group of travelers HP palmtop computers. Using a two-way paging system provided by one of our partners in this project, SkyTel, they'll be able to access a database of maps and business locations, provided by another partner, Etak. They also can receive real-time traffic information from MetroNetworks as well as and information about sporting events. We think people will find this quite useful. For example, if it starts to rain right before you leave for a track-and-field event, you could use your palmtop to find out if the event is going to be rescheduled. If not, you could check current traffic conditions to find out the best route to take. After the event, if you've got a hankering for French food, you could search your database for local restaurants, and then access a map to see how to get to the eatery you chose. So this is another good example of how the rise of networked computing will affect travel but in this case the networks are wireless. I see from your agenda, that many of you are exploring new uses for information technology in the travel industry. One example can be found out in the lobby where ACTE is demo-ing its new Web site.

So, something I think we can all agree on is that before this decade is through, all of us will see a lot more changes in how we live and work. And that means we have to find effective ways to embrace change. Which leads me to my final topic, the people aspect of change which I plan to discuss this briefly by telling you a story about one part of HP, our Test and Measurement or "T&M;" business. They make test equipment for electronic and telecommunications manufacturers .

Over the past three years, T&M; underwent a significant transformation process. They came to the conclusion shown here: "Change occurs when people's dissatisfaction with the status qou exceeds their level of anxiety about change." T&M; is an old business for HP it was founded more than half a century ago. It was a business where we have always been a leader. People were comfortable and maybe overly confident. In the late 1980s, their world changed dramatically. The Berlin Wall came down, and aerospace/defense spending dropped significantly. For a few years, T&M; reported zero to negative order growth - not good. In the early 1990s, they decided to stop feeling victimized by change, and instead to view it as an opportunity. "The future is ours to create" became their motto. They started really listening to their customers and began a rigorous process of scanning the external environment. As they became more outwardly focused, their view of the opportunities ahead became much broader and more exciting. They found new ways to apply their technology to the fast-growing telecommunications market, instead of defense. Now they're very successful once again, one of the most profitable and fastest growing parts of HP. One of the ways they helped their people embrace change was by using a model. Being engineers, they of course tried to identify every factor in the equation. Here's what they came up with.

People are more likely to embrace change, if they're dissatisfied with their current state of affairs. Factors likely to make them less dissatisfied include: focusing on their past success; and making the assumption that they are somehow entitled to keep their leadership position. Factors that help tip the scales the other way, in favor of dissatisfaction,. include: focusing on customers which requires doing a lot of listening; encouraging innovation and risk-taking, which includes expecting a certain percentage of new projects to fail; and performing a rigorous analysis of the marketplace and competitors where you compare yourselves to the leaders, rather than taking comfort from the fact you're ahead of the laggards or just better than average.

Now let's look at what makes people feel anxious about change. Of course, what we want to do is to tip the scale toward the factors that help people feel less anxious. But let's first take a look at what factors increase anxiety. Certainly one is the degree of loss that change will bring. For example, people are less willing to eliminate redundancies or simplify processes if they believe doing so will eliminate their jobs and there are no new opportunities for them. And an organization that's insensitive to the very real challenges presented by change, merely creates an environment where fear flourishes. Now, let's look at the factors that alleviate anxiety: Open communication does. So does visionary leadership that encourages people to embrace exciting, alternative futures. The reward system also helps tip the balance. If an occasional failure dooms a manager forever, he or she as well as others will never take a risk. Finally, change is much easier to embrace if one has been involved in architecting that change. Change imposed from above is often avoided. People who create their own futures are those who embrace them. These ideas proved to be very powerful for the people of T&M; in helping them evolve their business. As I noted earlier, your industry, and ours are both going through many changes now. And there's sure to be more to come. I believe there's a lot we can learn from each other.

Really what all of us are trying to do is to find the right balance, to tip the scales in favor of dissatisfaction with the status quo, when appropriate, while mitigating the anxiety change brings. If you can do that, then you will be helping your organization create a culture that's open to new ideas, new directions and new technologies. I like to think we're doing a pretty good job of it at HP but it's a continuing challenge and continuing opportunity.

I wish you luck in finding the right balance for yourself and your organization and want to close by thanking you for giving me the chance to speak to you this morning.