Bringing in Big Blue

By Edward Cone  |  Posted 2003-06-01 Print this article Print

Retailing is getting cutthroat. In major metropolitan areas, direct rivals are opening up shop across the street, daring the other to blink and pull up stakes. Among neighborhood pharmacy chains, Eckerd is now in a fight for its life, as Walgreens threate

Bringing in Big Blue

Ironically, Eckerd farmed out its information technology in 1993 precisely because it was starved for cash and falling behind Walgreens and other competitors in technology.

At that point, Eckerd was an independent company that had scrimped on technology while trying to eliminate the $1.5 billion debt from a 1986 leveraged buyout. Other chains, including Walgreens, were starting to show results with a technology Eckerd didn't have—cash registers with built-in bar-code scanners to track sales and improve inventory management.

In that context, IBM was a godsend. It offered not just to install such a "point of sale" system, but finance it as well. "That was a boatload of money you needed to do that, and we didn't have a boatload of cash," says Jerry Rothmeyer, Eckerd's vice president of information technology at the time. He retired about three months after J.C. Penney took over, after 17 years with Eckerd.

The long-term contract also gave Eckerd more technical people assigned to support merchandising and other retail operations than it had on its own, Rothmeyer says. About 200 Eckerd employees transferred to IBM as part of the deal. Ken Banks, then Eckerd's vice president of marketing, described the 1993 deal this way to the St. Petersburg (Fla.) Times: "This contract means we'll be able to react faster to trends, be better able to keep the shelves fully stocked all the time, manage our inventory with more speed and have more capacity to transfer prescription information from one store to another."

Clearly, the IBM deal did not deliver on all these goals. A decade later, Eckerd is still striving to "keep the shelves fully stocked all the time"—and its self-generated remedy is Quantum Leap.

But if the arrangement didn't work over the long term, Banks suspects that had as much to do with Eckerd's management as with IBM's efforts. "Is the fault because you outsourced or because your people are not demanding that the outsourcing supplier reach to the next state of the art?" he asks.

Former Penney CIO Evans says the quality of the IBM-managed information services didn't match the cost. "We could compare the cost and service Eckerd was getting to the cost and service Penney was getting. So we had a benchmark we trusted," Evans says. Eckerd's systems were failing by basic measures, such as network response time. Worse, given Eckerd's need for cash, outsourcing fees were set to rise by 17% each year, he says.

By outsourcing everything—not just commodity services, but application development—Eckerd also hobbled technology initiatives because every new project had to be negotiated as an addition to the contract.

"The way it worked was you were supposed to have all your projects planned at the beginning of the year," says Todd Hale, who served as an Eckerd merchandising department liaison to IBM during that era.

Each year's plan spelled out the computing resources and the number of full-time-equivalent staff hours IBM would devote to Eckerd's business. "But then there was a lot of red tape you had to go through to change priorities in anything. Basically, there were a lot more people between you and the technology," Hale says.

Most companies that become dependent on an outsourcer have no choice but to continue the relationship, Evans says. "I call it the roach motel—you check in, you never check out."

But Eckerd found a way out. At first, Petersen stepped carefully, looking for individual chores he might be able to do better and cheaper in-house. For starters, he tapped into the nationwide data network Penney had established and eliminated the satellite network IBM had provided. That allowed Eckerd to take advantage of favorable frame-relay pricing Penney had negotiated with AT&T, while also delivering more bandwidth and lower latency. The minimum round-trip delay for getting a response from a remote server over a satellite network is about a half-second, which is many times the normal transmission delay for a terrestrial network.

Petersen began considering other consulting firms for projects such as the streamlining of point-of-sale reporting, rather than automatically giving all his business to IBM. "I'm sure, at that point, they weren't all that happy. They could see their empire starting to crumble," Petersen says.

Ultimately, Petersen became convinced that Eckerd could not continue to have an arm's-length relationship with the management of its technology. Some companies embrace outsourcing as a way to off-load routine technology management chores so they can concentrate on more strategic issues. That wasn't how it worked at Eckerd, Petersen says. "This was more like, 'Here it is, you worry about it, and we'll sign a check every month.'"

Senior Writer and author of the Know It All blog

Ed Cone has worked as a contributing editor at Wired, a staff writer at Forbes, a senior writer for Ziff Davis with Baseline and Interactive Week, and as a freelancer based in Paris and then North Carolina for a wide variety of magazines and papers including the International Herald Tribune, Texas Monthly, and Playboy. He writes an opinion column in his hometown paper, the Greensboro News & Record, and publishes the semi-popular EdCone.com weblog. He lives in North Carolina with his wife, Lisa, two kids, and a dog.

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