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Synergy' Fizzles

By Mel Duvall  |  Posted 2003-05-01 Print this article Print

The choice of a new generation is rife with options. Will Pepsi prove itself to be up to the challenge?

Synergy' Fizzles">

'Synergy' Fizzles

Coordinating technology efforts, eliminating duplication and sharing best practices is something PepsiCo has been pontificating about for years, says Tom Pirko, president of BevMark, a beverage marketing consultancy in Santa Barbara, Calif.

With good reason. Many big, diversified companies are getting rid of the separate sales teams, separate marketing departments and, in some cases, separate supply chains associated with each business unit. The goal is to act like a single company, to make it easier for stores to buy from you.

Selling—and, more important, cross-selling—is more efficient this way. Newell Rubbermaid, The Scotts Co., CNA Financial and Unilever are all doing it, and overhauling information technology is critical to making it happen.

At PepsiCo, though, "they've been talking forever about how they're going to streamline operations and integrate systems and they're still talking," says Pirko, who has followed the company for two decades. "The commitment just hasn't been there."

PepsiCo CEO Reinemund acknowledged as much during a recent meeting with Wall Street analysts.

"I have to tell you, we've talked about this for years," he said. "I can remember in 1986 having a meeting with the division presidents at the time and we talked about synergistic things we could do together, and we had a nice discussion for a couple hours and went back and nothing happened."

Larger than powerhouses such as DuPont, Sara Lee or McDonald's, the $25 billion PepsiCo is one of the most successful consumer products firms in the world. Frito-Lay rules the salty-snack business, selling $14 billion worth of Doritos, Lay's and other munchies last year. Pepsi-Cola sales topped $5 billion, second only to Coca-Cola's $20 billion. While Pepsi's market share slipped slightly against Coke in the U.S. last year, it had gained steadily for three years before that.

The $4 billion Tropicana juice company is also part of PepsiCo, as is the $1.5 billion Quaker Foods. In all, PepsiCo controls 55 brands of food and drink. The company also owns 35% or more of each of the three big bottlers, which together account for 75% of Pepsi sales in the U.S.

Yet many former PepsiCo technology executives have left disappointed. "No one was willing to make the tough people-decisions," says Honorio Padron, a PepsiCo divisional CIO who left in late 1997. Padron described the climate during his 1 1/2-year term as "very volatile."

He was hired in part to lead an integration strategy at PepsiCo, but, he says, "No one was willing to say, 'Guys, this is not a democracy—we're going to do it this way.'"

PepsiCo asks departing executives to sign agreements not to "disparage" the company in public. The result: Several of the executives who talked with Baseline about their disappointment at PepsiCo requested anonymity.

They say the company could be even stronger than it is if it could carry out a clear, decisive information technology strategy. PepsiCo does not consistently share best practices, such as Frito-Lay's groundbreaking mobile computing ideas, among business units. The company struggles to integrate information systems across divisions, which largely operate as separate entities.

PepsiCo's central Business Solutions Group is supposed to guide companywide computer plans and standards. But each business unit also has its own technology staff. The two factions frequently butt heads, according to several former technology managers.

With no resolute action from the corporate parent to direct technology, Pepsi's business units constantly duplicate work and miss the chance to bargain hard with vendors for cross-company deals. The waste adds up.

In handhelds, for example, Pepsi's bottlers have spent more than $40 million on new hardware in the past two years and a $100 million Frito-Lay purchase is pending this year. Including software and consulting, the total outlay is estimated at $200 million. If PepsiCo were to combine its purchasing power and standardize on two or three applications, analysts estimate, a bulk buy could save 20% to 30%. That's up to $60 million saved in just this one area of technology.

The obvious savings come from aggregating demand, but just as important are the periphery savings, says Richard Waugh, co-founder of B2eMarkets, a company in Rockville, Md., that specializes in volume purchasing.

"When you can bundle the purchase to include software, installation, service and maintenance, the savings can be that much greater," he says.

Former PepsiCo technology executives peg total technology spending at about $1 billion per year, with individual business units spending about $650 million together, plus another $300 million in charge-backs from the shared services group. Alinean LLC, a consulting firm in Orlando, Fla., that specializes in figuring the value of information technology, puts PepsiCo's technology budget higher, at $1.6 billion annually.

It's not as if PepsiCo hasn't tried to unify technology.

In 1998, Steve Schuckenbrock, then chief information officer at Frito-Lay, set up the PepsiCo Business Solutions Group in Plano, Texas. The shared services group was to handle computing tasks that touched all business units, such as network infrastructure and data center operations.

Initially, the group was to adopt cross-divisional software for human resources, finance and procurement, create a central corporate data mart and set standards for infrastructure technologies, such as for systems management.

Later plans included integrated sales and marketing systems and a supply-chain management platform to control everything from procurement of raw materials to shipment of finished foods and beverages to stores.

PepsiCo anticipated at the time it would save unspecified millions in yearly expenses by cutting redundant information systems.

But five years later, there are no companywide enterprise systems. No two technology infrastructures are the same among the divisions; units use different enterprise software, different databases, different human resources systems, different financial applications, different distribution hardware and software. Frito-Lay, for example, runs Oracle software for financials and human resources and i2 Technologies software for managing its supply chain. Quaker recently aborted an SAP software project and reverted to older custom-built applications while preparing to move to Oracle financial, procurement and supply-chain applications.

PepsiAmericas and Pepsi Bottling Group both run PeopleSoft packages. For business intelligence, Tropicana uses tools from Hyperion but Business Objects at Frito-Lay and Informatica at Quaker. Pepsi-Cola built a call center in Winston-Salem, N.C., using Siebel Systems software, and Pepsi Bottling Group later moved its call center there. But no other units have joined them.

Even those PepsiCo executives who supported the concept of the Business Solutions Group eventually lost enthusiasm. "I believed shared services within the I.T. functions had tremendous merit," says a former divisional CIO. "I still believe that. But it was big job, a very tough assignment that required major cultural changes. And that's where things broke down."

CEO Reinemund says the company has let divisions go their own ways because that strategy worked. As long as units met growth and profit targets, management didn't want to interfere. PepsiCo's total sales grew nearly 7% last year and 5% in 2001.

"There is an advantage in keeping the kind of ownership that we've always had at PepsiCo, where the divisions own their businesses, they're responsible for their businesses, they know their businesses and they have focused resources against what makes them successful," Reinemund told financial analysts in February.

PepsiCo executives declined to talk with Baseline about the issues of transferring and unifying technology between divisions and instructed other employees to refrain as well. The company generally avoids the press except for specific occasions when Reinemund or Nooyi, president and chief financial officer, grant interviews.

Discussions with current and former PepsiCo managers, however, as well as with technology suppliers and industry experts, plus a study of public earnings reports, speeches, conference presentations and other documents, reveal an inability to successfully transfer the best technology in use at one Pepsi unit or bottler to the others.

Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.

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