Case Study: Johnson & Johnson and Managing IT

By Robert Scheier  |  Posted 12-01-2001

Case Study: Johnson & Johnson and Managing IT

JOHNSON & JOHNSON INC.
Corporate Headquarters: New Brunswick, N.J.
Year founded: 1886
CIO: JoAnn Heffernan Heisen
Employees: 100,942 in 51 countries
Business Units: 195
Revenue: *$24.6 billion, up 9% over same period last year
Net income: *$4.56 billion, up 14% over same period last year
IT Budget: More than $1.2 billion in 2001
* for the nine months ending Oct. 1, 2001

One dreary fall morning five years ago, Johnson & Johnson CEO Ralph Larsen called his controller, JoAnn Heffernan Heisen, to his office at the company's New Brunswick, N.J., headquarters for a chat. Larsen had just launched a corporatewide cost-cutting campaign to help finance a drive by the maker of Tylenol and Band-Aids into highly competitive and costly new drug markets. Then, as now, high-tech medicine was Larsen's vision for the future for the 115-year-old healthcare products company.

That morning, Larsen wanted J&J's technology people to be a bigger part of all of that—and to get a whole lot smarter about how the company was using technology. And no wonder: J&J was spending unknown millions annually on IT (no one back then could even estimate how much)—yet business executives and customers weren't getting the business information they needed. Cash-squeezed hospitals, for example, were asking J&J to help them cut their stashes of supplies, but J&J didn't have the Web-based tracking systems needed to deliver on that request. Further, not only couldn't corporate execs tell you how much it cost the company to make Band-Aids in any one region of the world, they also didn't know how many of J&J's 195 operating companies in 51 countries were selling to Wal-Mart

and other retailers, or precisely what they were selling at any given time. Perhaps most frustrating: The in-house information networks that did exist suffered frequent outages that could knock out e-mail for hours at a time.

"Nobody was talking to each other," Heisen recalls. "And why should they? Nobody asked the business units to talk with each other before, and no one had asked how much we were spending on each piece of the business."

Change was in order. Larsen told Heisen he wanted to cut J&J's IT costs dramatically. He also wanted reforms. Could she help? Heisen didn't take very long to answer. As controller, she had just closed the books for that fiscal year, and, she recalls, "in the middle of that, J&J's IT system went down suddenly, and I was a little upset with our IT folks." Heisen left Larsen's office that morning with a new job—as CIO—and a two-word mission. "He told me, simply, 'Fix it,' " Heisen says. "He said, 'We can't tell you what's wrong; we just know it's wrong.' "

So began a long and difficult voyage of reform and discovery for the $29 billion healthcare products company, one that began as a simple plan of action to improve IT but is ending up reshaping the company—and the way it's managing change. At the heart of J&J's quest has been a need to find answers to tough questions facing many large corporations today: In an age of globalization and e-business, how can information technology best support a far-flung, loose-knit organization composed of dozens of diverse businesses operating globally under one corporate umbrella? What IT systems should be shared, and by whom? Which business activities should stay local—and, most difficult—which should be unmasked for control by corporate cost-cutters? How does a company choose?

Today, five years into its overhaul, J&J is still asking some of those same hard questions, and its effort to "optimize" IT is still far from complete. Critics suggest progress is slow, cultural resistance to some of the changes continues to be formidable—Heisen quips she's taken to wearing black and blue "to reflect the perils of the job"—and tough cost-cutting challenges lie ahead. But so far, the project is well on its way to saving J&J hundreds of millions of dollars—Heisen is attempting to cut IT costs at a pace of $50 million per year by 2003—and the project is also accelerating the pace of pharmaceutical research and forging unprecedented levels of cooperation between what has been, for decades, fiercely independent business units.

Adopting a new form of management has been key. Call it federalized planning. Companies from J&J to BP PLC and United Technologies Corp. are using it to negotiate better cooperation between IT and business at their large, multinational organizations in hopes of boosting the bottom line. It's tricky to manage: Even five years after kicking off the changes at J&J, Heisen says, it's hard getting all of J&J's business units to go along with some of even the most benign changes in policy. "I get 190 land mines in any given day," Heisen says. Some business units, for example, try to convince her they can't adopt some corporate technology standards or kick in their share of the cost for upgrades in infrastructure. But that's nothing compared with how intransigent some of the units were when she first started the project: "I couldn't even get them to answer the surveys I sent out about what type of systems they were operating," Heisen recalls.

