With the unstable U.S. economy, American companies are planning cost-cutting measures to compensate for other rising costs and decreasing sales that are impacting their earnings.
Those reactionary companies could learn a lesson from Dow Chemical, which operates in a continual state of cost containment.
“We look at cost management from a strategic point of view,” says Mack Murrell, Dow Chemical’s vice president of IT. “I’ve always got a three to five year look ahead on costs.”
Dow’s strategic approach to cost containment, which involves planning for different business and economic scenarios, works effectively for the US$54 billion company.
Dow achieved earnings of $0.99 per share in the first quarter of 2008 (on $941 million in profit), which was just one cent less than the earnings per share it recorded the same period last year. Dow’s outlook for the second quarter remains strong.
Murrell notes that Dow’s revenues have more than doubled over the last decade while its IT costs have only increased 15 to 20 percent during the same time period. He adds that Dow’s IT costs are a little over one percent of revenue.
Dow has been able to tightly control its IT costs despite organic revenue growth, acquisitions and global expansion (the company operates in 160 countries) because it maintains an “appropriate” level of IT standardization. Murrell says appropriate standardization means the number of solutions is equal to the number of problems. In other words, he says, “You’re not doing things twice that need to be done once.”
Dow has done well enforcing its IT standards. Consider this:
The whole company, which sells 3,100 products, runs on a single instance of SAP. More than 90 percent of Dow’s 46,000 employees worldwide use laptops, and they all use the same brand of laptop, Lenovo. All employees have the same VoIP (voice over IP) phones on their desks with the same voice mail system. They also have one choice for a smartphone. It used to be Palm Treos, but now Dow is moving to BlackBerrys.
“There’s no variability where there doesn’t need to be,” says Murrell. And that lack of variability keeps maintenance costs down.
The emphasis on standards doesn’t mean that the IT department completely eschews customization. But they only customize solutions when it’s absolutely necessary, says Murrell. “Our experience has taught us that modifications and customizations are typically not value-added over the lifetime of a system. Each modification usually needs to be re-done as we migrate to new versions, which slows our ability to meet true business needs,” he adds.
Dow Uses Its Size as an Advantage
Dow’s approach to systems design and implementation, which is also highly standardized, plays an equally important role in helping the company keep its IT costs under control. Dow’s strategy is to buy packaged applications and to configure them so that they can be implemented across all of Dow’s businesses and geographies. Murrell says the IT department gathers from Dow’s businesses requirements for software, and then designs the software so that it supports the whole enterprise rather than individual business units.
“We spend the money once and do an application very, very well so that as we grow the number of businesses and grow in geographies, our applications scale,” says Murrell. Thus, he adds, the company’s overall investment in any one technology or application is spread across more users, which gives Dow a better return on its technology investment. It also enables the company to invest more money in IT because the investment is going to be distributed across so many users, Murrell says. In that way, Dow takes advantage of its size and scale to keep its costs down.
Murrell says his IT organization’s goal is to deliver a high-level of service at a low cost, but not too low a cost. “Driving our IT cost to zero is not where we should go,” he says. For now, Dow seems to have struck the right balance.