OFFICE DEPOT – Clicklayer Building Online Success on Brick-and-Mortar Business

ENTERPRISE VALUE AWARDS OFFICE DEPOT

Headquarters Delray Beach, Fla.

Core Business Office supplies, equipment and services

Financials 1999 total sales: $10.3 billion1999 Internet sales: $349.7 million

Employees 45,000

URL www.officedepot.com

If you’re a traditionalist, don’t read this. When Office Depot decided in 1997 to expand its Web operation into a full-blown B2C site, it opted not to do an ROI analysis, something almost unheard of for a company its size. Instead, Executive Vice President and CIO Bill Seltzer, Executive Vice President of E-Commerce Monica Luechtefeld and then-Chief Executive David Fuente made a gut-check call that online purchasing was about to explode, and it would be

worth whatever it took for Office Depot to be there first. Three years later, that call has turned up nothing but aces.

In 1999 the company racked up $350 million in Web-based sales—400 percent more than the previous year—and expected to push that to more than $800 million in 2000. Meanwhile, inventory turnover has increased from four times a year in 1996 to six times today, and it’s still rising. And the company has secured huge online sales contracts with industry leaders such as General Electric, MCI WorldCom and Proctor & Gamble.

Seltzer, who spearheaded the project, says Office Depot will have generated 9 percent of its overall revenue from the Web in 2000, and he believes it will double that figure this year. “No other retailer is converting from bricks to clicks at this rate,” he says.

With all of this success behind Office Depot, and much more potentially to come, it’s interesting to note that the company’s original decision to go online was academic—literally.

In 1994, MIT invited the Delray Beach, Fla.-based company to take part in an experiment in which a group of MIT’s suppliers would build websites that MIT would make purchases from. Office Depot reckoned, as did the other companies, that it would be smart to indulge an important customer. But it also saw beyond what would otherwise have been a one-shot deal. This experiment was an opportunity to explore the Internet’s potential as a distribution channel when few people even knew what this strange new medium was.

The MIT project eventually begot B2B Web channels for dozens of the company’s corporate customers, generating more than $60 million a year in three years. In 1998, after a feverish three-month development, the company launched OfficeDepot.com, a full-scale e-commerce site for small-business and individual customers. Today, Office Depot is arguably the leader in the retail industry’s rush from bricks to clicks.

It’s hard to know that for sure, but industry observers see the company’s increase in online revenues as a strong indicator. Steve Zrike, a senior analyst who covers online retail for Forrester Research, confirms that it’s an impressive conversion rate. “The fact that they’re doing this much just through the Internet is pretty significant, given the tiny percentage of customers who could actually get online before the beginning of 1999,” Zrike says. Revenue isn’t the only thing Office Depot is getting from the Internet. Seltzer estimates that each online transaction is at least 1 percent cheaper to process than one that’s phoned or faxed in, which adds up when you are talking about tens of millions of dollars in sales.

But perhaps the most significant result of the company’s move to the Web has been the evolution in Office Depot’s corporate mission. As B2C sales have taken off, the company has realized it can be many more things to more people. Instead of just supplying companies, Office Depot is helping them run their businesses through an array of free human resources handbooks, business tools, online forms, news and links to other business information providers.

The decision to plunge headlong into developing a B2C site was probably made a little easier because the company was groping for direction following a failed merger with Staples, its chief competitor. The need for a jolt of energy was obvious. Nevertheless, once the corporate brass made its commitment to launching the site by January 1998, the software development team faced a hellacious three-month span to write all the code and get things up and running.

That sounds like brinkmanship, but it was a strategic decision that paid off. And doing it without an ROI analysis—and winning—attracted the attention of this year’s Enterprise Value Awards judges. “They didn’t need to explicitly cost it all out in terms of numbers to know something [made] good sense,” says Doug Barker, CIO of The Nature Conservancy and one of the awards judges. “I found the whole approach really refreshing.”

Another decision that eventually panned out well was to treat the Internet as simply another distribution channel instead of an entity all by itself. “We saw [the website] as an integrated part of the whole,” says CEO Bruce Nelson. That stood in stark contrast to the approach of other retailers that got caught up in the dotcom frenzy and spun off their Internet projects as separate business units. Office Depot’s shareholders, who likewise hoped to hit the IPO mother lode, cried foul at the time. But now the company has a system that is consistent across the range of its customer contacts, while other retailers struggle to retrofit online resources into their infrastructures.

“The customer experience has to be consistent at any point where the customer might interact with your brand, which necessitates one view of the customer,” says Tracy Thorne, an e-business strategies analyst with the Hurwitz Group. “Office Depot has gotten this for a long time.”

To other observers, Office Depot’s decisions show how it has raised the bar in terms of building an Internet presence without losing focus as a business.

“A lot of what’s going on in e-business right now is how brick-and-mortar companies can take their brick and mortar and turn it into an advantage,” says Peter Solvik, also an awards judge and the senior vice president and CIO of Cisco Systems. “Clearly, in its market [Office Depot] is miles ahead.”

That future was not so assured when the company first decided to launch OfficeDepot.com. All it had to go on was faith.

During the first part of 1997, the executive committee met with retail analysts and concluded then that a full-scale move to the Web was an opportunity it couldn’t afford to miss. Online retail appeared to be taking off, and companies such as Amazon.com were setting the pace. The analysts also told Office Depot that office supplies would sell well over the Internet. After all, they reasoned, ink-jet cartridges, pens and paper are nonperishable items, and people usually know exactly how much they need.

