Case 007: Office Depot - Making Liquid Code
When Sherry Young needs to order supplies, she opens up her Office Depot catalog, calls 1-888-GO DEPOT, and punches in numbers using her touch-tone phone. Young, a personnel assistant for a Holiday Inn in St. Petersburg, Fla., tends to follow a routine in how she buys supplies from the $11.6 billion office-supply giant. But she could just as easily be buying products over Office Depot's Web site or saying her orders into a voice-activated phone system. For that matter, it won't be long before customers like Young will be able to reorder supplies through their wireless Palms.
All this is possible because Office Depot has consciously managed its technology investments to deliver consistency and convenience to customers. Indeed, if an application touches users, Office Depot generally spares no expense. "If the customer sees it and touches it, we're going to develop it ourselves, and cost is not a consideration," says Chief Executive Bruce Nelson. On the other hand, the company does not hesitate to use off-the-shelf technology for applications that don't touch customers, such as accounting and other back-office systems.
Office Depot's approach to application development can't alter the fact that its customers are only going to buy so many post-it notes, staplers and paper clips in the course of a year. But it may just help Nelson in his battle for customer loyaltya battle that, in office products as in so many other markets, ties directly into a company's profitability.
In recent years, Office Depot has occasionally been celebrated as a rare instance of a company with a successful "bricks and clicks" e-commerce strategy.
It's easy to see why: The company has emerged not just as the biggest generator of revenue from office supplies online but as one of the biggest retailers on the Web anywhere, with more than $1.5 billion in sales. Still, to focus on Office Depot's e-commerce success is to overlook the more sustainable advantage that the company is creating with its technology strategyan ability to give customers a consistent, reliable experience no matter how they interact with Office Depot. It's customer relationship management developed from the inside out, without an eight- figure software license.
Designing its systems to be integrated is not a recent obsession at Office Depot. In fact, much of the integration the company enjoys today comes from refusing to let systems get out of synch in the first place. Instead of using a packaged Web commerce server, Office Depot's Web store relies on the same backend as the company's catalogs and storesAS/400 inventory and order management applications, backed by mainframe transaction databases. The latest extensions put customer service representatives on browsers, and use the eXtensible Markup Language to hook into procurement applications. Significantly, the automated phone ordering system developed in partnership with NetByTel uses essentially the same XML interface developed for Office Depot's business customers. Office Depot plans to use a similar approach to work with a wireless service provider. In most instances where such relationships exist, it is because the vendor has demonstrated a willingness to work within Office Depot's architectural framework.
The technical strategy boils down to two fundamental principles. Here's a closer look at what they are and how they serve Office Depot's larger business goals.
Best Practice No. 1
Chief Information Officer William Seltzer, who is retiring this year, built his technical strategy around the flexibility that comes from defining a clean data architecture. "Our fundamental premise is that if you model based on the properties of the data and not a particular application, your work tends to be pretty reusable," explains senior vice president of systems development Ingrid Kluth.
Like data, business logic tends to be more reusable if you avoid wedding it to the assumptions of a particular application. Object-oriented languages and component technologies offer some tools for achieving reuse, but working in Java is no guarantee of success. Office Depot is working with IBM's WebSphere Java application server for some applications and considering using it more broadly. But Tim Toews, senior VP for international systems development, says embracing the spirit of object-oriented programming is even more important. By centralizing most core business components on AS/400 servers, the company has been able to incorporate them into different front-end applications for stores, call centers, and the Web.
So the Web site is tied into the same order management system as the call centers, rather than using a separate Web commerce engine. One payoff: From the beginning, Office Depot customers who ordered over the Web could check the status of their orders over the phone. That wasn't true of sites that launched as separate operations, leaving synchronization with call center systems as a project for another day.
Best Practice No. 2
Separate Business Logic from Presentation Code
One of the best ways to promote reuse is to draw a clear distinction between the business logic of an application and its presentation. For example, in a Web application there should be a clean handoff between the code that calculates a pricing discount, which would be the business logic, and the Web script that formats that data for display. The more the applications are neatly separated, the easier it is to do things such as substitute a voice interface for a visual one.
NetByTel's telephone system for taking orders was a good fit because it builds upon existing Web sites. Working with Office Depot, NetByTel created a "quick order" line aimed at customers who have a catalog in front of them and know what they want. They can dictate their customer ID and product numbers and navigate with commands like "yes," "no," and "back up" rather than having to memorize a touch-tone menu. Because the technical integration required was minimal, Office Depot could concentrate on refining how users interact with the systema series of verbal prompts, most read by an actress, some generated by a text-to-speech engine. One recent enhancement attempts to detect user frustration. If a caller swears into the phone, the recorded voice responds: "Hmm, it sounds like you may be having trouble. Would you like to speak with a customer service representative?"
Although the Web and its proliferation of browser types dramatized the need for this type of flexibility, Kluth says this principle applies to other parts of the business as well. For example, Office Depot followed this rule when designing a wireless application that works with wrist-mounted devices worn by workers at its mail order distribution centers. As a result, it was relatively easy to add a Spanish language alternative to the program that directs and tracks the receiving process for goods arriving at the warehouse.
So what difference do these technical approaches make where it counts, in helping Office Depot drive its business forward? As Nelson sees it, the heavy investments in homegrown applications will easily be justified if they retain customers and encourage them to interact with the company through multiple channels. Indeed, Office Depot's internal research shows that customers who buy through multiple channels (catalog and store; or, catalog and Web) tend to be more loyal and buy about 30% more products. "They become our most valuable customers," says CEO Nelson.
Office Depot's performance on the Web, then, is worth noting largely for what it suggests about the company's ability to retain customers over the long term. The indicators there are strong: Since the beginning of 1999, Office Depot has consistently driven more business to the Web than its competitors, despite eschewing the spin-off strategy originally pursued by Staples' dot-com unit. It may just be a coincidence, but Office Depot's stock price has also eroded less over that 35-month period than that of either archrival Staples or Office Max.
Nothing's perfect, of course, and Office Depot's technology deployments have their limitations. Inventory tracking is integrated enough that customers who buy online often have the option of picking up their order at the closest store, if the same item is available there, rather than waiting for delivery. But because the stores only send overnight inventory updates, there's a risk that the centralized data the Web site relies on could show an item in stock at the store when it's actually sold out. Programmers can work around this limitation by only offering the pickup option if the last update shows plenty of units of that item in stock.
And newer technologies, like the automated phone-order line, also have their pitfalls. On a recent shopping expedition by Baseline, the automated phone system kept asking if we wanted to continue shopping even after we said no and attempted to check out.
A more egregious gap appeared when we were switched to a service representative. Now that we were talking to a human, Baseline had to recreate the order from scratchthe contents of our shopping cart weren't included in the handoff to the call center system. Office Depot officials vow to fix that because they know having to provide the same information repeatedly is what gives automated phone systems a bad reputation.
Whatever the glitches of its current services, however, Office Depot cannot be accused of taking a short-term approach to technology or following fads. By reusing code, the company not only can serve customers across stores, catalogs and the Web todayit is prepared to use the same proven methods of dealing with customers that have worked in the past, and apply them to any new form of selling that tomorrow may bring.
Office Depot Base Case
Headquarters: Delray Beach, Fla.
Business: Retail sales of office supplies
Chief Information Officer: William Seltzer (retiring this month)
Financials Jan.-Sept. 2001: $8.4 billion in revenue, $161 million net income, 5.8% net profit margin
Challenge: Retain more customers by improving digital shopping experience