A Long-Term IT Plan

December 27, 2007

Because the rate of technological change is so rapid, and the job tenure of CIOs generally brief, most people see IT through the narrow lens of short-term, silver-bullet solutions. Heaven knows, vendors want you to believe that their important new technologies will blow away what has come before. You can’t blame a salesperson for trying to sell, or CIOs for having a queasy buy-or-lose feeling, but this attitude is precisely the opposite of the one companies should be taking. We would argue that because the winds of change buffet IT more than any other area of the organization, IT benefits most from a long-term, disciplined, strategic view, and a square focus on achieving the company’s most fundamental goals.

For example, Frito-Lay’s strategic goal has always been to make,move, and sell tasty, fresh snack foods as rapidly and efficiently as possible. That goal hasn’t changed since the 1930s, when founder Herman Lay ran his business from his Atlanta kitchen and delivery truck. He bought and cooked the potatoes. He delivered the chips to stores. He collected the money and knew all his customers. He balanced the books and did his own quality assurance. Herman Lay knew how to conduct the perfect “sense and respond”e-business before such a thing ever existed, for he held real-time customer, accounting, and inventory information all in one place – his head.

After years of spectacular growth, the company grew more and more distracted from this simple business model. By the early 1980s, the company’s sales force had swelled to 10,000, and information grew harder and harder to manage. The company’s old batch-based data processing systems were all driven by paper forms that took 12 weeks to print and distribute to the sales force. All sales transactions were recorded by hand; reams of disparate data were transferred to the company’s mainframe computers. Much was lost in the process of setting up a dozen different functional organizations and a variety of databases, none of which communicated with each other.

This modus operandi made it impossible to change prices quickly or develop new regional promotions, streamline production, or improve inventory management. It was as if Herman Lay’s company had suffered a spinal cord injury, with the brain and the body no longer connected.At the same time, the company was seeing the rise of strong regional competitors. The leaders realized that if trends continued as they were, its overall revenues would fall significantly by the early 1990s.

Mike Jordan, who took over as CEO of Frito-Lay in 1983, decided to tackle the problem. He reconstructed the company as a hybrid organization that was neither totally centralized nor decentralized. His goal was to teach the company to “walk and chew gum at the same time,” as he put it, by separating out the company’s two competitive advantages: the purchasing, production, and distribution leverages of a national powerhouse, and the local resources that gave the company regional speed and agility. All this led to an organizational design that kept purchasing, manufacturing, distribution, systems, accounting, and R&D as the centralized platform, leaving the decentralized sales and marketing organizations to launch their store-by-store and street-by-street offensives.

Having identified the company’s strategy, Jordan then developed a long-term IT renewal (as opposed to a “rip and replace”) plan. An executive committee – comprised of the CEO, CFO, CIO, and two executive vice presidents – outlined a shift from paper to a risky, emerging handheld technology for the salespeople on the street, as well as a transformation from batch accounting to online operational systems. The goal was to digitally reconnect the company’s nervous system. Equipped with the cool new handhelds, the sales force would be able to manage price, inventory, and customer changes in real time and connect to the supply pipeline. The handheld computers would also establish a technological “beachhead”– one sufficiently important to keep the business’s attention and achieve fast operating results.

Paying for all this, of course, would not be easy. The journey would take from 1984 to 1988, at a huge cost (at the time): $40 million for the handhelds and about $100 million for the databases and core systems. Some on the executive committee balked, arguing that efficiencies gained by the technology would be lost by salespeople working fewer hours. But the company had no choice but to revitalize its regional sales, and though the systems overhaul would be costly, staying put would be even costlier.

To fund the new computers, Jordan set up a long-term, ongoing funding mechanism designed to keep IT spending both predictable and fairly stable from year to year.To get things rolling, each sales region had to commit to a reduction in selling expenses from 22 cents on the dollar to 21 cents within a year of the handhelds’ installation. The savings would be achieved by increasing sales at constant cost, reducing costs, or a combination of the two.

The scheme worked: With the new system in place, the company saved between 30,000 to 50,000 hours of paperwork per week. By 1988, savings resulting from better control over sales data came to more than $40 million per year–savings that in turn funded the renewal of the core data systems. Frito-Lay was able to cut the number of its distribution centers, reduce stale product by 50%, and increase its domestic revenues from $3 billion in 1986 to $4.2 billion by 1989. Today, Frito-Lay continues to be the dominant player in the snack-food industry.

Frito-Lay’s technology story received a lot of press at the time, mostly because the handheld technology was sexy. But notice what the story was really about: It was about executing Herman Lay’s original, real-time business experience–feeling the money jingling in the pocket and seeing the inventory in the truck.

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