McBusted

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The most important shareholders meeting in McDonalds history was about to start. It was early May 2003 and several hundred stockholders and analysts were wedged into the Hyatt Lodge ballroom on the sprawling McDonalds Oak Brook, Ill., campus. Chief Executive Officer Jim Cantalupo looked on as Ronald McDonald bounded around the room in full makeup and oversized red shoes. The “Chief Happiness Officer” was shaking hands, smiling and doing something called “the Ronald dance” to a compilation of feel-good, McDonalds-themed songs.

Just six months into his tenure, Cantalupo surely knew he was going to have to do some pretty fast dancing of his own to restore investors faith in an American icon.

Shares had tumbled in March to $12.38, a nine-year low, after the company registered its first unprofitable quarter ever, losing $343.8 million in the final three month period of 2002. It said it would absorb $810 million in charges for the quarter and confirmed it would close 719 restaurants worldwide. Included in the $810 million charges was a $170 million write-off related to the discontinuation in December of a global, real-time digital network called Innovate, which represented the most expensive and extensive information technology project in the companys history.

That $170 million was just part of the $1 billion that McDonalds expected to spend on Innovate when it conceived the project in January 2001, according to executives and consultants involved in the project. Innovate was designed to allow McDonalds management, at some point in the near future, to see just how many billions of burger patties, buns and chicken nuggets were being consumed at any or all stores at any time of the day. For instance, they could see if the restaurant at South Cooper Street in Arlington, Texas, was handling customer orders at its cash registers within the three-minute service goal, and even if drive-through service was faltering as a result.

Further out, Cantalupos successors would be able to see if the oil in the fryer at a restaurant in Leicester Square, London, was turning out sticks of potato at the proper temperature and time. Anyone authorized to know could even connect from anywhere in the world to see if the carbon dioxide in a soda tower in any store in the network had fizzled out.

Such was the ambition of McDonalds in trying to use technology to return to its roots: the speediest, most consistent service in the fast-food industry.

But the fact the billion-dollar project failed before it even got off the ground shows the difficulty of turning even a simple business such as flipping burgers into a “real-time enterprise.” In fact, to date, McDonalds attempts to use technology to put its products in the hands of hungry consumers faster have been largely unsuccessful.

The companys failure to find a way to improve customer service is compounded by a lack of creativity: the company hasnt introduced a home-run menu item since it rolled out Chicken McNuggets in 1983. The Big Mac, McDonalds signature sandwich, is 35 years old.

Cantalupo told shareholders that McDonalds top priority now was not to Innovate, but to improve the quality of the products and service it provides in existing stores. No longer can it expect growth from the breakneck pace of expansion that defined its business in the 1990s.

If anything, McDonalds past success created a sense of arrogance and ambivalence that enabled it to operate in a vacuum, unencumbered by the realities of evolving consumer taste and the realities of the digital economy.

Yet it was that fast growth that led headquarters to want to create a means of controlling the key quality that makes a fast-food chain successful: consistency. But how could top executives really know what was going on in the stores? McDonalds opened more than 1,700 new restaurants a year in the past 10 years, taxing its outdated data collection systems and making enemies of franchisees who complained that McDonalds was cannibalizing its older stores for the sake of top-line growth.

To improve its existing restaurants, McDonalds now thinks it needs a more “relevant” menu featuring more healthy options. But it also knows it must improve the sluggish service that has sent many customers elsewhere during their lunch breaks.

A Web-based network that shipped information instantly around the world might have done that. It would at least have given executives the ability to monitor, and possibly affect on a minute-by-minute basis, the companys ability to get a consistent product to customers as fast as possible. Founders Richard and Maurice McDonald, and Ray Kroc, the distributor of a five-spindled milk shake maker called the Multimixer, who built McDonalds into a global powerhouse, would have understood. If connected to every key piece of equipment in every store, the real-time digital network would have allowed McDonalds to better serve customers by using information and communications technologies to monitor the quality of the oil used to make french fries, or ensure that each bun was toasted to the proper level of crispiness.

Moreover, it would have given McDonalds executives a birds-eye view of the entire system at any minute of the day. Identifying which locations were selling the most McGriddles breakfast sandwiches or premium salads would have been as simple as logging onto a browser at the corporate headquarters, according to staff inside McDonalds information systems organization. Sales, service time, staffing, supply-chain data, vendor locations, equipment repair orders and every other data item that McDonalds currently tracks—using an aging homegrown system that often delivered the data to decision-makers in a week or more—would be had in seconds through a Web browser.

