J.C. Penney’s Recession Investment Strategy

Charlie Feld: Times are turbulent in retail. What are your thoughts about getting through this era in a quality way?

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Tom Nealon: We have a five-year plan for the business that is very clear. Given the environment, though, we’ve created a “bridge plan” that is a practical response to the climate, without walking away from the objectives of the long-range plan. The economy has impacted decisions around the pace of new store openings, as well as around inventory levels, just to give you a few examples. What it’s not impacting at this point is investment levels that set the future capabilities of the company.

Mike Ullman: The way that we created the bridge plan was pretty straight-forward. We created three buckets. In the first bucket were the things that we decided to slow down or moderate. Things like our capital investment spending, inventory commitments and SG&A expense. In the middle column were the things that we intended to maintain our focus on—things like our power brands, our key initiatives around merchandising, and our commitment to our dotcom strategy. And in the third bucket were many of the strategic initiatives. These were the things that we intended to accelerate. Technology is essential to many of the initiatives in this category.

Feld: I assume you are not setting your priorities in a vacuum. Are the business leaders bought in?

Nealon: Absolutely. The priorities line up against the business priorities that are laid out in the long-range plan. There have been a few things we’ve taken off the agenda. We’re not being as aggressive on a back-office ERP implementation, for example. So I would say that 80 percent of our application spending is aligned explicitly with strategic initiatives and 20 percent is the “must do” compliance kind of stuff.

We’ve been able to hold the IT budget essentially flat without impacting our strategic projects. One of the things that we’ve done that is working really well is what we call our BILT, or Business Infrastructure Leadership Teams. What we were trying to avoid was the model of IT steering committees. What we wanted was an ongoing forum where the business leaders and the IT leaders were setting the priorities, discussing business issues around processes, systems, organization, implementation and change management. There’s a BILT team for each of the strategic initiatives.

Ullman: We didn’t want a traditional governance kind of role for IT. We really wanted it to be integral to our executive board agenda. So each month we have a four to six hour meeting of the top 20 people, and there’s at least a half hour if not an hour on the issue of how do we keep bringing forth the tools and productivity that the team needs to be successful. So even the merchants and the people who are furthest away from understanding the technology see IT as central to what we do.

The problems that we’re solving are bigger than technology issues, and our merchants get it. We’re not doing much work on the older systems. We’ve made some sacrifices there in order to reinvest in digital and personal security and various initiatives that we think are fundamental to running a successful business in a very competitive climate.

Feld: How would you describe your top priority initiatives and their business impact?

Nealon: I’m not sure how to answer the question of which initiative is number one or two. I’d say we have several things going on that I’d characterize as Tier 1 priorities. The first is channel integration from a merchandising perspective. We have industry-leading planning and allocation tools today for our 1,100 stores. Now we need to fold our dotcom and catalog business into these same tools, processes and organization structure. The processes and organization are done. Now we need to complete the work on the tools. Another Tier 1 priority is flow execution. We continue to drive time out of how long it takes us to bring new merchandise to market.

A third area that we’re really getting excited about is customer-enabling technologies. We are beginning to bring digital into the stores in a really creative way, and we’re being aggressive on mobile. Digital couponing, mobile wallets, social networks—all of these play a huge role in retail going forward. It’s not totally clear how it will shake out, but this is where we’re going.

Another area that we will continue to focus on is information security. We’ve met all of the PCI requirements, but this is something that we’ll continue to spend a lot of time and money on. This is a big deal in retail.

Feld: How have you changed your funding and governance model to align with the BILT teams?

Nealon: Two and half years ago, each business area held its own IT capital, and the expense dollars resided in IT. In the absence of the BILT teams, the expense dollars were allocated to each function. Everyone got so much, irrespective of the work. That was not an effective way to drive big, important agendas. Now the BILT teams are the forum where we decide how to set the funding priorities. It’s where we bring the discussions back to the long-range plan and the key strategies. This framework is effective because we have commitment to the process from the CEO and every member on the executive board. As a result, all funding associated with technology, both capital and expense, is held within the IT budget and governed through the BILT teams.

Feld: You’ve done a great job engaging the leadership team. Have you been able to do the same with the front line?

Ullman: We give the executive board and the broader organization visibility into the work—and we communicate early wins and where we’re going. From an organizational point of view, if you had asked someone three or four years ago whether we could integrate stores, catalog and dotcom in less than a year, involving over 1,000 people changing their jobs and with the IT infrastructure we had at the time, the answer would have been no. I think there’s something in it for everybody because they recognize we can’t run the business in the old way.

A member of the CIO Hall of Fame, Charlie Feld retired from EDS in 2008. Tom Nealon is EVP and CIO, and Mike Ullman is chairman and CEO with J.C. Penney.