CIO to CEO: Dawn Lepore’s Lessons Learned

As the CIO and later Vice Chairman of Technology of brokerage Charles Schwab from 1993 to 2003, Dawn Lepore was among those pioneering IT executives who became strategic business leaders. In 2004 Lepore parlayed the lessons she learned as a member of Schwab’s executive team to become president, CEO and chairman of drugstore.com.

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At Schwab, Lepore rode high through the dotcom boom. In 1995, she launched Schwab.com in a matter of weeks. It was the first customer-facing website for the company that was then a worldwide leader in electronic trading by its brokers, and it helped Schwab preserve its competitive position as a discount broker against upstart E*Trade. For her achievement as a technologist who created a strategic role for IT, CIO chose Lepore as a member of our CIO Hall of Fame.

Lepore left Schwab for drugstore.com as Schwab’s fortunes waned (then-CEO David Pottruck was fired in 2004). The online health and beauty retailer had turned only one profitable quarter since it was founded in 1998. Sales were sagging. Turnover was high. And company shareholders were growing restless. Lepore was hired to turn things around.

So far, the road to profitability has been challenging. Although revenues are rising, drugstore.com ended the second quarter of 2007 in the red. But Lepore is betting that fundamental business and IT principles will change that.

For example, she performed a comprehensive strategic review of the company’s business segments to evaluate the profitability of each customer order and partnership, then eliminated or adjusted the price on several thousand over-the-counter products. Among other accomplishments, she also reduced net shipping costs by introducing weight-and location-based surcharges for certain customer orders and nixed an unprofitable relationship with a pharmacy benefits management company.

Furthermore, applying the lessons she learned while selling her colleagues at Schwab on the importance of the Internet as a business tool, she has clarified the role of IT at drugstore.com as one of strategic business partner. “The role of IT as a strategic partner, especially when I was CIO in the 1990s, was not entirely the norm,” she says. “Today I think it’s clear that no company [can succeed] without defining a role for IT and how IT can operate within that role to improve business strategy. Drugstore.com’s IT team is a strategic partner in our e-commerce business. The business works closely with IT to identify top priorities and to analyze the ROI of initiatives based on revenue, profitability and customer satisfaction.”

Lepore recently spoke with contributing writer Matt Villano about how her past IT experience helps her analyze and evaluate business decisions.

CIO: Is drugstore.com a technology company or a retail company? And what does your answer tell us about the role of IT?

Dawn Lepore: When I got to the company, that was a raging debate. I could answer that question the first day I was there. We’re a retail company where technology’s absolutely critical.

There’s a subtle difference in whether you think of yourself as a retail company or a technology company. That doesn’t mean that the technology organization is not crucial to our success. It is absolutely crucial. But if you understand that we’re a retail company first—that technology needs to be used to enable e-commerce and enable our customers to shop—you look at technology slightly differently.

As I learned when I came aboard, the world of retail is a world of razor-thin margins. The good news is that keeps us on our toes; we have to watch every penny. The bad news is that we can’t really make mistakes. It’s very hard to make big investments that don’t pay off. Companies which have higher margins can make three or four bets, spend a fair amount of money and then decide which one works. We have to be a little more cautious in where we make bets [with IT] and how we do that.

Separately, being an e-commerce company presents some unique challenges. With other types of businesses, customers can have multiple ways of experiencing you. With our business, the only experience our customers have of us is through the website. That puts an added burden on us—a burden to maintain a positive experience all the time. We’re not perfect, but hopefully we can be over time.

How is turning around a company different from jump-starting an IT department as you did at Schwab?

Lepore: There are a number of differences. The scale is certainly a little bigger. Also, because we’re a public company, I must be accountable to our shareholders, which is something I didn’t have to worry as much about at Schwab because I was running the IT department.

When people have put money into your company and they’re depending on you to lead a team to turn the company around and deliver on their investments, there’s a huge sense of responsibility that goes along with that. And I definitely feel that every single hour of every single day. It’s not really something I’d say I focused on as heavily as a CIO.

Of course there also are lots of similarities. The idea of having to take a step back, look at where you are today and take a real strategic assessment of what are the strengths, what are the weaknesses, what are the changes that need to be made—that’s all the same. Really, both situations are a lot about leading change and a lot about making the right strategic decisions, having the right people in the right jobs and building the right culture.

I always strive to do my job while staying true to two personal valuesmade—managerial courage and generosity of spirit.

What has been your biggest challenge so far?

Lepore: One of the things that’s always challenging when you come into a company to turn things around is to respect the past and the team that got you where you are, but at the same time be very objective about what’s working and what’s not, what’s good about the strategy and what has to change. It’s a balancing act, because you want to be respectful and supportive of the people who built the company to the point where you joined it. They put their heart and soul into it. They made the best decisions they knew how to make.

Another big challenge is always keeping the customer in mind as we make changes to the way we do things. I’m on our site every day trying to gauge what the customer experience is like. It’s constantly a challenge for IT organizations to remember that the customer is really the center of things and, as we act, to ask ourselves what our efforts are going to be like from a customer experience. That was the case at Schwab, and because of the situation we’re in, focusing on customers is even more the case now.

How does your experience as a CIO influence how you communicate your expectations to Luke Friang, drugstore.com’s vice president and CIO?

Lepore: There are positives and negatives about me coming into the CEO position with experience as a CIO. The positive is that I truly understand how hard his job is. I truly understand the challenges he’s dealing with because I’ve lived them. The flip side is that in some ways that makes me even more demanding because I know what the issues are. I’m going to ask an awful lot of detailed questions just because I’ve got experience.

When I was CIO at Schwab, one of the things that I know my CEO appreciated is that I never emotionally blackmailed him. I never said, “Oh, well, I can cut costs but, you know, in exchange we’ll have to lose X, Y and Z.” And the good news is that my CIO never does that, either.

Luke understands that everything is a business decision. He gets that the business case can be about enabling future change, lowering cost structure, keeping our technology innovative or just about anything, as long as it’s expressed in terms of business value. He sees that he can’t just walk in and say, “Well, you have to trust me.” That makes the decision-making process for IT investments easier.

So what do you look at when you evaluate purchasing decisions?

Lepore: We’ve recently implemented drop shipping [so that inventory is maintained by the company’s wholesalers]. We put in a new internal search tool [for customers to search the site]. We also implemented a new prestige beauty site, Beauty.com, which is a key part of our strategy to refocus on profitability by selling products with the highest margins. Down the road, we’re looking at a major investment in terms of rewriting a piece of our platformmade—if the technologists decide it is more cost effective to move from proprietary software to an off-the-shelf package. As we evaluate all of these projects, we’re looking at how they are going to support things like revenue growth, cost reduction, retention of employees and speed to market.

We’re also looking at all kinds of [new] technology. But the argument that people don’t like working on old technology doesn’t fly. For us, it’s got to be, “Here’s the investment. Here’s why it makes sense. Here’s the payback. And here are the specific benefits.” At the end of the day, everything we do must be tied to the customer.

Matt Villano is a freelance writer based in Healdsburg, Calif.