Balancing Act

Balancing Act

0108 Central Intelligence

Management experts say a federal approach to planning may be the only answer for many large, complex organizations weighed down with thousands of applications, old and decentralized systems and a need to preserve their profitable, but largely change-resistant, local business fiefdoms (see chart). At its heart, federalized planning is a new management response to years of 1970s- and '80s-style decentralization that many large companies used to help them globalize quickly and profitably. But with the advent of the Internet and new information technologies in the 1990s, decentralization has also stymied cost cutting and change. While the Internet is inherently a centralizing technology that lets you "see" information—all in one place, at once, in real-time— it can't work optimally if you can't standardize information, Heisen says. Information networks let you, for the first time, collect information centrally and "use it to your advantage, to customize" your business response to it, Heisen says—depending on who the customer is or, in this case, which business unit you're trying to serve.

It's similar, experts say, to how the federal government is set up in the U.S.—with individual states having say into policies aimed at governing the whole, yet with the power to implement those policies in different ways locally.

"We are decentralized but we're one company, with an obligation as a single company to our shareholders," Heisen says. Adds Jack Rockart, a long-time J&J watcher and a senior lecturer at MIT's Sloan School of Management: "This approach can keep technology costs down and improve how it's used locally to make money for the entire corporation." At J&J, for example, rolling out Windows 2000 in a more centralized way than before saved the corporation an estimated $80 million, Heisen says.

And there's another long-term benefit. Federalized planning also formalizes cooperation between business and technology managers—and makes such back-and-forth over strategy an ongoing ritual. At J&J, for instance, change is not determined solely by Heisen, but via carefully-chosen, close-knit advisory task forces and strategy groups made up of key IT and business executives who report to her but are given the responsibility for rewriting the rules of the game for their areas of expertise, interest and concern. Heisen's 10 strategy groups comprise, in effect, a whole new layer of middle-management—but a virtual one, drawn from existing parts of the business to develop new ways of doing things that are focused entirely on keeping the IT and business people on the same page for a common goal: boosting profits, saving money, and finding new and better ways to do business.

But there's a catch. For federalized planning to work, it requires unusually strong management skills on the part of the CIO—and a commitment to consensus management. "For CIOs, this represents a whole different and tougher way of managing," says management guru Charles Handy. "And it challenges people throughout a large company to surrender control of their domains for the good of the whole. The secret is picking and choosing what should be surrendered and what should stay local."

Anatomy of Reform

Anatomy of Reform

How did Heisen do it? (See "CIO Roadmap".) She spent most of her first year on the job traveling to J&J's dozens of businesses just to figure out what was wrong. What she found was that the IT organization she inherited—or more accurately, IT organizations, since 150 of the business units had their own—was in no position to resolve CEO Larsen's complaints. Benchmarking revealed that Larsen had been right about the costly downside of J&J's fragmented approach to things: J&J had been spending more than the industry average of 30 percent to 40 percent of its IT budget on infrastructure. Cultural differences also created formidable barriers. Earlier attempts to standardize often backfired, says Richard Wasilius, vice president of corporate information management: "Each time someone tried it in the past, there was a sense that somehow there had been an unannounced power shift to corporate. Trying to jam it down people's throats doesn't work at J&J."

So Heisen knew she needed to move slowly. First, she phased out the most change-resistant staffers and hired more business-savvy recruits. She trained all of her IT staff to think more broadly about how their efforts could better serve corporate business interests. Through Leadership 21, a program she created, tech staffers were required to solve real-life business problems—under the tutelage of several top business managers at J&J. "We'd work well into the night," says Curt Selquist, company group chairman for J&J's Medical Devices and Diagnostics Group, one of three J&J business divisions. "We worked hard to give honest assessment and feedback to those employees," he said, and to flag Heisen when some staffers weren't working out. To further underscore IT's new mission at J&J, Heisen began promoting only those people both skilled at IT and good at communicating with business managers.