To make this system work through the public Internet or even a Web-based private network, McDonalds was looking at a huge cost—and it may not have been practical. After all, if $1 billion was to have been spent in the first five years just designing and implementing Innovate, the company would have spent hundreds of thousands or millions of dollars more maintaining the network each year as more and more functions and application were added. From a pure financial standpoint, theres little wonder that Cantalupo canned Innovate almost as soon as he got on the job.

“Theres no question the $1 billion would have only been a starting point,” says Andrew McAfee, an assistant professor at Harvard Business School and a specialist in large-scale corporate information systems implementations. “These projects are hard to break into bite-sized chunks. Over and over again, companies take a monolithic approach to these implementations, telling themselves that theyre going to spend a lot of money without seeing any real returns until that magical day when they flip the switch and go live five years down the road.”

Though the company had shown little to no excitement or expertise in large-scale information systems implementations when Innovate was initiated, its executives thought they could do a Wal-Mart-like makeover of their core technology infrastructure.

What they found out was that their expertise in developing and mass-producing cheeseburgers and french fries had little relevance to the world of software integration and implementation.

INTO THE FRYER

McDonalds challenge is painfully obvious from a May visit to a franchise on Midwest Road in Oak Brook, only a few miles from where Cantalupo spoke to stockholders.

In a restaurant last redecorated in the 1980s, among faux black marble wall tiles and fraying brown leatherette booth benches, a manager repeated the same phrase to customers as their orders were finally filled: “Im sorry about the wait.” With only three customers at the counter, an order for a single Extra Value Meal took more than seven minutes to fill.

As the result of a process reengineering the company forced on its restaurants in the late 1990s, the quality and speed of service is, as Cantalupo acknowledges, at an unacceptable nadir. The restaurant built on the “15-second burger” now finds itself losing its share of customers because of slow and sometimes shoddy service.

The American Customer Satisfaction Index (ACSI), which surveys more than 65,000 customers, has tracked McDonalds lackluster service performance for the past nine years. The study measures customer expectations, perceived quality, perceived value, customer complaints and customer loyalty—scoring each company on a scale of 1 to 100.

In 1994, the first year of the study, ACSI respondents gave McDonalds a score of 63, well below competitors such as Wendys (71) and Burger King (66), as well as Yum Brands Pizza Hut (69) and KFC (67) units. In 1995, McDonalds managed to score a 65—the highest level it would attain during the nine years of polling—before slipping back to a 61 in 2002. Meanwhile, its leading competitors have consistently scored from the mid-60s to low-70s over this same period.

Taking a closer look, every fast-food restaurant points to its drive-through window as the benchmark for its service performance.

The most recent data collected by QSR Magazine, a quick-service restaurant trade publication, shows that McDonalds drive-throughs took 162.7 seconds to fill an order between June 7 and July 28 of last year. Thats slightly faster than the 165.8-second average of the top five burger-centric fast food restaurants.

However, random secret shoppers hired by McDonalds and other independent watchdogs, such as QSR Magazine, report that orders can take between five and 10 minutes to fill and actually take longer during nonpeak operating hours.

Now, say Cantalupo and McDonalds President and Chief Operating Officer Charlie Bell, the technology efforts of the company will be focused on improving its customers experience; speeding up the trip through the drive-through or to the counter, and making the trip more convenient so that Quarter Pounder lovers will come back again.

This summer, the company begins its rollout of credit- and debit-card payment systems to about a quarter of its U.S. restaurants. These systems will require no signature for purchases, reducing the time it takes for a credit card transaction to go through to roughly the same time as a cash transaction. McDonalds hopes that taking credit cards will boost its flagging sales—Visa found in a study of credit card use in quick-service restaurants that customers spent 30% to 50% more when they used a credit or debit card than when they spent cash.

But restaurants need to configure their point-of-sale systems to take electronic payments before these systems can be installed—according to one integrator familiar with the McDonalds trial, it costs $12,000 for each McDonalds location to be configured to handle the technology.

Cantalupo says the company also plans to test kiosks that allow customers to punch in their own orders at the drive-through or while waiting to get to the counter—theoretically cutting down on the wait in line and reducing order-errors by cutting McDonalds minimum-wage employees out of that part of the transaction. And, says Bell, the company will focus on other basics of good service—like having clean bathrooms. “Were going to have the cleanest bathrooms in the business,” he declared at the stockholders meeting.

