CIO 100: Slowdowns Are The Best Times to Invest

IN 1982, DAVID P. DREW, THEN INTERNATIONAL DIRECTOR OF I.T. at 3M, began to work on a project to standardize the company’s IT operations around the globe. In 1988, when Drew was done, 3M had one global infrastructure instead of a separate operation in each of the 63 nations in which it maintained a presence.

3M’s globalization project was way ahead of its time. The company developed templates for global implementations that are still applicable more than a decade later.

Pretty impressive. But what makes 3M’s 1982 globalization project truly extraordinary is the fact that it was launched during an economic downturn.

By no stretch of the imagination was 1982 a good year. Unemployment averaged 9.7 percent, its highest level since the Great Depression. In November 1982, the unemployment rate hit a whopping 10.8 percent. The inflation rate that year hovered just above 6 percent. (Compare those figures with those from 2000, which saw 4 percent average unemployment and an inflation rate of 3.4 percent.)

For most companies, 1982 was a time to pull back, hunker down and mark time while studying the Machiavellian maneuvers of J.R. Ewing on Dallas. For 3M, it was a time to innovate.

And 3M is still reaping the benefits. The template-based approach and centralized management it developed then has helped it keep its IT headcount low?lower, indeed, than it was in the early ’80s. According to Drew, now 3M’s vice president of IT, this allowed the company to breeze through the IT worker shortage that hamstrung corporations throughout much of the dotcom boom. In fact, with an IT budget that’s 35 percent larger than it was in 1982, 3M today employs 25 percent fewer IT workers than it did then.

As 3M knew, innovation is most valuable when the economy is down-and-out. That’s when a company can separate itself from the pack. In good times everybody has lots of ideas and enough money to fund most of them. In bad times companies have to pick and choose. And that means they have to think analytically and creatively.

It’s risky innovating when the dollars budgeted for projects are precious. But when the markets rebound, those who have been innovating all along will be ahead of those who haven’t been.

What 3M and FedEx Know that You Don’t

Companies with a history of innovation have built legends and large revenue bases by capitalizing on good ideas in good times and bad. Drew believes that difficult economic times are actually a spur to innovation. “You’re forced to be creative and innovative because you have less resources with which to work,” he says.

Take Scotch tape. 3M engineers developed it and masking tape during the biggest downturn of them all, the Great Depression. Boldly, 3M established its Central Research Laboratory in 1937, the deepest trough of the Depression, just to let its engineers and researchers fool around with new materials. By the end of the ’30s, the lab had not only come up with new adhesives and abrasive materials?the company’s core products?but also reflective materials that made highway signs and markings easier to see on dark and stormy nights. Over time, 3M turned those innovations into billions of dollars in sales.

The idea that a bad economy is an invitation to innovate is now a core 3M belief. As 2001 began, and all the major economic indicators continued pointing south, W. James McNerney Jr., who became 3M’s CEO last January, launched a set of initiatives jointly called Acceleration. The plan moves responsibility for product development away from the company’s individual business units and back to the corporate office so that the corporation itself can step in with dollars when a unit doesn’t have the budget to support an innovative project.

With that level of executive commitment, Drew is sinking his resources into new projects, such as collaborative engineering tools, and cutting back on standby programs, such as internal user support. Drew says he’s managed to pacify his users by creating a data warehouse that gives them access to information, such as where to find a list of accounts receivable to generate a report, that they used to have to call an IT person to dig up. And he says his department has actually cut costs by installing the new technology. In order to do any of these things, Drew says, it’s critical to have a mandate from the top to put innovation over user convenience.

Another company with a history of innovating in hard times is Memphis, Tenn.-based FedEx. FedEx spent the recessionary years of 1979 and 1980 introducing computer systems that managed shipments and coordinated pickups for customers. Then, when the economy slumped again between 1989 and 1991, FedEx developed a satellite-based system to locate vehicles and an early supply chain application that provided a centralized routing management service. Although FedEx’s marquee technology accomplishment, its Internet-based tracking system, debuted in 1994 during the early days of the technology boom, the company is still expanding its Web presence even as the bloom fades from the dotcom rose.

In May, FedEx downgraded earnings expectations for its fourth fiscal quarter by nearly 30 cents per share, but Executive Vice President and CIO Robert B. Carter says the company is increasing its level of investment in Web customer service technology, despite his expectation that his overall IT budget will be cut. New projects include wireless access to package-tracking information and FedEx InSight, an application intended to allow people to customize their view of package deliveries and automatically receive notification via e-mail or fax when a package does or does not arrive as scheduled. InSight’s customization capability eliminates the need for customers to use a package-tracking number every time they want to track a shipment. In other words, in an increasingly customer-centric business environment, the application tracks shipments by user, not by package.