Next, Heisen set out building cross-corporate support for change. Originally, she hoped to create a single, centralized strategy, but soon realized that only a federalized approach would work. "We were too complex and independent from one business unit to the next to devise one strategy," Heisen recalls—and complicated, technology-wise, with thousands of applications and legacy systems. "We had a lot of history. We weren't like a Cisco or a Dell, which starts out with a green field," Heisen says.

It also became clear early on that long-standing relationships and turf battles would loom large unless she could get both business and IT behind common goals. So she began managing up—and down. First, she convened a meeting of 70 of the most senior IT people representing most of J&J's global business units and asked them to talk, for the first time as a group, about what they wanted IT to look like two, three, five years down the road—and how they could help give a competitive advantage to J&J businesses. Simultaneously, she and her executive staff met with J&J board members, and the presidents and senior managers of J&J's business units to hear their complaints and wish lists for change. The key question she asked: "Tell us how you see your businesses going and how IT will enable that," Heisen says. "We made sure the business side knew from the start that what we were attempting was to create an IT strategy for the business. We didn't want a tech strategy for the techies."

During those early gripe sessions, Heisen got an earful—but few surprises. "The business side felt that in the past, IT didn't understand the business," Heisen says. They wanted reassurance, she says, that a data standard would be driven by business needs—"not simply because a technologist somewhere thought it was cool," Heisen says. Eventually, her team chose six bedrock "business imperatives" that relied critically on information technology. Included: the need for J&J to globally manage its "franchises" in areas such as wound care, where multiple J&J companies together had a significant market share and expertise. Additional goals included cutting duplication and waste, boosting customer service, speeding product time to market, improving ties with new business partners and igniting innovation. The next question: Which technology strategies would J&J need to support these six business imperatives?

After much negotiation with the business side, Heisen's problem-solving groups settled on 10 business-IT priorities: data-sharing, infrastructure, human resources, information security, technology applications, knowledge exchange, e-commerce, purchasing, governance and finance. Each now would be seen as a separate "chapter" in J&J's corporatewide strategy. But what should each of the "chapters" be able to deliver? Again, Heisen told her IT staff to get input from the business side.

Heisen then set up 10 task forces, one for each chapter, and put a senior IT executive in charge of each—with all of the top 10 execs reporting directly to Heisen. Hundreds of senior IT staff from around the world were invited to participate in those early task force discussions—and did. The groups met repeatedly and, after a span of months, each urged specific changes.

The result? A management stew of centralized and decentralized approaches to managing change. The groups decided, for example, that security should be managed more centrally than, say, R&D.

Ditto for infrastructure, for the most part. There, standardization could occur without crippling its businesses, it was decided, so all of J&J was put on one desktop operating system, Windows 2000, and one organization, Network Computing Systems, was later put in charge not just of operating J&J's mainframes, networks and a few distributed computing functions, but of the company's entire IT infrastructure.

In each case, autonomy was considered—and granted, as long as the unit was able to prove that local control over a particular de-cision would best serve the corporation as a whole, either financially or creatively, or both.

But the task forces working on applications, data standards and governance had a tougher time negotiating a balance between centralization and decentralized control over technology and how it would be used at J&J. Questions abounded. How widely should a particular ERP system or a data definition be used? When should an individual business go its own way, and when must it adopt a standard application? And how broadly should that application be standardized—by group, franchise, geographic region? And who should be involved in making those decisions?

To help keep it all sorted out, Heisen created color-coded labels. Red, for example, means that all operating companies within a group, like pharmaceuticals, for example, must adopt a particular standard. Yellow means a standard must be adopted across each of J&J's 195 operating companies worldwide. Blue means it must be a standard for all J&J businesses in a given geographic region, and so forth.

And when arguments broke out? Committees made up of the heads of affected business units were formed to make the final calls. Jean Fowler, group CIO of J&J's medical devices and diagnostics unit, recalls that many hours of "very serious" discussions took place before the data task force decided that all of the businesses in her unit had to adopt common data codes. "There are very few mandates at J&J," Fowler says. But, she says, "this was a mandate."

