Following the debut of Enron Corp.’s Web-based power and gas trading platform, revenue at the Houston-based energy company jumped from US$40.1 billion in 1999 to $100.8 billion the following year.
But after striking gold by combining its energy industry experience with a world-class trading system, Enron kept digging into new markets, convinced that its IT infrastructure had the Midas touch.
In 2000, Enron suffered a $60 million loss in its broadband business. It struggled in more than a dozen unfamiliar industries and crashed within a year.
Questionable partnerships, overaggressive investments and shady accounting practices top a long list of factors in Enron’s downfall. But as they look for lessons from history’s biggest bankruptcy, executives in all industries are questioning whether they, like Enron, spent so much time turning IT into a profit center that they lost sight of their organizations’ core missions.
Is it time to go back to the days when IT supported the business rather than became the business?
“I think [Enron’s bankruptcy] is going to have a very sobering effect on boardrooms across the country,” said Dick Hudson, former CIO at Houston-based oil drilling company Global Marine Inc. and now president of Hudson & Associates, an executive IT consulting firm in Katy, Texas. “You can almost see a bunker mentality taking hold in the senior suites.”
Hudson said he has heard from CEOs who have been reviewing their risky IT ventures, such as application service provider spin-offs or extraneous e-commerce services, to make sure they don’t have any investments that will blow up in their face. If they find any such ventures, he added, “they will probably retrench. It’s a bottomless pit.”
Charlie Lacefield, who retired from his position as CIO at Midland, Michigan-based Dow Corning Corp. three years ago, warned that although IT innovation is critical for companies to thrive in a global economy, those that stray too far from their core business strategies could see their plans backfire on them, as it did with Enron.
“If IT is not the core competency of the organization, then why throw away the core competency?” asked Lacefield, who now lives in North Carolina. “Why would you want to do that with so many IT companies out there . . . that already have a running start on you?”
Hudson said he thinks Enron started with a good business strategy and that if it hadn’t pushed the envelope, it could well have been a successful Fortune 1,000 firm. But its sights were set on the Fortune 10, so it got into markets such as broadband, which is a tough nut to crack even for the industry’s leaders, he added.
“Those good old boys in Houston, they had to walk with the big dogs,” said Hudson. “They are a textbook case of greed and mismanagement.”
Enron officials couldn’t be reached for comment.
Many IT executives believe that Enron’s bankruptcy was a case of poor timing and that the recession is the real culprit behind nationwide IT cost-cutting. Others see the trend as a natural shakeout following years of technological overzealousness.
“What the 90s showed us was how much IT can do,” said Charlie Feld, CEO of Irving, Tex.-based IT management firm The Feld Group. “I think the next decade is going to be about businesses finding ways to harness all that creativity and use it, rather than chasing it because it’s there.”
As a CIO-for-hire at companies like Delta Air Lines Inc. in Atlanta and Frito-Lay Inc. in Plano, Tex., Feld’s jobs have often been about simplifying IT infrastructures that grew complex because companies chased so many new opportunities that they lost focus.
“Companies fall in love with different technologies or business plans, and suddenly they find their infrastructure’s been built in stovepipes,” said Feld. “IT should make life simpler.”
Companies poured cash into customer relationship management, enterprise resource planning and Web-based systems during the 1990s, said Lacefield, and many are now realizing that they never saw returns from them.
At the time, he said, “it was nothing to talk about tens of millions of dollars of expense.”
The problem, said Bill Schiano, an e-commerce professor at Bentley College in Waltham, Mass., is that companies were developing e-commerce IT strategies. “What they really needed was . . . a business strategy with e-commerce at its center,” he said.
Another mistake companies made was pursuing complex business-to-business processes when they couldn’t even integrate their internal data, added Mark Evans, CIO at Tesoro Petroleum Corp. in San Antonio. Industrial-strength application integration tools that unlock legacy data and break down traditional IT silos are only now hitting the market, he said.
“Truth is, you can save more money improving internal processes than you can with any B2B project,” Evans said.
The Dow Chemical Co. is still investing in IT, said Snehal Desai, director of e-business at the Midland, Mich.-based company, which owns half of Dow Corning. But Dow Chemical is focusing on longer-term structural changes to the way it does business, rather than pursuing new revenue streams, Desai added.
For instance, in 2000, when Dow Chemical was looking for a hosting system to manage the workflow of its new business development projects, it couldn’t find a suitable product on the market, so it created its own. It then spun off a separate company called iVenturi to develop and market the system, but it wound up putting it up for sale within six months.
Dorothy Hawkins, vice president of IT for the energy distribution group at NiSource Inc. in Merrillville, Ind., said companies today seem to be placing greater responsibility on the shoulders of IT departments to consolidate business processes and standardize operations.
Companies are done with the pipe dream prospectuses of the 1990s, and they’re back to the fundamentals: using IT to deliver ever-increasing quality to customers at ever lower costs, said Jim Prevo, CIO at Waterbury, Vt.-based Green Mountain Coffee Inc.
“I think the whole world went nuts,” he said. “But somehow, the truth has a way of winning in the end.”
Asking tough questions about IT can be valuable, but it can also stifle innovation if there’s no room to take risks. Still, IT leaders say there are ways to strike a balance between fiscal responsibility and technical creativity.
— Don’t look at the Enron debacle and dismiss the idea of information creating value, said Roger Gray, CIO at Pacific Gas & Electric Co. in San Francisco. “The basic concept of creating value through the use of knowledge rather than simply investing in brick and mortar is not fundamentally flawed. . . . However, I think the concept of ‘capital-light’ got carried away.”
— “Lose the word infrastructure,” said Charlie Feld, CEO of The Feld Group. Learn to explain the importance of integrating various applications rather than throw out the I word, which often translates into big bucks. Explain that if all you do is build applications, you’ll wind up with application spaghetti.
— Conducting business with customers and suppliers over the Web makes sense, but know your limits, said Jim Prevo, CIO at Green Mountain Coffee. Many-to-many business-trading exchanges can fly in the face of strategic supplier relationships that meet corporations’ needs in terms of cost, quality and service, he said.
— Don’t let corporate processes stifle efficiencies gained from IT, said Andrew Scott, technology director at AeroGroup International Inc., the Edison, N.J.-based maker of Aerosoles shoes. For instance, since AeroGroup’s enterprise resource planning system went live in December, the company has merged its IT and distribution/logistics departments because their work has become so intertwined, he said.
— Give business leaders solid numbers that measure value and return on investment, said Charlie Lacefield, retired CIO at Dow Corning.
— Get back to business basics, said Prevo. Executives got so caught up in the race to stay on top of the IT curve that they lost perspective. “The world was playing musical chairs,” he said, and when the music stopped, a lot of people were left standing.