Special Report -- FINANCE AND TECHNOLOGY
Sophisticated data systems turn financial records into versatile strategic tools
Clark H. Johnson, chief financial officer for Johnson & Johnson, was shocked when he read a Du Pont Co.-sponsored benchmarking study on finance-unit expenses back in 1989. It turned out that his department ranked among the worst in Corporate America on its overhead-to-sales ratio. Johnson now says it was "hard to get people serious about costs when sales were growing at double-digit levels." But that troubling discovery prompted him to launch a revamp of finance operations that he figures has saved the multinational health-care products maker an average of about $200 million annually.
The real benefits go much deeper than mere cost savings, however. In zeroing in on costs, Johnson (no relation to the founders) also triggered a revolution in the use of financial information technology at J&J that has transformed his role from bean-counter to full business partner with revenue-producing line units. Thanks in part to quantum leaps in computer hardware and software technology in the past few years, Johnson's finance department is no longer preoccupied with transaction systems, reporting, and cost efficiency, but is concentrating on analyzing information to boost revenue.
Today, Johnson's pride and joy is a "data warehouse" called Darwin, a sophisticated system that enables managers in some 50 countries where J&J operates to slice, dice, and analyze masses of information from computers all over the company on everything from accounts receivable to inventories. One key benefit: customer profit and loss statements that have given J&J the ammunition to renegotiate unfavorable contracts. Right now, J&J is mulling dropping at least one product line that Darwin revealed as a loser. What really excites him, however, is the prospect of a real-time "virtual financial statement" that he could call up with a mouse click, which would let him make critical capital allocation decisions earlier and slash the thousands of hours of grunt work now required to close the books. That would free Johnson and his colleagues for more challenging tasks.
After nearly two decades of struggling to boost product quality and then downsize workforces, many other U.S. companies are realizing that those steps alone will not guarantee them a competitive edge into the next millennium. Information technology--software and hardware that mines data and transforms it into strategic information--is fostering a sea change in the way companies assess their growth prospects. The most savvy companies realize that it will help them to discover new customers, wring more revenue out of existing ones, and lower financing costs by optimizing assets and liabilities. "The companies that are leading have cost-compression on autopilot. The real potential is to deepen and augment customer relationships," says Harvard business school professor Jeffrey Rayport.
CENTRAL PLAYER. At Johnson & Johnson and other companies that have successfully embraced the new information technology, the chief financial officer, rather than the chief information officer, has typically emerged as the central player, in part because finance gathers a company's most critical data in overseeing functions such as billing, accounts payable, and the general ledger. The CFO is spearheading the shift from old mainframe-based "legacy" systems, which cranked out lots of data but little useful information, to the global, integrated systems that have made possible data warehouses like J&J's Darwin and the virtual financial statement.
But, alas, experts say that companies like J&J are the exception. According to Dimitris N. Chorafas, a financial technology consultant, only about 15% of large U.S. companies are successfully utilizing the latest information technology. Adds Thomas Walther, a partner at Coopers & Lybrand Consulting and co-author of the newly published Reinventing the CFO: "An awful lot of companies are still mucking around with their transaction systems."
Leading-edge companies that have ventured into the Information Age are finding that these technologies are producing not only dramatic cost savings but also radical changes in the way they do business, particularly internally. They are realizing short-term gains by integrating and standardizing a mishmash of traditional systems such as accounts payable, general ledger, and payroll. The more venturesome are discarding those systems entirely in favor of software packages that allow these functions to "speak" to each other and share data across the enterprise.
Johnson & Johnson, Sun Microsystems, and Kraft Foods are a few of the many large companies that have set up so-called "shared services" units using networked computers that consolidate certain finance activities into a single location. J&J, for example, pulled together all of the payroll units that had been located in its U.S. facilities. Now, 26 clerks pay J&J's 32,000 domestic employees vs. 120 under the old arrangement. Other companies are outsourcing these activities to vendors.
