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The Altria Group: Running IT as a business

Altria, frequently ranked number one in Economic Value Added, credits much of the company's success to its focus on ROM. The top ranked consumer goods company owns Philip Morris International and Kraft Foods, among other companies.

At a time when most enterprise IT organizations are struggling to improve their business' ROI, the IT unit at Altria...

Group Inc. is intent on improving the company's ROM.

The concept of ROM, or return on management, was introduced in 1990 by Paul Strassmann, whose work is the basis of the SearchCIO 200. Strassmann's argument that large enterprises were squandering their IT dollars on petty cost-cutting efforts rather than spending them on business enhancement found an adherent in Jim Noble, vice president of technology and CIO at the $80 billion Altria.

"We have to determine what's critical and what's not. Sure we could save a few cents by turning off some lights," he says, "but would that really make a difference to our business and to our shareholders? At Altria, we don't obsess about efficiency; we focus on effectiveness."

To more effectively serve Altria's subsidiaries, which include Philip Morris USA and Kraft Foods Inc., Noble joined forces with Electronic Data Systems Corp. last spring and created a new Altria unit: Technology Enterprise Computing Works LLC. Known as TecWorks, the new IT services organization offers Altria's subsidiaries computing services on demand, in competition with other third-party service providers.

TecWorks provides the Altria subsidiaries with a catalog of service offerings. Each offering consists of a service definition, service-level agreement (SLA) and a unit price based on the level of service to be provided. For instance, a "high-availability AS/400" offering costs more than the standard AS/400 service offering. This on-demand model allows the companies to obtain only the premium IT services they need, so they don't have to pay for resources that they don't require.

While TecWorks doesn't have to show a profit, it does have to demonstrate that its pricing is competitive with outsourcers and other third-party service providers. The IT subsidiary's customer base -- the Altria-owned companies -- are not a captive market; with many IT services, the company are free to choose the service provider that best meets their price-performance requirements.

Prior to forming TecWorks, Altria employed 5,500 IT professionals worldwide. Since creating the new subsidiary and contracting with EDS to help manage the company's IT infrastructure, that number has fallen to around 5,000. But Noble stresses that creating TecWorks had less to do with reducing staff and cutting costs than with helping Altria become "a more technology-intensive business." The new IT business model, he says, enabled Altria's core IT services staff -- around 550 people -- "to shift our focus from operations to profitability initiatives aimed at helping the business units improve their processes."

Key among these initiatives are new product life cycle management (PLM) software and electronic product codes (EPCs).

Noble, who prior to joining Altria worked in General Motors Corp.'s IT organization, says that PLM grew out of the auto industry's early computer-aided design and manufacturing implementations, and that GM successfully used PLM to shorten its product development and introduction cycle from 48 months to 16 months. Not coincidentally, EDS, which at the time was a GM subsidiary and managed the auto manufacturer's IT operations, was a pioneer in PLM and developed one of the leading PLM software packages. While product development takes place on an entirely different scale in the consumer packaged-goods (CPG) industry, as compared with the auto industry, Noble is convinced he can deploy PLM to shorten Altria's product cycle and gain a significant competitive advantage.

EPC (known in some circles as RFID, or radio frequency identification) is what Noble refers to as "a transformational technology that could turn the CPG industry on its head." These intelligent bar codes have the potential to dramatically reduce the amount of time, money and effort involved in tracking packaged goods and managing inventory.

The world's leading retailer, Wal-Mart Stores Inc., has already decreed that its suppliers must tag shipping pallets and product cases with EPC codes by January 2005, and the entire CPG industry is scrambling to meet the deadline. But Noble says the true payoff could come from tagging individual items and then analyzing point-of-sale data. This could pave the way for strategic initiatives such as direct-to-store delivery, shelf stacking for sales optimization, and tailoring product mixes to better suit regional preferences.

Christopher Boone, program manager for U.S. vertical industry research at technology market research firm International Data Corp., says technologies like EPC are driving CPG manufacturers "to look at their IT spending as an investment, as opposed to a back-office cost." In particular, Boone notes, they have seen how Wal-Mart, their biggest customer, has approached IT as a strategic investment. Altria and others have recognized, he says, that "if they don't follow suit, they may lose Wal-Mart as a customer."

Noble does not disagree. "If all you're going after are some minor improvements in efficiency, then you're just wasting your time" he says. Strategic undertakings like PLM and EPC "are what Strassmann was getting at in his famous book. It's initiatives like these that are truly rewarding to a company and its shareholders." They can also earn you a spot on the SearchCIO 200.

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