An unblinking focus on the Web makes sense for the company, even as it soaks up precious dollars. Just this year, more FedEx customers used its website for service than called the company’s toll-free number. FedEx now averages 1 million package tracks a day at Fedex.com; it does fewer than 100,000 per day over the phone. That’s important because, according to Carter, every call to the toll-free line costs the company $2.14 on average, while every customer inquiry on the website costs an average of 10 cents.

Like Drew, Carter has the support of his CEO in prioritizing innovation. And like 3M, FedEx is cutting back on supporting users and other basic services in order to fit new projects into the budget. Carter says the company will go even further to continue innovating if it has to.

“If we have to pull back on back-office or service capabilities, we will. We will not pull back on customer-facing technologies,” he says. “It’s a core part of the FedEx culture. We’d rather invest in [new technology] than in trucks or airplanes.”

Why True Value’s Hardware Business Needed New Software

Chicago-based TruServ is a new entity, formed in 1997 by a corporate merger, but its True Value hardware stores?a name familiar to hardware buyers since 1948?are not. Recently, the company became concerned that its cooperative network of store owners was relying too much on consumer sales and missing out on the lucrative industrial market. So last May, as other companies were sacrificing their Internet initiatives to the angry gods of the stock exchange and the bottom line, TruServ launched its customized Internet catalogs, allowing store owners to market themselves to large companies. TruServ provides the back-end order-taking and fulfillment capabilities (powered by Net Warehouse, an online ordering application the company spent $1 million to develop); store owners handle the marketing of the site and provide customized pricing schemes and homepages for each corporate customer. To date, 150 out of 7,638 True Value stores have signed on to the program.

One store in Warren, N.J., Warrenville Hardware, has already saved a large corporate account by using the online catalogs, says the store’s owner, Bill MacDonald. MacDonald believes that his shop would have lost a $1 million contract with Murray Hill, N.J.-based Lucent Technologies if he hadn’t been able to respond to Lucent’s request for an online ordering system. He has also begun offering the service to other corporate customers, such as Chubb & Son, an international insurance provider based in Warren. “The catalogs help us keep business and increase business,” MacDonald says.

TruServ implemented this project even while CIO Neil Hastie’s budget dropped from $58 million in December 1999 to $34 million this year. Hastie’s response has been to streamline his software development process. He instituted a quality control program in which IT employees reviewed every step of the development process before executing it. So rather than building something and spending an average of 23 man-hours per day to fix it, as was previously the case, Hastie says his staff now spends an average of one hour per day debugging software that has been carefully reviewed throughout its development cycle.

“The quality is built in throughout the development life cycle,” says Hastie, who spent 18 years at Fel-Pro in Skokie, Ill., which was purchased in 1989 by Southfield, Mich.-based Federal-Mogul Corp., an auto industry supplier. “We build quality in to the process, not at the endgame.”

Hastie also reduced costs by letting his staff shrink and killing lifeless projects. He pulled the plug on a data warehouse for a customer service application that was soaking up resources but that no one was using. He says he’s overseen a staff reduction of 35 percent to 40 percent since he arrived.

Sometimes, hard times leave you no choice.

How Dollar Rent A Car Finds New Customers

When the economy goes sour, businesses begin trimming expenses and cutting perks. Perks like corporate travel?and rental cars.

Beginning in January 2001, Dollar Rent A Car Systems of Tulsa, Okla., invested $200,000 in a new application that would allow the company to take reservations directly from airline websites and from PDAs. The company worked with Dallas-based Southwest Airlines to develop an application based on a technology called Simple Object Application Protocol, or SOAP. The application would let Dollar customers reserve Dollar cars on Southwest’s website without requiring heroic integration efforts or asking Southwest to adopt any new technology of its own. Dollar launched the program with Southwest Airlines in May after having initiated its first wireless reservations process, also based on SOAP, in February. Since then, the company has seen a small sales increase from wireless reservations. But Larry Zucker, Dollar’s executive director of application development, believes the Southwest deal will ultimately bring up to $10 million in new revenue to the company because in one click it transforms Southwest customers into Dollar customers.

Since 1994, Dollar has had five programmers and programmer analysts on its 130-person IT staff who do nothing but look for innovative ways to use and develop technology. Those programmers build prototypes of innovative applications?a recent example is an XML interface to be used as a common protocol to link the disparate data formats used by tour operators?and pass those prototypes on to Dollar’s IT developers, who build them in to workable systems. Zucker says he has had to sacrifice hiring employees for other IT duties such as service and support in order to maintain his innovation team. Again, as is the case with his peers at 3M, FedEx and TruServ, Zucker has upper management support for placing innovation over service on his daily to-do list.

When Zucker looks at today’s gloomy economic weather, he sees an opportunity to get a jump on his competition. “Dollar has been very committed to making sure that we not just keep up with what’s been going on in the industry, but that we try to get ahead,” he says. “If we fall behind, we get left in the dust.”