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Noveon needed to boost its returns, fast. So the billion-dollar specialty chemicals company loaded up on low-cost standard computers.
The Task: Create an almost entirely new computing and communications infrastructure for a billion-dollar company.
The components in place: IBM AS/400 minicomputers, for handling manufacturing and other operations; Sun Microsystems servers, for taking orders electronically; and Compaq servers for e-mail, file storage and printing services.
The decision: Keep the IBM minicomputers. Replace the rest with Dell equipment.
Its a choice Todd Nelson is not losing sleep over, even if Noveon, the company hes working for as vice president of global information technology, has not been known for taking risks. And Dell has not exactly been known for providing the computing power behind corporations of this size.
Nelson implements technology strategy for Noveon, a two-and-a-half-year-old company based in Brecksville, Ohio. It is the former chemicals business of BFGoodrich, once a tire company in Akrons rubber row.
Noveon puts the red in Hawaiian Punch and the orange in Sunny Delight. It puts texture in fabrics so designs can be added. It thickens Coppertone suntan lotion and Itch-X foot cream. Its plastics are turned into polyvinyl chloride pipe favored by plumbers and builders nationwide.
But the main goal for Nelson, a former PricewaterhouseCoopers technology consultant, is to generate a return for shareholders. Noveon was created in March 2001, after a leveraged buyout. Top priorities were to improve productivity, grow the company, get a better return on capital and reduce the $906 million in debt that the spinout carried on its shoulders at birth. Sooner, rather than later.
Nelson saw the split-off as a chance to develop a single, standard means of communicating, crunching numbers and exchanging data around the world. Just before the creation of Noveon, Goodrich had picked up $500 million worth of new companies with disparate systems. At the time, little was spent on technology in order to primp up the business for a sale. Nelsons pitch afterward: “Lets right the ship here and make sure were all working off the same playbook.”
Standardizing on a single computing and communications platform plays into Dells sweet spot. If you decide to standardize your corporate operations on the Windows operating system and Intel microprocessors, then Dells economies of scale and efficiencies in manufacturing and distribution should save even fairly complex businesses money. If you want a mixed environment that includes, say, a lot of servers based on the Unix operating system, the answer likely lies elsewhere.
Until recently, that led Dell to focus on medium-sized outfits such as electronic recruiter Hire.com. And only five years ago, Dell moved beyond basic fix-the-break services for companies.
“Dell is a narrow competitor,” says Jeff Clarke, the Compaq-bred executive vice president of Hewlett-Packard, the server, computer and printer rival most clearly in Dells sights. “For Dell to expand into services or the high-end computing market it would have to build capacity that it doesnt have right now. The business model doesnt account for innovation or global distribution and Dell may not be willing to give up the profit margins.”
Not so, says the companys founder, Michael Dell. “A lot of innovation can be done within a standard,” such as adding features, increasing performance and squeezing more blade servers into a given rack, saving customers overhead, he says.
Dell also pledges to cut prices in so-called enterprise services. In areas it has already entered, such as storage area networks or servers, Dell estimates it has already brought down prices 40% to 50%. More noticeably, carefully targeted services—such as assessing the fastest way to consolidate, stage and transfer computing services to a Dell platform—have become a $3.4 billion business, says Gary Cotshott, vice president of Dell Services. Even for large companies such as Noveon, Dell figures it can maintain a 10% cost advantage over competitors such as HP or IBM.
That appears to have been the case in Brecksville. Johnson invited HP, IBM and Dell to enter a reverse auction conducted at the outset of 2002 by FreeMarkets, the Pittsburgh company that sets up online contests that allow suppliers to compete for sizable new pieces of business.
Before the auction, Nelson says Dell promised “more than a 10% difference” in price over its nearest rival. He says Dell won the auction without having to lower its prices on machines and related services further.
The services arena is where IBM and HP expect to outshine Dell, which they regard as a box assembler and distributor. IBMs Global Services business, for instance, employs tens of thousands of consultants for corporations to use for everything from strategy consulting to system design to hand-holding during installation. HP, with the acquisition of Compaq, now fancies itself as IBMs closest rival.
“Services is the most obvious area where Dell doesnt have what it takes to compete,” HPs Clarke told a group of financial analysts in New York in June. “In order to keep systems up and running in a sophisticated environment you need the infrastructure of thousands of people and be able to distribute spares and escalate engineering support. If Dell had to support a stock exchange, for example, it would have to rely on a third party.”
