InformationWeek
Defining The Business Value Of Technology
| September 22, 1997 |
CHEMICALS:
Seeking The Right Formula
This bedrock industry has the customer in mind as it refines its IT approach
By Lisa Nadile
"We're reorganizing the company into a more fully integrated chemical operative with more discrete business units that operate more independently," says Robert Ridout, VP and CIO at DuPont & Co. DuPont's annual revenue is $22 billion, a figure that tops many a small countr
y's gross national product. It is a figure that the IT executives, including Ridout, cite often when trying to convey the true international grasp of the Wilmington, Del., company to outsiders.
Ridout and his boss, former DuPont CIO Cinda Hallman, rocked the chemicals industry and made IT history last December by overseeing the dramatic outsourcing of DuPont's IT infrastructure to third-party consulting firms Andersen Consulting and Computer Sciences Corp. The $4 billion, 10-year deal raised eyebrows for its sheer size and its competitive daring. It also elevated Ridout up the corporate ladder. He replaced Hallman as CIO when she was promoted to global VP of integrated processes and systems on Aug. 1.
DuPont's move to third-party IT support is an example of a chemicals company's attempts to effectively shrink the size of doing business in order to remain competitive and to continue growth, a key trend in the chemicals industry. The deal was also conceived in support of an effort to push into new marke
ts, another key trend. Countries in Latin America and Asia are ready to supply the petroleum and other resources needed to support new chemicals plants. Chemicals manufacturers like DuPont or Dow Chemical plan to use that petroleum to produce the raw materials for goods such as plastics, automotive parts, and adhesives.
This industry worth hundreds of billions of dollars creates the building blocks that are used to erect the world economy. Any product sold today that uses plastic, adhesives, fuel, or any other man-made content probably started off with a formulation from a relatively short list of manufacturers.
Technology managers in the chemical industry have to deal with everyday IT issues in an environment complicated by international relations and severe product sales fluctuations-as much as 50% of the market every five years. The industry consists of three segments: base commodities, plastics, and specialty products. The first two segments are those affected by the dreaded five-year cycle.
That's why IT strategies in the chemicals industry must encompass the macroscopic, where the business cost to entry easily tops a billion dollars and involves contracts with foreign governments, to the microscopic, where each end user must have an E-mail address and the best desktop equipment possible, regardless of the country that person is operating in.
Those factors-market volatility, geographic expansion, and product innovation-are why the chemicals industry has been known as an aggressive implementor of IT.
For example, many chemicals companies implemented data warehouses before they were called that. Instead, they were used as an automated index of chemical formulations that quickly supplies product-development ideas or marketing trends.
Because of the distributed nature of the chemicals business, many companies have implemented client-server applications such as SAP's R/3, J.D. Edwards' products, Marcam Solutions' Prism, and other financial systems that carry enough power and functionali
ty to be useful, but also come with a price tag in the millions. Indeed, the chemicals industry was one of the first to embrace SAP R/3 as a de facto standard for enterprise resource planning.
And chemicals companies have been in the forefront of WAN technology, such as EDI and frame relay. They are experimenting with electronic commerce over the Internet.
DuPont says the deal with Andersen and CSC will cut its IT costs by 5% to 10%. The deal took effect in the second quarter and is a complex agreement that allows the manufacturer to retain significant control and staff. About 1,100 of the 4,200 IS people will stay to manage contracts and to handle restricted areas such as research and development and also process control. This remaining IS division will hold on to $290 million of the former $690 million annual IS budget.
Two Birds, One Stone
CSC will receive a total of $3.5 billion, and it will purchase DuPont's IT architecture for $52 million, which it also will use for outsourcing projects for other clients. The El Segundo, Calif., company's purchase includes 65,000 desktop computers, 13 data centers, and all the computer networks.
Andersen, in Chicago, will receive $550 million. It will focus on vertical application development and will supply software to Conoco, DuPont's oil company.