While these new systems cut costs, they often result in better customer service. Dallas-based Haggar Clothing Co.'s new inventory control system has slashed the time it takes to fill a customer's order from a week to about 48 hours, according to Chief Financial Officer Ralph A. Beattie. "You have to be able to provide product when the customer needs it," he says. Another major benefit: By better managing its inventory, Haggar can "boost cash flow and reduce borrowing."
Additionally, some CFOs are cautiously starting to use their intranets, or internal webs, to deliver financial information. At Sun Microsystems Inc., a simple system called Paycheck uses the intranet to let employees view their payroll information online anytime they want, saving Sun hundreds of thousands of dollars in postage. The next big leap, experts say, will be the move to link intranets to form virtual corporations, enabling companies to reduce paper transactions.
To be sure, installing software that essentially links the operating processes of an entire company is a crucial decision. That's because this typically requires a major overhaul in business practices. Of these programs, R/3, a product of German-based SAP, is the most popular, particularly among multinational manufacturers. It's also the most controversial. At Eli Lilly & Co., Chief Information Officer Thomas Trainer raves about it. "We took a clean sheet of paper, reengineered the process, and tried SAP. It works." The biggest benefit has been in helping Lilly adopt economic-valued-added (EVA) management, the performance measurement system used to award bonuses to several hundred executives. "With SAP and EVA, we've transformed how we've managed this company," Trainer says.
Kraft, for one, thinks it can achieve similar results faster and cheaper without SAP. Says Kraft's William Chiasson, senior vice-president for finance and information: "SAP didn't fit. It's a very complex installation, and it would take years more."
But the real promise of information technology resides in data warehouses. The technique enables analysts to conveniently slice and dice customer data in new ways and to quantify softer, nonfinancial measures of performance, such as customer satisfaction and employee creativity. Instead of focusing solely on market share, says Elizabeth Hjelm, a Coopers & Lybrand Consulting manager, companies are also analyzing how much of a customer's total business belongs to them--what's called "share of wallet."
Data warehouses are not new, but technological advances have lately made them more feasible for more companies. Retailers such as Wal-Mart Stores Inc. pioneered the concept more than a decade ago to monitor sales trends and fine-tune their marketing and inventory strategies. Now, about 90% of large U.S. corporations are "building or about to build them," according to William B. Dodds, a business information strategic leader at Electronic Data Systems Corp.
One of the most ambitious projects of its kind is under way at Coca-Cola Co. Called Project Infinity, the $100 million-plus effort is based on SAP's software and aims to create a common global business language for Coke, including standard Coke product codes. Eventually, Project Infinity will make every piece of information immediately available to everyone in the worldwide Coke system, from bottlers to headquarters executives, according to Chief Financial Officer James E. Chestnut, who's heading the project. For example, Chestnut could determine instantly that a French bottler had ordered 100 gallons of Classic Coke concentrate, and more important, how profitable that bottler was.
"DATA EVERYWHERE." For all its obvious advantages, the new technology remains a minefield for the unsophisticated. Many that have gotten on to this information highway have swerved off course, often because they were seduced into buying expensive hardware and software they didn't need or understand. And laggards of all stripes are wringing their hands over how to leave behind their Stone Age systems. "I have data everywhere but not a drop of information," lamented Charlie Drumm, a consultant with General Accident Insurance Co. of America, at a recent technology conference. "You can have a homeowner's policy with General Accident and an auto policy with General Accident, and we have absolutely no idea whether you're the same person."
Furthermore, companies continue to be tempted to pour millions into system upgrades to keep up with the Joneses or find a magic wand. Says David Axson, vice-president of the Hackett Group Inc., a technology consulting firm: "There's an awful lot of technology out there looking for a problem to solve." Installation always takes longer and costs more than expected, mainly because people are reluctant to change their business practices. Another "people" obstacle, says EDS' Dodds, is "lack of communication" between CFOs and CIOs, who sometimes see each other as rivals. Consequently, many data warehouses turn into data "outhouses," he believes.
Smartly applied, however, information technology is likely to build the mansions of the next century.By Phillip L. Zweig with John Verity in New York, Stephanie Anderson Forrest in Dallas, Greg Burns in Chicago, Rob Hof in San Francisco, and Nicole Harris in AtlantaReturn to top