Having clean bathrooms was always a tenet that Ray Kroc insisted be at the forefront of McDonalds image. He would often tell McDonalds insiders that kids cant tell the difference between the quality of one cheeseburger or another but mothers would always know and remember which bathrooms were clean and which werent.

But information systems dont scrub toilets and they dont fry potatoes.

THE SPECIAL SAUCE

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The McDonald brothers first conceived of what would become known as the fast-food or quick-service model shortly after World War II when they mapped out the layout for their original restaurant in San Bernardino, Calif., on a tennis court. The idea was simple: take the mass production, assembly-line system used for manufacturing cars and replicate it in a burger restaurant.

They installed large grills in their kitchen to cook up burgers in large volume and incorporated what they would call the Speedee Service System. This wasnt a system that relied on technology but common sense. It eliminated menu items that required utensils or dishware, replacing them with the nine-item menu that would become the foundation of the McDonalds dynasty. No dishes. No forks. Paper wrappers and cups and a few napkins.

Managers, who often owned the stores they managed, would write down orders on pads of paper and pass them back to the kitchen. More often than not, the burgers and fries would be waiting under heat lamps. Inventory was something that managers handled by intuition and experience. Often, managers would jot down how much milk or cheese or beef they would need for the next week on the back of the order forms they filled out when taking customer orders at the register.

The registers werent computerized and certainly werent linked to the kitchen. They simply facilitated the transaction.

Next, they divided the actual food preparation into specific jobs for different workers. One fellow worked the grill, cooking the patties. Another “dressed” the burger with a precise amount of ketchup and mustard before wrapping it and sending it down the line. Another worker was in charge of mixing milk shakes and pouring sodas. Yet another employee would work the register, collect the money and deliver the meal to the customer.

Over the years, McDonalds franchisees and corporate executives came to discover that many of the same problems that originally hampered the McDonalds brothers California restaurant were still eating away at their profit margins.

Turnover of employees has been and always will be one of the biggest problems facing McDonalds operators. In fact, McDonalds claims that one in 10 Americans has worked at a McDonalds at one time in his or her life. Since the pay is mostly minimum-wage level or slightly above, McDonalds typically attracts teenagers and other relatively inexperienced or unskilled laborers. The fast-food industry attrition rate has been pegged at more than 100%, placing a premium not only on being able to hire and train new employees quickly, but to also make the assembly line method of building burgers extremely easy to understand and quick to pick up.

One feature of Innovate was supposed to fix much of that by streamlining the delivery of employee training and benefit data through the system. Using the Internet to convey training information, such as how to clean fryers or use the point-of-sale system, McDonalds hoped to leverage their existing training system across this platform.

But helping with human resources was just a small part of the $1 billion, five-year grand plan. McDonalds provided few details about Innovate. However, current McDonalds information technology managers, who spoke on condition of anonymity; former McDonalds Chief Information Officer Carl Dill, who worked at the company from 1982 to 1998; and software consultants close to the project confirmed McDonalds lofty intentions.

According to those individuals, an Oracle enterprise resource planning system, which can handle most day-to-day business functions, would serve as the hub. The Oracle software would run on Sun Microsystems Sun Fire Unix servers, replacing the companys homegrown IBM mainframe general ledger accounting system, and enhancing or replacing virtually every major back-office system in place at McDonalds used for finance, supply-chain management and human resources.

But the innovation didnt stop there. Innovate also would have monitored the temperatures of cooking and freezing appliances, as well as the exact usage of food and packaging supplies. The theory was that by working closely with suppliers and store managers, the company could improve the consistency of the product—for example, all burgers would be cooked at the exact same temperature and flipped at the exact same intervals at any restaurant in the world.

In the process, McDonalds hoped to instantaneously collect and send data to stores from the corporate office simply by punching a few keystrokes. If a store in Seattle wasnt moving people through the lines or drive-through as fast as others in the same general area, McDonalds could ask the local manager to add another employee or two to the lunch shift to improve service time. If one store wasnt moving as many McRib pork sandwiches as others in the area, the corporate office could double-check to make sure the restaurant had all the proper signage and marketing resources in place.

McDonalds hoped to be able to let its executives and managers see at any time of day how sales of any product at any store were proceeding, where backup supplies sat anywhere between its stores and its suppliers plants, and manage its stores accordingly. If there was a run on salads in California, replenishing supplies could be rerouted from trucks originally destined for Iowa. This would give McDonalds the power to react to customer demand quickly, and draw substantial financial rewards from the resulting efficiency.