Equally important, as a bricks-and-mortar company, Office Depot realized it had the infrastructure in place to make the whole thing work. “We saw online sales as something that would fit our model very nicely,” says Seltzer. “Especially since we had our own delivery centers and delivery trucks.”

The company was up against some timing pressures. Staples was rumored to be prepping its own website for launch in January 1998 (though it didn’t launch until that summer), and Office Depot didn’t want to lose the market space to its competitor. Also, the high season for office supply retailers is the first quarter of the year, and the company wanted to be ready with its site to meet demand.

Most important, however, Office Depot prided itself on its entrepreneurial culture and didn’t think it needed to ruminate over decisions that had obvious benefits to customers. If people wanted to buy online, the company felt it had to make it happen. “ROI’s a good tool, but it’s not the be-all and end-all,” says Rob Koch, vice president of corporate finance. “Some decisions are purely strategic.”

Besides, says Seltzer, with no way to predict what kinds of sales would be generated through such a new medium, any ROI analysis would be guesswork. Doing without one saved the company three to four months in getting the website up and running.

“If you do ROI, you spend a lot of time arguing about numbers, and we were able to save that time,” he says. “It was pretty much an act of faith in our industry and our technology.”

For the seven-person team that developed the site—led by Michael Kirschner, vice president of e-commerce development, and Tim Toews, senior vice president of international systems development—it was an exhausting but exhilarating three-month marathon.

“At the time, the company was just reeling from the failed merger [with Staples],” says Seltzer. “We may have been working 17 hours a day, seven days a week through Thanksgiving and the holidays, but this gave people something to focus on, which was huge.”

The person in charge of infrastructure for Office Depot’s international e-commerce sites, Bob Conklin, who helped build the infrastructure for the website, describes the experience as a “brave new frontier.”

“We truly believed we had to be the first movers and get in quickly, but there weren’t the tools, procedures and disciplines in place that you have now,” he says. “There were a lot of sleepless nights, pagers going off, and those 2 a.m. moments when something crazy occurs and it’s all hands on deck.”

Seltzer insists there was method to the madness. He believes that when you do something quickly in a high-pressure environment, you end up with a better and more valuable product. That’s what happened in this case, he says, adding that the frenzied pace helped create a huge boost in corporate morale. “People don’t mind working long hours if what they’re doing is really contributing a lot,” he says.

However, it’s one thing to get a website up and another to make it work. Enterprise Value Awards judges give a lot of the credit for the success of the Office Depot site to the integration between the company’s various distribution channels and its back-office functions.

The ability to get the websites up and running quickly was based on a years-old data architecture that Seltzer helped devise in the 1980s at a supermarket chain and replicated elsewhere. It is composed of seven basic databases that store any piece of information that might be needed throughout a retail system, be it in a call center, for shopping online, by someone working in accounts receivable, or for purchases made at a physical store. It doesn’t distinguish between channels, and the information is consistent throughout no matter where the information is accessed. All front-end activities, regardless of channel, are integrated with back-end functions such as billing and order processing.

Simply put, this means the system doesn’t care whether someone is ordering by phone, fax or over the Internet. A person can go on to the Internet and check to see if something’s in stock at a local store before making a trip there, or track the status of an order online even if the purchase was made over the phone. This isn’t the experience a customer would have with less integrated systems, where he may have to go to any of five separate channels.

“The data architecture is bedrock,” says Seltzer. “We’ve spent a lot of time doing it right.”

It was invaluable in establishing the Web presence so quickly since it made its integration with the rest of Office Depot’s system relatively painless once the company decided not to spin off its online business. It also fostered scalability because it’s been easier to build new features onto a simple, clean system, Seltzer says.

For example, Office Depot is now using the Internet to expand its international presence through its wholly owned subsidiary, Viking Office Products. Employing a data architecture in Europe that’s the twin of the one Seltzer built in the United States has simplified creating new websites in different countries using minimal resources. Office Depot has opened 19 international sites so far.

“The architecture in all countries is the same,” Seltzer says. “So our front end just varies by language and adjustment for local laws.”

In the United States, Office Depot’s suppliers are seeing an immediate return from the company’s integrated approach to the Internet. The company has used its experience with the website to create an extranet for its vendors so that they can set up product items and descriptions, and check the levels of inventory by location.

“It brings value in that it gets information into our system without [the need for] human interface,” says Seltzer. “For us, it means labor savings and accuracy. For [the vendors], they no longer have to sit down, write us a letter and mail it, or convey information through a sales call. The feedback we’re getting is that they love it.”

But it’s the change to the corporate mission that could provide the biggest added value of all from Office Depot’s move to the Web. It relaunched OfficeDepot.com in August last year as a full-service provider of business resources, news and information. Now small businesses can use the site for a range of things, from purchasing a video on how to capitalize assets to getting information about how to send press releases. Office Depot gathers the site’s content from professional editors, consultants and other partners, and gives visitors free access to all of it.

Meanwhile, the company has plans for other online services, such as assistance for people who are trying to select the best wireless plan, a website that can be accessed by mobile devices, and a communities feature it aims to have in place in early 2001. “In the next 12 to 18 months, small businesses will have everything it’s taken larger companies years to build,” says Luechtefeld.

Seltzer concedes that these additional services may not mean big bucks for Office Depot, but they’re worth offering if they get people to come back to the site over and over again.

“There’s value if you can build a sense of community among small businesses and yourself,” says Seltzer. “You’re doing more than just being a provider of supplies. You’re being a friend to small businesses. And people buy from their friends.”