Waste Management's New Model: Garbage In, Profits Out
The trash-disposal company, No. 3 in our 2011 InformationWeek 500 ranking, is using statistical models to drive price optimization as part of a companywide transformation strategy.
Pricing is one of the most powerful tools in business, yet many IT organizations won't touch it with a 10-foot pole. That reluctance, and a dearth of tech tools for this purpose, explain why the pricing of products and services continues to be driven by gut instincts and personal experience in many industries, rather than by data-driven decision support systems. Waste Management decided that wasn't good enough.
The trash handling and recycling company, which had $12.5 billion in revenue last year, created a price-optimization system that uses customized statistical models of the factors that drive market prices and price sensitivity in each of its 25 regions. Through a Web portal, pricing managers can see customers whose contracts are up and the likelihood they'll accept or reject a price increase.
Pricing managers then apply their judgment on how to proceed. Is the customer in a key market that Waste Management's trying to break into? Is this a customer who has complained recently about poor service? Is it on an existing truck route, thus cheaper to service? "No matter how much you automate, you'll never fully replace the judgment a human being can bring to the table," says CIO and senior VP Puneet Bhasin.
The software provides a starting point for determining where to raise prices and where to ease off. "The key is identifying the right price, so the customer isn't feeling like they're not getting the value, and we're being profitable," says David Logsdon, VP of IT, who helped drive the project.
For a company with 22 million customers that provides more than 100,000 quotes a month, bringing automation, science, and discipline to the pricing process is part of a broader, tech-intensive transformation. Waste Management's ambitious goal is to increase revenue $3 billion to $5 billion over the next three to four years, while cutting costs by $1 billion.
Top 10 IT Innovators: InformationWeek 500
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CEO David Steiner, Bhasin, and other senior execs meet every three weeks for about six hours to discuss the progress of some 15 key initiatives that are under way. The effort launched about nine months ago; projects include e-business improvements, sales-force automation, logistics and routing optimization, and pricing. About 80% of the projects have a major tech component.
The company created a new department as part of its transformation called Decisions Sciences, which brings new expertise in statistics and analytics, and which reports to Bhasin. For the e-business effort, where the company's trying to drive online sales for things such as short-term large trash-bin rentals and small-business services, IT is accountable for budgeted revenue increases. "My friend here carries quota," Bhasin says with a smile, slapping Logsdon on the back.
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