Strong IT Capability Helps Midmarket Companies Grow

When the winds of fortune bring a gust of growth to midmarket companies, CIOs need to be fast-moving, flexible and braced for change to bring their firms to new heights.

When sales spike, CIOs must hit the ground running.

Hollywood starlets Kate Hudson and Pamela Anderson fell in love with the pricey Ugg sheepskin boots. Oprah showcased them on her 2000 holiday gift show. All signs practically screamed that the next few years would be big for Ugg shoemaker Deckers Outdoor Corp. because, well, everything was coming up Uggs.

Too bad technology was tripping up sales at the fast-growing Goleta, Calif., company. A new Oracle Corp. system -- more than a year in the making -- was, if not dead on arrival, then gasping for air from the moment it went live in August 2001. Sales reps were calling in orders, only to be told the system was down, forcing the firm to process sales manually.

"We had problems shipping, we had problems invoicing, we had problems printing invoices, we had a ton of issues. That's why I was hired," says IT Director Kurt Sowa, who joined Deckers in 2002. "I ended up relieving my predecessor."

Fast Growth
Between 2002 and 2005, sales more than doubled at Deckers Outdoor Corp.

Working feverishly with a three-man team and mustering the know-how of 15 years at military contractor Northrop Grumman Corp., Sowa traced the meltdown to a bad implementation -- and redid it. One, two, three, four months and one fastidiously tested upgrade later, the system went live without a glitch. Sales started rolling through the system.

"It was one of those momentous days, because Doug Otto was just beaming," recalls Sowa, referring to the chairman of the board who founded Deckers 30 years prior.

CIOs of companies like Deckers have to clean up systems quickly so the business can take advantage of sudden growth opportunities. Often hired because a previous CIO was unable to deal with the rapidly changing terrain, folks like Sowa come in as riders to the rescue. They are tough guys hell-bent on cleaning up the mess and determined to exploit swiftly closing windows of opportunity.

But they are much more than cleanup artists who focus solely on the crisis at hand. CIOs of fast-growing companies will tell you that the only sure thing is that the company will be different from today, often much bigger within only a few years. They have to make IT decisions based on what they think the company will look like down the road, such as spending enough money up front to ensure key systems are scalable.

When Oprah plugged Uggs again on her 2003 holiday show -- the baby blue and pink ones -- Sowa's technology systems were primed: They helped Deckers post net sales growth of 22% in 2003 and reap $19 million in net income, up an astounding 481% from the year before. Growth hasn't slowed since. Deckers' sales more than doubled in the past three years, going from $99 million in 2002 to $264 million in 2005.

A Creative Stress Test

A 2006 Harvard Business School study finds that strong IT is essential to profitable business growth and productivity at midsized companies. The survey of more than 600 midsized global firms shows that those with strong IT capability grew revenue nearly 7% faster per year and enjoyed 23% higher revenue per employee than their peers with weak IT capability. The companies range from 100 to 500 employees. "Growth is a big strain on organizations," explains Marco Iansiti, the David Sarnoff Professor of Business Administration at HBS and one of the study's authors.

Most companies have a small number of people tending to customers and other critical tasks. When a company grows, people get stretched. And when growth outpaces what people can do, the scene is set for disaster. "Those organizations that are thoughtful about IT implementation and deploy it as they begin to grow can do much more to chase the business opportunities by releasing the talent and capabilities of the people in the organization," Iansiti says.

In other words, fast-growing companies require CIOs who can act quickly and creatively to free up technological and organizational clogs that stymie growth.

Patrick Melanson was the CIO at Prudential Steel Ltd., a Calgary-based subsidiary of Maverick Tube Corp., when he got a call in late 2002 from Maverick's CEO to do just that. Corporate information systems needed some law and order; the fast-growing steel pipe maker Maverick had decided to adopt the GE model for integrating its many acquisitions; thus subsidiaries would function as independent business units but comply with certain standards and procedures decreed by the head office. The CEO asked Melanson to move to Missouri and make the hybrid model work for 4,700 employees at the combined $1.8-billion entity.

"I was not even in the job yet, and the phone started ringing," recalls Melanson. Maverick had just acquired five pipe mills from a bankrupt competitor, and someone had botched the transition agreement with the IT department. "Email and Internet was going to get cut off at the [deal] closing for all these pipe mills. I was getting calls saying, 'Hey, they're going to get cut off; we gotta do something!'"

Restoring Internet access for the new acquisitions was only the tip of the iceberg. Melanson had to stabilize the company by creating a new IT infrastructure that could evolve. More important, he wanted to find a painless way to help executives understand IT's role. One day he awoke with a unique idea: Fashion IT operations like one of Maverick's plants, with an IT front office, IT plant maintenance group and IT plant engineers. "I came up with it in my sleep," he says.

Since 2003, Melanson has worked under three presidents and two CFOs, helped integrate half a dozen acquisitions, assumed sponsorship for a PeopleSoft implementation and -- oh, yes -- kept IT humming while Maverick logged a three-year annual growth rate in revenue of 52%. Now Melanson's IT plant idea will be further tested; the Luxembourg company Tenaris recently bought Maverick for $3.2 billion.

Finding out-of-the-box ways of doing things is the hallmark of successful CIOs at fast-growth companies. As Sowa says, "When you get to a small company that is growing like fire, you don't necessarily have all the policies and procedures and ways of doing business well defined, and you're having to invent them as you go along."