Monitored remotely and, eventually, managed remotely, the system would take a lot of the responsibilities away from individual store managers.

Scheduling of crew members would be simplified because the system would tell managers exactly how many customers ordered Big Macs or Quarter Pounders between noon and 2 p.m. every day of the week. Predicting the likely volume of sales—not only total sales, but also specific product sales—would make it easier for a manager to pick and choose the specific employees he or she wanted working the different spots on the burger assembly line.

Eventually, McDonalds technology managers and consultants say, the Internet-based network would have linked all of the companys 30,000-plus restaurants and 300-plus approved vendors 24 hours a day, seven days a week, to the back-office system at its corporate office in Oak Brook. This would have given McDonalds executives a complete, instant picture of the companys operations around the world, and, in theory, the ability to act quickly when necessary to adjust the deployment of promotions and supplies to meet demand.

While McDonalds already collects sales data from many of its stores on a daily basis, the companys decade-old financial reporting systems—built on IBMs CICS transaction service and DB2 database—werent built with real-time business intelligence in mind. Different units within McDonalds used different tools to get at that data, from batch reports to data warehouse tools. McDonalds Canada, for instance, uses IBMs Visual Warehouse tools to analyze marketing and promotional programs. Depending on the location, McDonalds can only cull this data in a matter of days or weeks. But with Innovate, executives would be able to analyze data from all over the world from their Web browser—it would give them a dashboard for driving McDonalds business.

Taking it a step further, McDonalds may have eventually moved in lockstep with its car-making brethren by using the system to replace human workers, one of the most expensive and complicated components of the model. Indeed, McDonalds 2002 corporate payroll topped $3.1 billion. Some McDonalds stores already have installed machines that fill and distribute soda to the service line. Eventually, the cooking, wrapping and frying of burgers might have been handled by machinery, taking the troublesome and unpredictable element of human crew members out of the equation altogether. If every McDonalds restaurant in the chain eliminated just one minimum-wage worker from each shift, each store could save $82.40 a day. It might not seem like much, but taken across McDonalds 30,000-plus restaurants—those owned by McDonalds and those run by franchisees—the automation of one job could save about $900 million a year systemwide.

McDonalds also hoped to extend this detailed flow of data to the kitchen itself, checking to ensure that the consistency of products was maintained remotely. Though officials declined to confirm it, several sources close to the company say Innovate eventually would have incorporated Simple Network Management Protocol (SNMP) technology that would have monitored every significant piece of equipment in each store. Every piece of food storage and preparation hardware would be monitored and managed remotely, ensuring consistency in the products worldwide and reducing the employees needed to staff a typical McDonalds.

SNMP is the standard method used to monitor and manage network equipment like routers, hubs and servers from network management systems such as Hewlett-Packards OpenView and Computer Associates Unicenter. It provides a common way to pass status information from intelligent devices back to a monitoring system over a network. With the addition of simple electronic monitoring devices, a network connection, and an SNMP management information base (a piece of software that interprets the data from the device for the monitoring system), that “intelligent device” can be nearly anything—including a freezer, a fryer, or a soda dispenser.

For instance, instead of reacting to a freezer that had malfunctioned overnight, the manager would be alerted instantly by the system to the problem. The system would also tell the manager which freezer repair technicians were in the area and approved by McDonalds and provide the technician with any historical data about the freezer or other McDonalds equipment in need of repair. Early notice to an assistant manager at 10 p.m. could be the difference between a $3 fuse and losing hundreds or thousands of dollars worth of perishable products left unrefrigerated overnight.

Taking Innovate to its outer limits, the folks in Oak Brook would have been able to track the exact temperature of the oil used for french fries in any store connected to the network. How much syrup and carbon dioxide was in each soda tower would have been monitored.

McDonalds knows that consistency and speed are the cornerstones of its business. The impact could range from the superficial to the disastrous.

If french fries in one restaurant had too much oil or cook even two minutes longer than those at another restaurant, its customers are going to know the difference. If a 16-year-old crew member isnt cooking the beef patties long enough at the prescribed temperature of at least 140 degrees, an E. coli bacteria breakout—and millions of dollars in lost sales and legal settlements, to say nothing of potential loss of human life—could and has happened.