Heisen's project is on track to be finished by late 2003, and insiders expect technology strategy will now be an ongoing, iterative process at J&J—with no end in sight to new levels of business-IT initiatives and cooperation. Next year, for example, J&J managers are hoping to build a de facto "private trading exchange" for its data, a central point where different J&J business units and applications can share information.

The Future

The Future

But J&J has yet to prove beyond a doubt that business and technology managers can identify only the most critical projects and execute change without distracting business managers from the core challenges facing their businesses. "The fact that J&J has been able to stick to its knitting on information management strategy is a good sign," says Roddy Martin, life science analyst for AMR Research Inc. "Many organizations are not getting that right."

Insiders like J&J's Selquist also worry that today's tough economy might require the reforms to move faster. Whether J&J can do that without overloading the organization and further taxing its fragile culture, given the company's complexity, is uncertain. "We need to be able to work at a pace our businesses can handle, workload-wise, and financially," Selquist says. "My continual worry is whether we are taking on the right levels of work, and the right level of expense, over the proper period of time."

Undoubtedly, J&J's executives would prefer these worries to the IT jumble J&J was facing in 1996. In some ways, CEO Larsen has already gotten what he wanted—a way to selectively centralize IT without alienating the rest of the company. Good management has been key. "JoAnn doesn't act like a czar, she acts in a very collaborative way," says Bill McComb, president of J&J's McNeil Consumer Healthcare unit. That kind of skill, it's turning out, is worth its weight in Tylenol for J&J.


ROBERT SCHEIER is a veteran business and technology writer and editor whose work has appeared in eWEEK, VARBusiness and Computerworld. Comments on this story can be sent to editors@cioinsight.com.

Focus

: Federalized Planning">

Focus: Federalized Planning

What is it? Modeled after the federal governing system of the United States, where state governments implement federal policies but govern locally, federalized planning is a way to negotiate, set and meld corporate-wide strategies under a common set of policy standards. These may be implemented by local business units in ways they prefer.

Why bother? It cuts costs, and encourages business and technology executives to work more closely together to create and implement strategies aimed at boosting the business bottom line.

Business payoff: J&J has saved some $10 million so far this year and expects to save as much as $50 million per year in North America within two years through volume purchasing, cheaper maintenance costs and eliminating duplicate IT projects. It also hopes to boost profits by speeding new drugs to market.

Challenge for the CIO: The CIO needs to be a leader and facilitator rather than a top-down manager. Without consensus management and facilitated teamwork, cultural frictions could doom change.

Who else is doing it? BP PLC and Siemens AG, among others.

CIO Roadmap

CIO Roadmap

  1. Assess problems, replace corporate staff where necessary.
  2. Create focus groups to see where IT and business should be on the same page.
  3. Set up IT-business task forces to tackle problems.
  4. Charge task forces with fact-finding and set deadlines for reporting back.
  5. Get recommendations for change from IT- business task forces.
  6. Review recommendations and choose a fix.
  7. Decide which businesses should make changes and get their feedback.
  8. Charge task forces with authority to oversee implementation of changes.
  9. Turn task forces into permanent, decentralized IT-business governing groups to keep fixes in place and plan new ones.
  10. Create ways for units to measure, over time, the impact of changes to business and to overall corporate goals.
  11. Keep task forces focused on continuous change.

Resources

Resources

Books and Papers

The Age of Unreason
By Charles Handy. Harvard Business School Press, 1991.

Transformation of the IT Function at British Petroleum
By John Cross, Michael J. Earl and Jeffrey L. Sampler. MIS Quarterly, Dec. 1997, p. 40.

Leveraging the New Infrastructure
By Peter Weill and Marianne Broadbent. Harvard Business School Press, 1998.

The Squandered Computer: Evaluating Business Alignment of Information Technology
By Paul A. Strassman. Information Economics Press, 1997.

Achieving Strategic Business-IT Integration and Alignment
By William Ulrich, Helen Pukszta and Alexandre Rodrigues. Cutter Information Corp., 2001.