That may be. But cheaply installing commodity computer systems and software—based on Windows or, now, Linux—is right up Dells alley. At its factories, the company loads software and testing utilities onto its systems. At its Round Rock, Texas, headquarters campus, it trains customers to do their own support, rather than force them to take on high-priced add-on contracts. Coming soon: Packages of services for a fixed price, including, for instance, preset amounts of computing power for 1,000 seats in a company.
“For those things that fit the Dell portfolio and competency,” says Cotshott, “we clearly believe we offer more value, for the same dollar, than our competitors do.”
But even Meta Group didnt think the $1.2-billion-a-year Noveon was within the “Dell portfolio and competency,” Nelson recalls. Meta recommended the use of a supplier such as IBM or a consultancy such as PricewaterhouseCoopers.
Meta (and HP) was proven right: Dell stumbled at the outset in providing service.
Unlike HP or IBM, Dell doesnt install networks of machines with its own cast of thousands. It contracts out the work to service providers. Cotshott says that keeps Dells costs lower than competitors who maintain $280 an hour consultants on staff.
In Noveons case, a “Dell-badged resource” from Cleveland was brought in. The plan was to determine what software was on each of 120 machines in a particular Ohio site, for starters. The inventory was to take place remotely, to save time and money, using diagnostic software touted by Dell as part of its service.
But the service provider was not able to perform the remote diagnosis. At least not the team put on the job. Its members had to go around by foot, desk to desk, to get the analysis done. On top of that, they hadnt experience in deploying 1,200 machines in 10 locations either. Not acceptable.
Nelson insisted on a new team from the same Dell service provider. “You have to get the A team,” he recalls. Now, he is “extremely happy” with the service hes getting. The rollout will put 125 Dell PowerEdge servers in place by the end of next year, replacing 70 Compaq and Sun servers.
In this $4 million project, Nelson and his technology team will replace 2,000 desktop and laptop machines worldwide. Hes already closed Brussels and Hong Kong data centers, consolidating their operations in Brecksville. And hell have begun moving the company onto a single digital platform for handling both data communications and voice. In its drive to standardize, Noveon is replacing aging private branch exchanges with more Dell servers and Cisco Systems communications gear. Over the next three years, Noveon will switch to talking over the Internet, not just sharing presentations, data and documents through it.
Neither IBM nor HP will be part of the process. IBM lost out on supplying servers for this generation of Noveon computing and communications, partly on cost and partly because it left a bad taste with the billing it did on hundreds of machines it leased to Noveon. HP declined to compete, citing, Nelson says, insufficient information on which to enter the auction.
For Noveon Chief Financial Officer Mike Friday, standardization produces a “common culture” across the company and “really wrings money out of the bottom line” in support costs.
He measures Nelson on how well he can keep his costs down. At the time of the spinoff, the company was spending 1.3 percent of sales on technology. Thats now down to 1.2 percent.
Nelson figures Noveon will get a 15-to-20 percent boost in productivity, not just by reducing support, but by running smarter operations. The move to computer-based voice communications means, for instance, that the companys digital directory will keep track of what individual is assigned to what phone number and e-mail address. All anyone will have to do is plug in and log in to be set up to talk and type in a new location.
On a larger scale, Friday is counting on analytics to improve yields in the manufacture of chemicals; better collaboration to speed up new product development; online learning programs to reduce training expenses; predictive systems to maintain equipment before it breaks down and other such technology to push productivity.
The company uses a particular measure, working capital as a percent of sales, to gauge the returns it is generating from the money it kept in its bank accounts for operations, as well as the productivity of its operations. Since 2000, Noveon has pushed down that ratio from 23 percent of sales to 17 percent of sales. To get to its objective of below 14 percent, there is just one answer left, Friday said in August. “The only way well do that is through IT.”
Noveon Base Case
Noveon Base Case
Headquarters: 9911 Brecksville Rd., Brecksville, OH 44141
Phone Number: (216) 447-5000
Business: Makes and markets a variety of specialty chemicals used in personal-care products, drugs, foods, beverages, packaging, pipes, graphic arts, fabrics, papers and paints.
Chief Information Officer: Todd Nelson, vice president, global information technology
Financials in 2002: Net income of $34.7 million on revenue of $1.07 billion, a net profit margin of 3.2 percent.
Challenge: Meet growth and profit targets in order to reduce debt of nearly $1 billion taken on when company was created out of BFGoodrich in March 2001, via a leveraged buyout.
Baseline Goals:
- Reduce debt, from $906 million at start of March 2001.
- Reduce working capital as percent of sales to 14 percent, from 23 percent in 2000.
- Boost revenue, which has been static at $1.1 billion in first two years of operation.
- Increase free cash flow, which dropped to $168 million in 2002, from $189 million in 2001.