In 1993, an E. coli outbreak at Jack in the Box restaurants claimed the lives of four children. McDonalds also could use this technology to make life easier for its franchisees by automatically generating historical temperature logs for food safety reports required by the Food and Drug Administration. And it also could alert owner-operators in the event of an unusually large voided transaction at the drive-through window point-of-sale system (suggesting that a crew member might be pocketing money instead of putting it in the register).

McDonalds wasnt the only quick-service chain at least thinking about the potential of SNMP. In 2001, Burger King began a trial of SNMP-based monitoring in restaurants in England with equipment from Opto 22, a Temecula, Calif.-based systems integrator. Network-based monitoring is common in European grocery chains concerned with stock spoilage and strict local health regulations.

“This wasnt a new idea by any means,” says Michael Disabato, a senior analyst at Midvale, Utah-based Burton Group and former information technology manager at McDonalds. “We were talking about this 10 years ago. But when we first proposed this, [McDonalds executives] just laughed at us. Because it came from the technology group and not the operations people, it wasnt taken seriously. This was a recurring problem at McDonalds.”

TURNS AND RETURNS

A more immediate problem for McDonalds and Cantalupo was dealing with the diminishing profits and sluggish sales that had conspired to erode the stock price. Innovate, he said, didnt address the most pressing needs of the company—improving the speed and quality of restaurant operations. As former CIO Dill says, “McDonalds didnt understand how to use technology to improve its day-to-day operations.”

When Cantalupo canceled the Innovate project, he said McDonalds would reduce its capital spending in 2003 by $700 million, to $1.2 billion, which is down from $2 billion in fiscal 2002, ended December 2002. Some of this cash will be used to repurchase McDonalds shares and for increasing shareholder dividends as well as paying off some of the $9.7 billion in long-term debt on its balance sheet.

McDonalds lackluster financial performance in recent years has led three of the 15 analysts tracking the stock to issue “sell” recommendations. Only six of the 15 analysts rate it a “buy” or “strong buy” despite its precipitous plunge.

In fiscal 2002, McDonalds posted a profit of $893 million on sales of $15.4 billion. That sales figure represents only a 4% improvement from fiscal 2001 when it earned $1.64 billion on sales of $14.8 billion.

“Weve had a neutral rating on the stock for five years,” says Alan Hickok, an analyst at U.S. Bancorp Piper Jaffray. “Its financial performance has been deteriorating for years without arrest. That it finally reported a loss wasnt so much a shock as an inevitability.”

An internal memo sent out in December from Vice Chairman Jim Skinner to employees working on the Innovate project states that McDonalds decision to terminate Innovate was based on the companys recent financial difficulties.

“We have been screening our initiatives based on their customer impact and their ability to deliver financial benefits to the system in the near term,” Skinner wrote in the memo. “With that in mind, we have made the very difficult decision to immediately stop all work on Innovate.”

Immediately canceling Innovate meant that between 100 and 200 contractors and McDonalds employees working on the project would be pink-slipped or reassigned. And the $170 million spent in 2002 specifically for the Innovate project was lost.

McDonalds current CIO Dave Weick says most of that $170 million was spent on the “research and development” of Innovate. BearingPoint and PricewaterhouseCoopers (now part of IBM Global Services) consulted on the project and provided the initial analysis and framing used to determine the projects viability and likely return on investment (ROI).

“As far as the ROI, candidly, I dont want to go into specifics,” says Weick of measuring Innovates possible profit return. “We did have some numbers but Im not able to discuss them. I can tell you that we viewed Innovate as a five-year plan to get [implemented] in our major markets. Clearly, with that kind of expense, we were sure we would have seen substantial ROI had the project gone forward.”

PricewaterhouseCoopers (PWC) would not comment about its work on Innovate. BearingPoint spokesman John Schneidawind says the consulting services firm will not comment on McDonalds nor will it say whether or not McDonalds is even a customer. However, McDonalds CIO Weick did say that BearingPoint played a key role in Innovates development (see Dossier, p. 54).

Jim Carlini, president of information technology consultancy Carlini & Associates, says BearingPoint, PWC and McDonalds executives likely sat down in the initial stages of Innovates development to determine what benefits the company hoped to gain from the system.

“Im sure they wanted to know basic information like sales per restaurant, service times, the number of crew members working a particular shift and all the other data youd want to improve your operations,” he says. “Im sure they spent millions just determining what platform would work best in all the stores and, possibly, some prototypes and initial software licenses to test it in some capacity.”

