Johnson & Johnson Case

Voiceover (NARRATOR): In early 2010, Johnson & Johnson executives began thinking that the organization should change the way I.T. was managed, and how technology projects were prioritized. There was a feeling that I.T. needed to focus more sharply on increasing revenue, instead of reducing or avoiding costs.

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Voiceover (NARRATOR): For the previous five years, Johnson and Johnson had maintained an average profit margin of about 19% internationally, gained mostly through acquisitionssuch as its purchase of Pfizers consumer products division.

In 2008 alone, the consumer products division had brought in $16 billion; medical devices and diagnostics, $23.1 billion; and the pharmaceuticals division, $24.6 billion.

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Screen: 57 countries 250 operating companies 90,000 employees $63B in annual sales

Voiceover (NARRATOR): The company was now operating at a truly vast size and scale.

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Voiceover (NARRATOR): In 2009, CEO Bill Weldon issued a challenge to LaVerne Council, the companys Chief Information Officer: generate one billion dollars in new revenue from I.T. applications.

The I.T. budget had been two billion dollars a year, or about three percent of the companys revenue. But now Weldon slashed it by six hundred million dollars a devastating 30% cut.

In addition, he limited spending on new I.T. projects to between five and six hundred million dollars a year.

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Voiceover (NARRATOR): Try to imagine the kinds of things that Johnson & Johnson CIO LaVerne Council needed to think about to address Weldons challenge.

Voiceover (LaVerne Council): I know that companies in different industries have different needs for I.T., so the percent of sales spent on technology differs across companies. For instance, Amazon is a technology company, so theyll spend a lot more than a manufacturing company like Johnson & Johnson.

Johnson & Johnson currently spends less than three percent of sales on I.T. That doesnt seem excessive to me, but management wants me to cut six hundred million dollars from a two billion dollar I.T. budgeta thirty percent reduction. Thats huge!

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Voiceover (LaVerne Council): A lot of I.T. is ongoing fixed costs. For example, we have to run computers, keep the network up, refresh equipment and update software. That leaves us maybe 20% of our budget for new initiatives.

A lot of companies think about I.T. purely as a way to reduce costs, not to raise revenue. But the Internet has changed some of that because firms use I.T. for online sales, for targeted advertising, to offer new series and so on.

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Voiceover (LaVerne Council): Well, first things first. How can I.T. generate more revenue for Johnson & Johnson? Where we have existing demand for products, we need to increase sales of existing products, increase sales to existing customers, and increase sales to existing channels.

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Voiceover (LaVerne Council): To stimulate NEW demand, we need to create new products, create new customers, and create new channels

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Voiceover (LaVerne Council): We should definitely look at our overall strategy for I.T. governance. Centralization is more efficient; it lets you reduce duplication and arrange for discounts based on volume. Stronger central control would give us some opportunities to cut costs.

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Voiceover (LaVerne Council): On the other hand, strong local control is more agile and responsive, since were not making our subsidiaries check with a lot of people and jump through hoops before they can make resource allocation decisions and choose technology. The ability to be more nimble could be important as we look for ways to increase revenue. And Johnson & Johnson didnt even have a corporate CIO or centralized I.T. leadership team until 2006. A lot of people here are strongly against giving more control over I.T. to corporate. Our international subsidiaries are used to having a lot of freedom.

Im going to be getting a lot of phone calls about these decisionsfrom a lot of different people around the company.

Voiceover (Narrator): Listen to the phone calls that LaVerne gets from different managers and executives. How would you respond to their concerns and recommendations?

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Voiceover (CFO): As the CFO, my main job is to keep a lid on expenses. I like you, LaVerne, but youre always asking for bigger investments in technology. Right now our sales arent too great, and Wall Street and the shareholders are demanding a better return. And you think you can raise a billion dollars a year in new revenue? Good luck! I cant think of anything weve built in the past thats brought in anything close to that.

What I want you to do is reign in the subsidiaries. They spend like drunken sailors. Didnt you once tell me that we have 150 different ERP systems? Those things are expensive, and I bet none of them talk to teach other. A modern firm should be able to just press a button and have all of its consolidated statements come out.

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Voiceover (Group CIO): LaVerne, Im trying to implement corporate I.T. policy--get the companies in my group to coordinate what they are doing. The story about how we once had 150 different ERP systems is a legend. I keep hitting the company presidents with it to convince them they need to talk to us BEFORE buying a system or building one. Sometimes it works, sometimes it doesnt.

My viewpoint is that of Johnson & Johnson as an entire company. Whats best for the individual subsidiary may not be best for Johnson & Johnson, but its hard to get people in a subsidiary to acknowledge that. Theyre in their own little worlds.

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Voiceover (Subsidiary Manager): All I know is, J&J has about 250 subsidiary companies in 57 countries, but I just manage ONE. My goal in life is to grow this company and grow our profits. Thats how Im evaluated. Its not just about getting a bonus, its about keeping my job.

What I want from I.T. is tools that my staff loves, that cost as little as possible and that make money for us. And I dont want it to take years from the time someone gets an idea until we see the results.

Ms. Council, I understand that corporate is interested in efficiency, but you arent here. With all due respect, you dont know the conditions in this country, or the business environment I face. Maybe we do have 150 ERP systems. But how long would it have taken to have installed SAP across all of J&J? And what would it have cost? Wed still be waiting for it. I bought my own system and it meets my needs. Why should I care beyond that?

If we have to coordinate everything with you and your staff, itll add a year to each project while your people study our proposal and ask us to make a bunch of changes. I cant afford to wait that long to start moving on a good idea.

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Voiceover (Local IT Manager): The president of the subsidiary here? I have a great relationship with him. I talk directly with him and try to do what he wants. Ive seen company presidents fired for not performing--the pressure is incredible. It may not even be their fault; the economy and the market may just be bad that year. Ms. Council, you really have no idea what we deal with out here.

We always try to buy a system before building one, and most of the time we can. Even if we have to make changes to it, its almost always faster and cheaper than building it ourselves. I understand that you need us to coordinate with headquarters I.T. and your staff, but my people really hate doing it. They have to fill out forms and send in proposals, and then answer a bunch of questions about what we want to do. And then most of the time they come back and say go ahead anyway, so it seems like a big waste of time. It just adds to the bureaucracy around here.

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Voiceover (NARRATOR): Youve heard about Bill Weldons challenge to LaVerne Council. And youve also heard some opinions about it from different executives and managers within Johnson & Johnson.

Keeping all these factors in mind, outline the choices you would make if you were put in the same situation as LaVerne Council.

Question:

Take the role of a CIO in LaVerne Council's position; that is, a CIO who has been directed to produce $1 billion in new revenue while simultaneously taking a 20% cut in your budget. Detail the steps you will take to achieve these goals, do the following:

Present recommendations for an IT governance strategy at Johnson & Johnson. Include specific recommendations for:

Structuring reporting relationships.

Approval levels for subsidiary projects (i.e., how much can a project cost before it requires approval from corporate?).

Assigning full management responsibility for specific applications to corporate IT.

Coordinating IT in the companys subsidiaries.

Explain how your proposed changes in IT governance will increase efficiency and reduce costs.