© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

S. Srinidhi, Keshav Loomba and Ashish K Singh

Hewlett Packard R&D/Analytics

An innovative approach to hedge

against macroeconomic

uncertainties affecting businesses

Presentation – Jyotirmay Nag HP R&D/Analytics

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

Why this is important How we help What has been done

Proof of Concept overview

Uncertain Economy:

• Extreme volatility in macro-economic conditions expected across the globe in FY’12.

– Prolonged impact of euro- zone crisis

– Spiraling cost inflation in emerging economies

– Sluggish growth – USA, Japan,Europe

– Unsustainable fiscal deficit in developed economies

Impact on HP:

• Possibility of extreme impact on Revenue/Margins

Current Scenario :

• Any revenue/margin forecasting decision is either not factoring in or is not correctly reflecting the impact of macro-economic realities

Analyses

• Highlight how revenue and costs

of a country are affected by

changes in macro-economic

conditions

• Forecast quarterly revenue and

costs - updated dynamically every

month

• Establish relationship,

statistically, between overall cost

drivers and costs to enabling the

BUs to achieve their quarterly

targets

• Economic scenario simulation

Inputs Required

• Country level historical

revenue/margin information

• Economic variables - GDP growth,

IIP, inflation, interest rates,

currency pair at a country level

Case studies

• India-ops macro dashboard

Other references

• SSRN (2005)

• SAS (1993)

• WHARTON (2011)

• BCG (2011)

• REVIEW OF FINANCIAL ECONOMICS (2006)

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

Proof of Concept objective

Given the current volatility of the economy

and capital markets, it is imperative that any

value-creation strategy incorporates a

detailed consideration of the key

macroeconomic risk factors facing HP

The objective of the tool is to construct a

statistical model that employs multiple

macroeconomic factors, GDP Growth rate,

Inflation, IIP, Exchange rate, Interest rates, to

explain their level of significance on income

statement line items. i.e. Revenue, COGS,

SG&A, EBITDA Margin and conducts scenario

analysis with the use of cost drivers

Scope

Objective

Illustration

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

− Constructed financial plan, pro forma numbers FY 2009 to FY 2014

− Macroeconomic data of IIP, GDP growth, inflation, interest rates (India), currency pair collated

Data collection

− Checks for trends/seasonality in the data

− Evolve analytical model using regression/ARIMA methodology

− Test model accuracy using out of sample and out of time data

Algorithm Development

– Adaptive model for early identification of uncertainties in quarterly aspire targets

– Identify revenue sensitivity to changes in macro-economic variables

Optimal coverage

3 2

Context

Approach and Impact

Proof of Concept: India operations macro-economic tool

• Develop a dynamic macroeconomic

forecasting tool for India operations

• Enable scenario analysis and asses

the impact of macro-economic

variables

• Update budget figures

3 1

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

− Material Variance, Costs Revision – Commodity costs, Fuel costs, Production conversion costs, distribution costs, Billable labor

− Overhead costs - Sales productivity, Marketing Spend, Non-billable labor

Cost Drivers Independent

Variables

– The independent variables would reflect, individually, level of significance, significant or insignificant, on the variability of overall costs

Cost driver Model Dependent Variable

Context Independent Cost drivers – To realize the greatest return from cost

driver analysis, tool assesses the relative impact of each ICD

component against overall reported costs and overheads

Multifactor Tool: Cost drivers and its impact

• Companies, such as HP, in an industry

at maturity faces increasing level of

competition and erosion of pricing

power

• Previously considered insignificant

costs are management priorities for

restoring healthy margins

• Traditionally reported costs, i.e.

Inventory costs, accounted only 10% of

inventory’s total effects on profits

• Cost driver driven impact, going

beyond traditionally reported costs,

employed for impact assessment

– The established relationship between the drivers and overall costs would enable the user to manage significant cost drivers for restoring healthy margins

Impact-Cost Drivers

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

Process Flow

STEP I

– External forecast model is

created by use of Macro-

economic variables.

– Model is developed for Revenue

& COGS.

STEP II

– Internal Forecast model is

created using Cost Drivers

– Model is developed for COGS,

Margin.

REDUCE MARGIN GAP

– Delta b/w Step I vs. Step II

attributes are reduced by varying

Cost Drivers

Undesirable impact of exogenous variables on financial performance is reduced by cost driver analysis

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

Macroeconomic Tool... Solution architecture

MS Excel database

Analyse SCENARIOS

Adjust Drivers

Actual Data

Act

ua

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st

Dat

a

Dri

ve

r M

od

el

MS Excel Interface In

pu

t R

epo

rts

Users Desktop Ext

. Fo

reca

st

Mo

de

l

Asp

ire

Dat

a

Indices

Drivers

2

2

Revenue

GRAPHS

Regression

To realize the greatest return from cost driver analysis, tool assesses the relative impact of each ICD component against overall reported costs and overheads.

EIU Reports

Financial Reports

1

1 Financial data is taken from the financial pro-forma numbers and macroeconomic data is taken from EIU Reports. Theyget uploaded in the tool’s database

Forecasted Data

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here © Copyright 2012 Hewlett-Packard Development Company, L.P. The information contained herein is subject to change without notice.

APPENDIX SNAPSHOTS OF TOOL

8

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contained herein is subject to change without notice. Confidentiality label goes here

SNAPSHOTS (1/2)

HOME SCREEN – TAB FOR ACTUALS – TAB FOR MACROECONOMIC MODEL – TAB FOR DRIVER MODEL

HISTORICAL SCREEN – TAB FOR HISTORICAL VIEWS – GRAPHICAL,TABULAR VIEW OF DATA – RELATIVE SIGNIFICANCE OF ME

VARIABLES

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

SNAPSHOTS (2/2) FORECAST SCREEN – TAB FOR FORECAST MODELS – TAB FOR CHANGING MACROECONOMIC

VARIABLES – GRAPHICAL,TABULAR VIEWS

DRIVER SCREEN – TAB FOR COST,EBITDA MODEL – GRAPHICAL,TABULAR VIEW OF DATA – USER CAN CHANGE DRIVER DATA FOR

REDUCING MARGIN GAP

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

Actuals and Aspire * Macro-economic data Drivers

DATA REQUIRED

• Income Statement

- Revenue

- COGS

- SG&A

• Balance Sheet

• Cash flow statement

• Inflation

• IIP

• Interest

• Exchange Rate

• GDP

• WC

• Short Term Borrowings

• Commodity/Fuel Costs

• Direct Labor

• Marketing Costs

*Preferably as detailed as possible – quarterly basis for the maximum possible duration. In addition, we would request for actual data and original aspire data .

© Copyright 2011 Hewlett-Packard Development Company, L.P. The information

contained herein is subject to change without notice. Confidentiality label goes here

Thank you