Carlini, however, is skeptical that $170 million was spent entirely on consulting fees and some early-stage hardware and software. “Im guessing they buried several other pet technology projects in there as well,” he says. “But those consulting fees can add up in a hurry.”

The rest was apparently spent on Sun Fire-class enterprise server hardware from Sun Microsystems to host the Oracle 11i software that would form the backbone of Innovate. The fate of that hardware is unknown, though sources at Sun indicate that another project is under way at McDonalds involving Sun hardware. “Were not at a point where we can talk about anything because its still in the middle of things,” says Aaron Cohen, a Sun customer public relations spokesperson.

Oracle officials declined to comment on Innovate or McDonalds.

As one former McDonalds information systems manager put it, “No one wants to talk about this project. If youre doing business with McDonalds, youre not going to talk. And if youre not, youre not going to talk because eventually youre going to want to do business with them.”

McAfee, the assistant professor at Harvard Business School, says McDonalds likely fell victim to classic pitfalls that befall corporations trying to implement and justify information systems projects of this size for the first time.

“Companies attempting implementations of this size have very different ways of determining their return on investment,” he says. “Ive seen companies take the sharp-pencil approach and break everything down to the penny. Others arent looking for any kind of immediate return because theyre simply making a strategic investment and will worry about the ROI down the road.”

Had McDonalds made the $1 billion investment in Innovate to streamline its supply chain and improve its day-to-day operations, it would have needed to achieve at least a 1.5% improvement in sales, or roughly $231 million a year, to pay for the initial rollout. And thats an additional 1.5% above the 3% to 5% in annual sales McDonalds was already projecting.

McDonalds Weick says the project would have reached the break-even point as soon as eight of the McDonalds top-performing locations were live. However, he was unable to elaborate on the exact dollars McDonalds hoped to save.

McDonalds certainly made efforts to manage the cost and risks up-front for Innovate. After an initial exploration of the ideas behind the project with PWC Consulting, McDonalds brought in a sourcing consulting firm, the MPower Group (based a little more than a mile from the sprawling McDonalds corporate campus in Oak Brook) to help create processes for selecting technology vendors and integrators for the project (see Gotcha! above). According to white papers published by the MPower Group about its groundwork for Innovate, McDonalds saved 40% against existing professional services rates with its integrators, and negotiated technology vendors down 60% from their initial quotes as a result of the sourcing process they put in place.

That McDonalds first foray into large-scale, real-time data systems failed comes as no shock to some experts.

“It doesnt surprise me a bit that a company like McDonalds, with its relative lack of experience in this area, spent so much money and has so little to show for it,” McAfee says. “It happens all the time. The fact that McDonalds isnt exactly on the cutting edge in terms of technology or the executive-level appreciation and understanding of technology surely made matters worse.”

FOOD, FOLKS AND FORECASTING

Weick says Innovate was a “couple of months” away from implementation in Canada and France when the project was halted. He adds that locations identified for the first implementations were some of the “stronger” locations.

“We didnt want to add another distraction to sites that werent performing as well as the ones we did choose,” he says.

Still, the McDonalds information technology team forged ahead. With the second quarter of 2003 targeted as the date for the first rollout of Innovate, there was little time to second-guess the projects operational merit. A McDonalds information technology manager familiar with Innovate who didnt want to be identified says the sites in Canada and France were restaurants owned and operated by McDonalds. Roughly 70% of all McDonalds restaurants are owned and operated by independent franchisees.

“They wanted to roll out Innovate to the McDonalds-owned stores first because they knew there would be strong resistance from the franchise community,” the McDonalds source says. “Most of the stores abroad, especially in Europe, are McDonalds restaurants. It was a natural place to start and then, eventually, bring it into the U.S.”

McDonalds executives said that had the first live versions of Innovate met expectations, U.S. stores wouldnt be linked for at least another two years.

Peter Abell, an analyst at AMR Research, says a real-time global network would tax even the most ambitious information technology organization. Configuring and integrating the software necessary to communicate back to Oak Brook from 30,000-plus locations-including some in third-world locations where broadband connectivity is still just a dream-was more fantasy than reality.

“Doing it over the Internet does create some security issues but you could secure it pretty well,” he says. Virtual private networks and data encryption would have guarded against prying eyes. The main technical hurdle would have been ensuring there was enough network bandwidth available for every restaurant to be visible at all times.

“The real challenge is determining whether or not there are enough cost benefits to make it worthwhile in the first place,” says Abell.

