Project Leapfrog

By Laura Hughes  |  Posted 01-01-2002 Print Email
Company | Royal Caribbean Cruises Ltd.
Corporate Headquarters | Miami
CIO | Thomas Murphy
Employees | 28,000
Passengers carried in 2000 | 2,049,902
Bookings after Sept. 11 | 50% drop from previous year's levels
Revenues | $940.7 million in Q3 2001, up 11.2% over Q3 2000
Net income | $159.2 million in Q3 2001, down 21% from Q3 2000
Yield per cabin | Off 10% to 15% in Q4 2001 from Q4 2000 (est.)

In March 1999, when Tom Murphy was hired as CIO of Royal Caribbean Cruises Ltd., he was asked by CEO Richard Fain and President Jack Williams to help shake things up at the $2.9 billion Miami-based company. And what a shake-up it would be. Fain wanted to practically double the size of the company over five years, increasing employees from about 17,000 to 40,000 and the fleet from 17 ships to 29—the most aggressive launch schedule in the history of the cruise business. Fain's $1 billion expansion plan would also take the corporation digital.

And why not be bullish? Industrywide, bookings and revenues were soaring to record highs, and the country's long economic expansion had finally begun to lure new legions of middle-class families to the high seas for the first time. Indeed, one of the biggest challenges RC and other cruise lines had back then was figuring out how best to spend their relatively fat budgets, not just to meet growing demand but to boost repeat bookings. "Cruise lines were stepping all over each other to stretch capacity, steal passengers from one another and boost occupancy rates," says Glen Reid, a cruise analyst with Bear, Stearns & Co., "and Royal Caribbean was among the most aggressive."

During his first big meeting as CIO, Murphy recalls, each business unit manager got up and outlined his plan to woo more customers—offering up everything from more luxurious menus to bigger dance floors on ships. Then it was Murphy's turn. "If you would rather invest in lobsters and new sheets, more power to you," Murphy recalls telling the group. "But if you want to launch four new ships next year and put $10 million worth of IT equipment on each, then it's going to take a huge difference in attitude about how you spend money on IT." Murphy says there "was a huge disconnect in their thinking, a gap that had kept IT and the business apart."

At first, Murphy's remarks hit dead silence. Before he joined the company, IT had been the department that everybody loved to hate, known more for wiring up systems that didn't work and for being a "command-and-control organization that had no sense of customer service," recalls Murphy. Even policies designed to resolve complaints were problematic: Shoreside and shipside systems were not coordinated, and some customers would get compensated twice for the same complaint, costing RC unnecessary millions.

Now here was this new guy, Murphy, talking about leading change and supporting the business. "Jaws dropped," RC Vice President Perry Sandburg recalls. But the more Murphy talked, the more his new colleagues listened. For each of the business strategy goals detailed in CEO Fain's 1999 five-year plan, Murphy cited a way that IT could be used to achieve it. Fain wanted to boost customer loyalty and occupancy rates; Murphy's new digital reservations network would replace what he called "a spaghetti code" of 12 different, glitch-prone systems that didn't talk to each other nor provide any data about customers before they boarded ship. Fain wanted RC to be smarter about purchasing everything from soap to onboard entertainment; Murphy's new supply-chain management system would automate the purchasing process, cut costs, improve planning and pool big orders of supplies for better prices. Fain wanted to expand the employee roster—fast—adding 27,000 new hires in five years; Murphy would automate HR to make that rapid growth possible without breaking the bank or straining current systems. The goal: a single view of all employees, their salaries, benefits, skill-sets and succession plans—and the tracking technology to keep tabs on it all.

Murphy also knew that to make it all work, he'd have to boost IT's visibility inside RC: more senior titles for new IT hires, training of IT recruits in business strategy, and performance reviews that measured business initiative along with technical savvy. At one point, Murphy even handed out RC-IT polo shirts with special logos as part of an internal branding campaign he devised to boost department morale. "A lot of lightbulbs went on that day," Murphy recalls, "not just among the business folks, but among the IT people as well."

The company would later call the technology-driven expansion strategy Project Leapfrog—a name Fain gave to it one day during an officer's lunch. The goal, ultimately, was to roll out a whole new fleet of high-tech ships to jump RC from the No. 2 berth to the leader in the industry. Each new vessel would cost up to $350 million—and be packed with about $10 million in IT investments.

But like so many CIOs charged with bringing a corporation into the Digital Age, what seemed headed for the stratosphere in early 2000 would end up coming down hard. As early as spring 2001, less than two years into Fain's push, storm clouds were already brewing. The recession in Japan, a spending slowdown in Europe and the continuing fallout from the dot-com bust in the U.S. had begun to erode bookings and revenues. Still, RC executives pushed forward on their plan even as they began heavily discounting rates to keep cabins filled. It worked for a while: Before Sept. 11, RC was able to fill more than 90 percent of its beds with passengers, but only by charging rates as low as $369 per person for a seven-night Caribbean cruise—a far cry from peak-season, first-class rates of $3,285 per person. It was a price discounting strategy that prompted executives in the cruise business to joke that it had become cheaper to take a three-day Caribbean cruise than to take a family to dinner in Manhattan. The strategy carried a price: Partly as a result, fourth-quarter 2001 yields for RC—the combination of price and occupancy rates—would be down at least an estimated 10 percent to 15 percent from the last three months of 2000.



 

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