A Scalable Architecture

Joe Martins arrived at Design Within Reach (DWR), the chic European home furnishings chain, in 2002 as a consultant to help restructure IT operations. Back then, the San Francisco-based DWR had 15 stores, or "studios," and big plans to open some 15 more a year over the next few years. The company, then just 4 years old, was "struggling a bit with the servers and systems they had," says Martins, 42, a former retailer who switched to IT in the early 1990s. "High network availability takes a certain expertise that you need to have some experience with."

Each studio had its own servers that tapped into a central ordering system. "I looked at the systems in place at each of the studios and realized they were very overbuilt and barely manageable at just 15 studios," Martins says.

"The reasoning of my predecessor -- and it's going to sound funny -- was that we needed to have servers in the studios so that if the [central] LAN connection went down, the salespeople could still be able to log on and print locally," Martin says. "My rather simple question was, 'Well, our order system is central, so what are they going to log on to, and what are they going to print?'"

Martins needed to redo the entire IT infrastructure into a more scalable one. The store servers were shipped to San Francisco headquarters where they became part of a central server farm. Martins outfitted the studios with thin clients embedded with Microsoft Windows XP. Now DWR can focus on keeping the central systems, including the LAN, in prime condition rather than worrying about the health of servers in 63 remote locations. Today the server farm at headquarters handles the work for all DWR studios.

"When the business is moving fast, nobody wants to wait for IT to catch up," Martins says. "We have to figure out how to get a strategic set of systems in place that we won't have to replace the following year because we grew 40%. The [business] might not know when they're growing by 40% a year."

Fast Growth
For three years, steel pipe maker Maverick Tube Corp. grew 52% a year.

But CIOs who can't discern where the business is going may find themselves in trouble, as did Martins' predecessor. DWR went public in 2004 in an offering that raised $32 million, but as its financial filings show, has found it painfully difficult to satisfy the financial rules imposed by Section 404 of the Sarbanes-Oxley (SOX) Act.

At the heart of the problem was a $670,000 systems conversion project. DWR's third-quarter report filed Nov. 15, 2005, tells the story. "We converted our existing information technology systems to a new, custom-built system. We encountered problems with the conversion. In particular, the new systems do not contain mechanisms to automatically identify and correct or reject erroneous or incomplete data." Company shares plummeted 50% on the news.

In August, Nasdaq notified DWR that the company was subject to delisting for failing to file subsequent financial reports on time. The CIO who led the development and integration of the custom-built IT system resigned. Martins, who arrived at DWR after the firm decided to go with the custom-built system, was put in charge, albeit without a CIO title.

Although Martins declines to speak about the SOX problems -- at press time, Nasdaq had granted the company a reprieve provided it filed past reports by Nov. 24 -- he is doing a cleanup job there too. Rather than wrangle with the complexity of the custom-built system going forward, the company elected to scrap it. Martins chose enterprise resource planning software Microsoft Dynamics AX as a replacement. "Our focus is on design and modern furniture. We shouldn't be in the software development business."

Flexible Future

Given the uncertainty of the future, IT needs stable yet adaptable systems that can evolve with the company. "Change is constant. You always keep change in mind; you really build for change," says Eric P. Meyer, a French native with degrees from Purdue and Brown universities.

Actually Meyer, 42, has a pretty good crystal ball. At the age of 33, he shook an industry to its knees, co-founding Netflix Inc. in 1997 and changing the way we rent movies. At Netflix, the push was to build architecture that could evolve, he says. "We spent probably 30% of the engineering time overall initially in making sure we had a scalable infrastructure. It was a penalty we chose to pay to be able to grow."

That doesn't mean building everything to last five or more years, cautions Meyer. It's a balancing act. Sometimes the best solution is to build for the next few months. "It is perfectly fine to build something that will last only three months," Meyer says. "But you spend the maximum amount of design time in things that, if they have to change later, are expensive to change. Then you don't worry a lot about the architecture of things that are easy to change or short-lived, because you think, 'OK, I am going to throw that away; it doesn't matter if it isn't the best piece of code.'"

Flexibility isn't just with technology. Meyer left Netflix after four years and is now chairman, COO, and de facto CFO and CIO (whew!) of Be Jane Inc., an online home improvement forum for women do-it-yourselfers. Ultimately, Be Jane will hire a CFO (and maybe a CIO too), and Meyer will happily give up the CFO role. But for now, he relishes multiple jobs.

"In a young, fast-growing company, you do not want to be stuck to functions; you want to be able to move quickly between functions to where you are needed," he says. "We try to bring a lot of creativity to it." Creativity is a driving force within a fast-growth company -- and the CIO's job ultimately is to make sure technology doesn't douse the fire but fuels it.

When Deckers' Sowa talks about the pride he and his team take in "trying to understand the business," you can hear the excitement in his voice. Similarly, DWR's analytical Joe Martins gushes about the "togetherness" at his company. "We have a great culture," he says.

There's no question that a CIO of a fast-growth company must above all be excited about taking advantage of immediate opportunities as well as planning for the company's rosy future. "When I work, I tend to be a workaholic," Meyer says. "I am passionate about what I do. That is why I do it, and so I do it a lot."

Linda Tucci is senior news writer for SearchCIO.com. Write to her at ltucci@techtarget.com.

This was first published in December 2006

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