He says Wal-Mart managed to create a real-time network by using satellite dishes at its different locations. The satellites allowed the stores to instantly approve credit-card and debit-card transactions. All the companys credit card authorizations are handled by the network and all the sales and supply-chain data, such as orders received and placed with vendors, are transmitted back to headquarters.

“The biggest problem a company like McDonalds would have is getting high-speed bandwidth in every location,” Abell says. “Some parts of the U.S. still dont have reliable high-speed connectivity. And theyre international. So that could definitely be problematic.”

But even if Innovate had taken flight in Canada and France, it might not have ever materialized in the U.S., because many franchisees are still furious about how another McDonalds system they had to implement slowed service.

In 1998, McDonalds unveiled a new cooking system called “Made For You” that required individual franchisees to overhaul their kitchens and install McDonalds-approved computer systems in order to produce a fresher, warmer product.

Competitors such as Burger King, Wendys and Jack in the Box were spending millions to advertise the fact that their burgers were cooked to order and that customers wouldnt be served burgers that had been cooked and left under heating lamps for several minutes before they were sold.

“We know people dont like the idea of eating a burger thats been sitting around for five minutes,” says Richard Steinig, who owns and operates four McDonalds in the greater Miami area. “But what we dont know is how that translates into better sales. Im not so sure it does.”

Made For You cost franchisees between $30,000 and $60,000 per restaurant, according to former CIO Dill. In addition to implementing the new PC point-of-sale (POS) system, most kitchens had to be expanded or reconfigured, at the franchisees expense, to accommodate the new kitchen equipment and layout. Franchisees paid the expense with McDonalds reimbursing them up to $12,500 per store. In the past, McDonalds would cook up batches of Big Macs or Quarter Pounders or regular cheeseburgers based on anticipated demand. Metal placards were used to track the amount of time each order of, for example, a dozen Big Macs had been under the heating lamps.

This system worked for years and was especially efficient during peak rush periods at lunch and dinner. So when McDonalds corporate rolled out the Made For You campaign, many franchisees resisted. Considering the average McDonalds restaurant recorded sales of $1.5 million in 2002 and owner-operators typically earn between 5% and 7% of the total sales, an additional expense of $30,000 or $40,000 to overhaul the kitchen could consume about one-third of a years profits.

McDonalds executives contend the average cost to install the Made For You system was roughly $25,000 per store.

Franchisees such as Steinig claim that before Made For You was implemented, it would take between 60 seconds and 90 seconds to serve most customer orders. Now, it takes between two minutes and three minutes per customer, or longer.

“Made For You has been terrible,” Steinig says. “I want to do whats good for the system and whats good for business. But if Im spending a load of money I expect some return for my money. Show me where its increasing sales. I know were selling a hotter product, but its not helping sales.” The average McDonalds in 2002 reported sales of $1.5 million compared with $1.03 million for the average Burger King, meaning McDonalds filled 46% more orders than Burger King. “That adds up over time, especially during the rush hours,” Dill says. “We just had too many customers to make it work the way the smaller competitors could.”

The PC POS system replaced proprietary computer registers that delivered information to in-store processors. These computers are a McDonalds restaurants black box, recording information on operations such as an individual stores total sales for the day, and the number of patties, buns, cups and other products used, and delivering it back to the McDonalds mainframe systems in Oak Brook each night over a modem connection. It also is used by managers to place orders from distributors for replacement patties, buns, chicken breasts, napkins, etc., as well as for setting up staff work schedules. However, a former McDonalds manager now working as a restaurant consultant says the data that is batch-dumped to the McDonalds mainframe system in Oak Brook every night doesnt offer the detail McDonalds executives needed and, worse, took as long as a week to be compiled, analyzed and distributed to managers who would then order more patties, buns, etc. from McDonalds vendors.

“For example,” the manager says, “they might know how many patties were sold but not how many specific sandwiches were sold at a particular location. It would provide only very general sales information. Not enough to efficiently replenish orders from suppliers to managements satisfaction and certainly not fast enough.”

And as McDonalds attempts to make its menu more “relevant” to the tastes of todays consumers, this timely data becomes all the more critical. Hence the need for a project like Innovate.

But instead of investing in Innovate over the next five years, Cantalupo says McDonalds will invest in itself through the share repurchases and dividends. These measures might provide temporary relief for the beleaguered stock price but will do little to improve the quality of the food or the speed of service at its locations.