While singular in its size and scope, DuPont's outsourcing deal is indicative of several trends in the chemicals industry. DuPont is looking to CSC and Andersen to provide individual end users with the attention they need as the company continues its focus on developing new products and markets. Making a business out of support will lead to its impr
ovement, and employees will benefit, Ridout says.
For example, a flatter organization means new responsibilities for some. Workers in the various DuPont plants now enter chemicals manufacturing data directly, rather than pass the information on to an outside manager. The result is fewer errors, plus a new emphasis on end-user training, which helps eliminate the technology fears many employees have.
By carefully rethinking the corporate business architecture, DuPont and other chemicals companies are getting back to basics. They are paying greater attention to the customer and suppliers, placing business operations closer to the customer, and improving business productivity and efficiency by streamlining operations. For DuPont, the technological skeleton within this reorganization must be more flexible so that it can access resources more quickly and meet the needs of customers working in faster-paced markets.
What DuPont found with the communications tools it was upgrading-both E-mail and networks
-is that it eliminated unnecessary bureaucracy in seeking to free up staff members from the trap of the corporate hierarchy. "Staffing the job doesn't have to mean someone in that geographic area." says Ridout. "I've put together teams with members in Houston, Geneva, and Wilmington. I can get the best people for the job."
DuPont learned from these global teams how the international markets differed. No longer did the U.S. offices feel comfortable dictating what was needed in these global marketplaces, Ridout says.
DuPont's move may have been motivated to a great degree by a desire to be more flexible in response to changes in technology, says Jim Harrison, Ernst & Young's national director for the energy industry in Houston. The deal helps get a large amount of equipment, including aging mainframes with their attendant maintenance costs, off the books as assets. Outsourcing software development means that the company can take advantage of experienced consultants who create customized solutions u
sing the latest technology.
The flexibility of the technology also helped DuPont leverage its joint ventures in new geographical areas by helping communication between the parties sharing the monetary risk. DuPont felt confident enough after the deal that it tackled two difficult but booming areas, Latin America and Asia-specifically China. These sites were known for complex business rules and cultures as well as an inexperience with doing business in the chemicals market. In addition, plans for expansion into other areas are in the works. "You'll see more of the same in other geographies, such as Eastern Europe," says Ridout.
DuPont is also taking part in another industry trend by upgrading to SAP R/3. The financial systems' and other vendors' products, such as Marcam's Prism, are the backbone for integrating the supply chains and having access to more resources, says Ridout.
Many other companies are installing SAP or another financial system to replace monolithic custom solutions. "Systems lik
e SAP's, J.D. Edwards', and others' are a good fit for large-scale chemical-process businesses," says Jim Zell, director of the Benchmarking Partners Inc. research firm in Cambridge, Mass. "Most of these companies are still mainframe-oriented, but they are probably replacing many [high-maintenance] custom applications, such as order entry, marketing, sales, and distribution."
Many chemicals companies are using technology to weather the cyclical nature of the competitive chemicals market by helping them to lower costs. According to one analyst, the large number of products generating profit by small margins means chemicals companies need to turn these systems into ones that can quickly slice and dice through complex heterogeneous environments.
Greater Flexibility
Chemicals companies ride the price cycle, desperately seeking new markets in a mature industry that is extremely competitive. "Projected growth is international, specifically in
the Pacific Rim and South America. The companies are anticipating the boom expected in 1998," says Zell. "The winner is the smartest, the leanest and meanest, and the one with the lowest-cost products, typically commodity products."
The downside is that commodities are the most cyclical output of the chemicals industry. The impact of this cycle is the demand for flatter management structure and a better use of technology to do business more quickly and to be more reactive to changes in the market.
No Imitators Of Outsourcing
"Some are looking at outsourcing bits and pieces, like desktop support, but no one is looking at the wholesale solution" in the way DuPont did it, says Ernst & Young's Harrison.
Also, signing this kind of agreement can limit a company. "Most companies can't predict their needs in two or three years, so they don't want to sign a deal that could not meet their future needs," Harrison says.
