The Big Score

In mid-2001, P&G embarked on a radical plan to outsource all of its back office -- not just IT, but finance and accounting, facilities management, HR, and purchasing. The stated goal was to streamline its structure and focus on developing and marketing products. But it's clear that the far more urgent aim was to cut costs. The plan was massively ambitious; it would make for the largest outsourcing contract ever. And it was massively disruptive; as part of the deal, more than 5,700 employees would be folded into the winning bidder. Many complained bitterly about the uncertainty of being forced to work for another company.

The bidding process, which pitted EDS against Dallas-based Affiliated Computer Services, lasted for 18 long months. Finally, on September 18, 2002, P&G told its employees to expect an announcement. It would award Plano, Texasffibased EDS a long-term contract valued at a staggering $8 billion. Randy Reedy, a viceffipresident of P&G's IT team, was dispatched on a company jet to Manila to break the news in Asia. An hour outside of Osaka, Japan, the copilot tapped Reedy on the shoulder. He'd just received a message: They'd been ordered to head back to the states. Reedy was stunned. "What in the world is going on?" he blurted.

Back in Plano, all hell was breaking loose. EDS had just reported a disastrous third-quarter earnings miss. As part of the deal, P&G was due to take a big stake in EDS. Now, its executives watched in horror as investors sliced away $9.2 billion, or about 53%, of the company's market value. The P&G team huddled late into the night. At least one person broached the thought that they were about to ship 5,700 of their people to the "next Enron." At 1 AM, P&G chief A.G. Lafley called his EDS counterpart, then-CEO Dick Brown: P&G was putting the deal on hold. But for all intents, the contract was dead. Two months later, P&G ended talks with EDS. Even now, nearly a year later, Bobby Grisham, the EDS executive who headed the company's pursuit of P&G, can offer only this terse understatement on the $8 billion deal that got away: "It was tough."

The day after the deal imploded, executives at IBM and HP began strategizing about how to get a piece of P&G's action. HP, in particular, had closely monitored the race. It was already supplying a big chunk of P&G's computer systems -- an estimated 90% of its servers and 40% of its workstations -- and was desperate to protect that business. Eight days after P&G made its decision, Steve Huhn, a VP of sales for HP managed services, arranged for Carly Fiorina to call P&G's Lafley. Her message: HP services now had the critical mass to handle P&G. "One of the things we struggled with, after the Compaq merger, was that there was a lot of ignorance in the marketplace about what we could actually do," says Fiorina. "It was important to convey to A.G. that we had capabilities in this space that he might not be aware of -- and in fact, he wasn't aware of our capabilities. I wanted him to know that we were going to engage in the competition for his business."

In the harsh light of day, HP seemed clearly out of its league in a competition against EDS and IBM.

Both HP and IBM hoped to convince the company to move away from a one-size-fits-all outsourcing strategy. Which is exactly what P&G did. It broke the contract into pieces -- employee services, facilities management, and so forth -- and bid out each chunk separately. It would start with the biggest, most critical slice of all: its worldwide computer-systems network.

Project Chantilly

On January 2, Dan Talbott gathered his core pursuit team into a cavernous conference room at HP's Atlanta office building. Seated around a table were senior marketer Tom Simmons, client manager Mary Roth, and John Junker and Jim Alverdi, client reps who interact daily with P&G. As he looked at each of their faces, Talbott knew they were thinking, "There's no way we can win this deal."

In the harsh light of day, HP was clearly out of its league. Just consider the likely competition: IBM is a $81 billion behemoth in the services industry, with dozens of billion-dollar deals in its portfolio. EDS, which invented IT outsourcing when Ross Perot founded it in 1962, boasts $21 billion in annual sales. Despite its merger with Compaq, HP had yet to make its first multibillion-dollar score. At best, HP was the dark horse, and everyone in that Atlanta conference room knew it.

And HP wasn't in the race yet. Everything depended on the Palo Alto site visit, when P&G would determine whether HP had the right stuff even to compete for the deal. HP had to find a way to counter its greatest weakness: It had never taken on a customer of this size. P&G runs on 100,000 email-boxes, 78,000 workstations, 3,500 servers, and a farm of mainframes; the company's IT shop consists of 2,000 people in 53 countries.