During the May shareholder meeting, Cantalupo and the executive management team unveiled its “Plan to Win,” a strategy focused on improving sales at its existing stores rather than opening new stores. A big part of this plan is creating a menu thats more relevant to consumers. Long lambasted for a menu high in fat and cholesterol, McDonalds is pinning hopes on a new salad line.

“The salads are great,” Hickok says. “The only problem is that everyone already has them. At least theyre trying, but theres no reason to think that these salads are going to be the savior.”

Ironically, McDonalds reversal on Innovate has been accompanied by continued attempts to use technology to improve the speed and convenience of its fast-food transactions- such as its plans to use electronic payment systems and kiosks. It has announced a series of other high-tech gambits that seem completely out of character. For instance, it launched a wireless Internet access trial in 10 New York restaurants-a free 60-minute Net access with the purchase of an Extra Value Meal-which doesnt seem to be fully in line with Cantalupos quest to improve the quality of McDonalds existing-store products and service.

But then technology has never fit easily on McDonalds menu. “Culturally, it was always a fight at McDonalds,” Dill says. “My first day on the job I remember meeting with then-CEO Fred Turner and he said Carl, I never want to fail to sell a hamburger because a computer is down. McDonalds just wasnt comfortable with technology.”

-with additional reporting by Charles Babcock

MCDONALDS BASE CASE

Headquarters: McDonalds Plaza, Oak Brook, IL 60523
Phone: (630) 623-3000
Business: Worlds largest fast-food restaurant chain serving more than 46 million customers each day at more than 30,000 locations in 121 countries.
Chief Information Officer: Dave Weick
Financials: $893 million net income in 2002; $2.1 billion operating income; $15.4 billion revenue.
Challenge: Implement worldwide digital network and enterprise resource planning system for financial data, human resources and supply-chain management applications.BASELINE GOALS:

• Increase sales by at least 3% to 5% in 2003.
• Improve operating income by 5% to $2.2 billion by 2005.
• Cut capital expenditures to $1.2 billion in 2003, down $700 million.
• Cut the length of time needed for managers to collect and analyze individual restaurant sales and inventory from more than one week to a little as a minute.

MCDONALDS PLAYER ROSTER

INSIDERS Jim Cantalupo
Chief Executive Officer
The trusted corporate executive, Cantalupo, who headed McDonalds in the 1990s, was lured out of retirement in January in the hopes of improving McDonalds flagging fortunes. Cantalupo announced immediately upon his return the discontinuation of Innovate.

Jack Greenberg
Former Chief Executive Officer
He was the man behind McDonalds moves. He approved the initial Innovate analysis, development and investment. But critics say his frenzied expansion and acquisition strategy eroded profit margins and distracted McDonalds from its core operational strength. Greenburg resigned in December.

Dave Weick
Chief Information Officer
As the McDonalds point-man on Innovate, he collaborated with consultants and his own information systems staff to design and develop the real-time digital information network.

Jim Skinner
Vice Chairman
A former McDonalds restaurant manager trainee, Skinner was appointed vice chairman in December. He sent the memo to employees that Innovate was being shut down.

Ray Frawley
Manager of Innovate Leadership Team
The Australian-born Frawley, along with Weick, oversaw the day-to-day progress of Innovate through its initial development. Frawley told colleagues Innovate was “the greatest experience of my professional life.”

Mats Lederhausen
President, Business Development Group
Another fast-rising, foreign-born executive, the Swede is currently in charge of McDonalds growth initiatives.

OUTSIDERS

Dalip Raheja
President and CEO, The Mpower Group
A trusted advisor, Rahejas Mpower Group provided “sourcing” consulting to McDonalds, helping the company select the technology vendors and system integrators for Innovate.

Carl Dill
Former CIO, McDonalds
The long-time information chief oversaw the development and implementation of many McDonalds systems, including the point-of-sale system in use today, He says building and managing McDonalds systems ranks as one of the greatest challenges in his career.

Michael Disabato
Senior Analyst, Burton Group
The former network and security architect at McDonalds says that if the company is to thrive it needs managers who better understand the risks and rewards of technology.

Richard Steinig
Independent McDonalds Owner/Operator
A self-proclaimed “squeaky wheel,” Steinig owns and operates four franchises in the Miami area.

BASE TECHNOLOGIES

McDonalds “Innovate” project attempted to create a real-time view of the restaurant chains business using mostly packaged software.