While not looking for a huge outsourcing partner, the flat management organization DuPont is crafting is one that M.A. Hanna Co. in Cleveland aspires to as well. After numerous acquisitions and diverse market efforts, the specialty chemicals company made some drastic changes. It has craf
ted itself into a set of decentralized business units, moved out of the more volatile areas of business, and streamlined its corporate staff. The company, which had $2.5 billion in revenue last year, is the largest manufacturer of special-formulation rubber compounds outside the automotive tire industry, company officials explain.
"We divested of mining and shipping and developed a specialty chemicals business, such as rubber manufacturing," says Tony Pizzelanti, VP of IT for Hanna.
The company wants to build a new business by getting closer to customers and being more responsive. To make this possible, Pizzelanti and staff have begun the arduous process of consolidating and standardizing their equipment within the 22 legacy systems received from a number of acquisitions. Implementation of SAP applications is a priority and should be complete by next year.
State-of-the-art networking technology now runs from Europe and over the entire network. A strong emphasis on end-user training for any new tec
hnology and application is in place, because without it, the new, leaner work force will be ineffective, says Pizzelanti.
Hanna's new svelte approach to business was implemented for one reason: to get closer to the customers. The firm saw what many others missed. In a mature industry with elbow-jabbing competitors, a company must get the customer to come back for more. A very simple goal, but not always an easy one.
"All companies are trying to get closer to their customers," says Pizzelanti. "We are trying to integrate into their value chain, so that it creates more of a value loop. When you're closer to a customer, they know that if they want to put together a product or distribute one, then we can deliver it when they need it," he explains.
Admirable goal, but how do you achieve it? There is only one way, says Dan Piteleski, VP of IS for H.B. Fuller Co. in St. Paul, Minn. And that is with bulletproof technology. Fuller is a specialty chemicals company, manufacturing adhesive liquid and power c
oating paints.
Fuller is decentralized into four geographic regions. "We want to take advantage of local knowledge, but still pull the company together," says Piteleski. Fuller, which had $1.3 billion in revenue last year, has baseline products that aren't necessarily leading edge, but they are reliable and trustworthy, leaving the staff time to make important steps forward with deliberation.
That's why, in addition to improving relationships with customers, suppliers, and governing organizations, Fuller is evolving existing technology, albeit more slowly than many. For Piteleski, that steady progression is deliberate-and it has paid off.
"We've been using a data warehouse to analyze which products sell, where, and why. We now have a regional and global data warehouse in the manufacturing, financial, and customer systems, plus we've developed our own [workflow] technology for moving information among those systems," comments Piteleski.
The company's IT strategy is simple. Data is accessible
through the mainframe, and Oracle is the relational database. Fuller also uses an object-oriented database from Gemstone Systems Inc. The company further relies on such easy-to-use graphical-development tools as IBM's VisualAge. In addition, frame relay was added to the net-work for global connections and for E-mail, Piteleski says.
That deliberate development also extends to the Internet. "We're moving into it slowly. I'd like to see them improve security. Despite what is being written, I don't trust it. I need to trust it before exposing Fuller's chemical formulations to the Internet," says Piteleski.
Like Fuller, many chemicals companies say they are enthusiastically making plans for intranets to help with corporate desk-jockeying, but they pull up short before actually committing to use of the World Wide Web for business. Still, IT executives voice the sentiment that E-commerce will become an integral part of the chemicals industry's business-process model. But will the Web replace the handshak
ing and face-to-face contact that is crucial to the deal-making processes so much a part of the chemicals industry? Never.
"It's all about a customer's comfort," says DuPont's Ridout. "They are used to personal relationships."
It's that blend of old-fashioned business dealing with technology and services innovation that is driving the chemicals industry to explore new ground.
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alk to many IT professionals in the chemicals industry, and they sound less like they're crafting a technology strategy and more like they're running a small country.
